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Full text of "Report on amendment of the law of contract"

REPORT 

ON 

AMENDMENT OF THE LAW OF CONTRACT 

ONTARIO LAW REFORM COMMISSION 




Ontario 



Ministry of the 1987 

Attorney 

General 



Digitized by the Internet Archive 

in 2011 with funding from 

Osgoode Hall Law School and Law Commission of Ontario 



http://www.archive.org/details/reportonamendmenOOonta 



REPORT 

ON 

AMENDMENT OF THE LAW OF CONTRACT 

ONTARIO LAW REFORM COMMISSION 




Ontario 



Ministry of the 1987 

Attorney 

General 



The Ontario Law Reform Commission was established by the Ontario Law 
Reform Commission Act for the purpose of reforming the law, legal procedures, 
and legal institutions. The Commissioners are: 

James R. Breithaupt, CSU, CD, QC, MA, LLB, Chairman 

H. Allan Leal, OC, QC, LLM, LLD, DCL, Vice Chairman 

Earl A. Cherniak, QC* 

J. Robert S. Prichard, MBA, LLM* 

Margaret A. Ross, BA(Hon.), LLB* 



M. Patricia Richardson, MA, LLB, is Counsel to the Commission. The 
Commission's office is located on the Fifteenth Floor at 18 King Street East, 
Toronto, Ontario, Canada M5C 1C5. 



*Mr. Earl A. Cherniak, QC, Dean J. Robert S. Prichard, and Mrs. Margaret A. Ross joined the 
Commission at a time when this Report was very near completion and almost all the recommenda- 
tions had been made. 

The Commission wishes to acknowledge the critical contribution of three former Commissioners: 
Hon. Richard A. Bell, PC, QC, Mr. William R. Poole, QC, and Mr. Barry A. Percival, QC, 
whose tenure at the Commission extended through most of this Project. 



ISBN 0-7729-1999-2 



TABLE OF CONTENTS 

Page 

Letter of Transmittal xiii 

Chapter 1 INTRODUCTION 1 

Chapter 2 CONSIDERATION 5 

1 . Introduction 5 

2 . The Present Law and the Case for Reform 5 

3. The Approach to Reform 7 

4. Proposals for Reform 8 

(a) The Pre-Existing Duty Rule 8 

(i) Part Performance and Agreements to Extinguish 

Existing Obligations 9 

a. Amendment of Section 16 of the Mercantile 

Law Amendment Act 9 

(1) Executory Promises and Outright 

Forgiveness of a Debt 10 

(2) Revocation of a Promise Covered by the 
Mercantile Law Amendment Act 12 

(ii) Modification of Contracts 13 

(b) The Past Consideration Rule 18 

(c) Firm Offers 20 

(d) Reliance as the Basis for the Enforcement of Promises ... 25 
Recommendations 32 

Chapter 3 FORMAL CONTRACTS 35 

1 . Introduction 35 

2. The Present Law 35 

3. The Case for Reform 38 

(a) General : The Need for Formal Contracts 38 

(b) Retention or Abolition of the Seal: 

Reform Proposals from Other Jurisdictions 39 

(i) The New York Law Revision Commission 40 

(ii) The English Law Revision Committee 41 

(iii) The Model Written Obligations Act 41 

(iv) Other Jurisdictions 42 

(c) Conclusion 43 

4. A Replacement for the Seal 43 

[iii] 



IV 



(a) General 43 

(b) Subsidiary Issues 44 

(i) Limitation Period 45 

(ii) Remedies 46 

Recommendations 47 

Chapter 4 THIRD PARTY BENEFICIARIES AND PRIVITY OF 

CONTRACT 49 

1 . Introduction 49 

2. The Present Law 50 

(a) The Doctrine of Privity 50 

(b) Exceptions to the Doctrine of Privity 51 

(i) Trust Law 51 

(ii) The Law of Agency 52 

(iii) Assignment of Contractual Rights to Third Party 

Beneficiaries 53 

(iv) Other Legal Techniques to Avoid the Privity of 

Contract Rule 53 

(v) Statutory Exceptions to the Doctrine of Privity 54 

(vi) Conclusion 55 

3 . American Developments 55 

4. Proposals for Reform and Statutory Recognition of Third. Party 
Rights in Other Jurisdictions 58 

(a) New Zealand 58 

(b) Western Australia 61 

(c) Queensland 62 

(d) Quebec 64 

5. Arguments For and Against Reform 66 

6. Options for Reform 68 

Recommendation 71 

Chapter 5 CONTRACTUAL ASPECTS OF THE STATUTE 

OF FRAUDS 73 

1 . Introduction 73 

2. History of the Statute of Frauds Requirements in England and 
Ontario 74 

(a) Introduction 74 

(b) Subsequent History in England 75 



(c) Ontario History 76 

3. The Scope and Nature of the Writing Requirements and their 
Judicial Interpretation ; 77 

(a) Types of Contracts and Other Obligations Affected 77 

(i) Promise by Executor or Administrator to Answer 

Damages Out of His or Her Own Estate 78 

(ii) Contracts of Guarantee 78 

(iii) "Any contract or [sic] sale of lands, tenements or 
hereditaments, or any interest in or concerning 

them" 79 

(iv) "Contracts not to be performed within a year from 

the making thereof ' 82 

(v) Section 5 Promises 83 

(vi) Ratification of Minors' Contracts (Section 7) 83 

(vii) Misrepresentation as to Credit Worthiness 

(Section 8) 84 

(b) Evidentiary Requirements under Section 4: Sufficient 
Memorandum or Note 85 

(c) Effect of and Relief from Non-Compliance with the 

Statutory Requirements 86 

(i) The Effect of Non-Compliance 87 

(ii) Relief from the Effects of Non-Compliance 87 

a. Restitutionary Claims 88 

b. The Doctrine of Part Performance 89 

(1) General 89 

(2) Sufficient Acts of Part Performance 89 

(3) Acts of Part Performance 

by the Defendant 91 

(4) The Scope of the Doctrine 92 

(5) Damages in Lieu of Specific 

Performance 92 

(d) Conclusions 93 

4. Arguments For and Against Retention of the Statute of Frauds 
Writing Requirements 94 

(a) Function of Writing Requirements 94 

(b) Criticisms of the Statute of Frauds Writing 

Requirements 95 

5 . Developments in Other Jurisdictions 98 



VI 



6. Proposals for Reform 102 

(a) Repeal of Obsolete and Anachronistic Requirements 102 

(b) Contracts Not to be Performed Within One Year 102 

(c) Land Contracts 103 

(i) General Recommendation 103 

(ii) Definition of Land 110 

(iii) Agreements to Lease 110 

(d) Contracts of Guarantee Ill 

(i) General Ill 

(ii) Inclusion of Indemnities 113 

(iii) Definition of Guarantee 113 

(iv) Scope of Writing Requirements 114 

(v) Relief in Cases of Non-Compliance 114 

(e) Disposition of Non-Contractual Provisions 115 

Recommendations 116 

Chapter 6 UNCONSCIONABILITY 119 

1 . The Present Law 119 

(a) Judicial Developments 119 

(b) Legislation 121 

2. The Position in Other Jurisdictions 123 

(a) United States 123 

(b) New South Wales 125 

(c) United Kingdom 126 

3. The Case for Legislative Reform 127 

4. Specific Issues 128 

(a) Substantive and Procedural Unconscionability 128 

(b) Decisional Criteria 128 

(c) Power of the Court to Raise Unconscionability of its 

Own Accord 132 

(d) Scope of Provisions 132 

(e) Remedies 132 

(i) Rescission, Restitution and Expectancy Damages .... 132 

(ii) Injunctions 1 34 

(f) Exemption from Liability Clauses 1 34 



Vll 



(g) Outright Prohibitions and Presumptions of 

Unconscionability 1 35 

(h) Consumer Protection 135 

Recommendations 136 

Chapter 7 PENALTY CLAUSES AND RELIEF FROM FORFEITURE OF 

Monies Paid 139 

1 . Introduction 1 39 

2. Contracts to Pay a Stipulated Sum on Breach 1 39 

(a) The Present Law and the Case for Reform 139 

(b) Responses to the Problem and the Position in Other 
Jurisdictions 142 

(i) England 142 

(ii) United States 142 

(c) Conclusions 145 

3 . Relief from Forfeiture of Monies Paid 147 

(a) The Present Law 147 

(b) Issues and Conclusions 150 

Recommendations 153 

Chapter 8 PAROL EVIDENCE RULE 155 

1 . The Present Law and the Case for Reform 155 

2. The Position and Proposals for Reform 

in Other Jurisdictions 158 

(a) United States 158 

(b) England 159 

(c) British Columbia 160 

3. Proposals for Reform 161 

Recommendations 1 63 

Chapter 9 GOOD FAITH 165 

1 . The Present Law 1 65 

(a) Introduction 1 65 

(b) Good Faith in Contract Negotiation and Formation 167 

(c) Good Faith in Contract Performance and Enforcement.... 167 

2. Weaknesses in the Present Law and the Case for Legislative 
Reform 169 

3 . A Survey of Suggested Approaches 1 69 

(a) The European Civil Codes 1 69 



Vlll 



(b) Uniform Commercial Code 170 

(c) Second Restatement of the Law of Contracts 1 72 

(d) Ontario Law Reform Commission, Report on Sale of 

Goods 173 

4. Proposals for Reform 173 

Recommendations 176 

Chapter 10 MINORS' CONTRACTS 177 

1. The Present Law 177 

(a) Introduction 177 

(b) Classification of Minors' Contracts 178 

(i) Preface 178 

(ii) Void Contracts 178 

(iii) Contracts Not Binding on the Minor Unless Ratified 

After Attaining Majority 179 

(iv) Contracts Binding on the Minor Unless 

Repudiated 180 

(v) Valid Contracts 180 

a. Contracts for Necessaries 180 

b. Contracts of Service 182 

(c) Rights and Liabilities Associated With Unenforceable 
Minors' Contracts 1 83 

(i) Minors' Rights 183 

(ii) Minors' Liabilities 1 84 

(d) Minors' Liability for Tortious Conduct Associated With 
Unenforceable Minors' Contracts 1 85 

(e) Enforceability of Guarantees of Minors' Obligations 1 86 

(f) Minors' Contracts and Agents 187 

2 . Legislative Intervention in Other Jurisdictions 187 

(a) Preface 187 

(b) New Zealand 187 

(c) New South Wales 189 

(d) British Columbia 192 

3. Reform Proposals in Other Jurisdictions 194 

(a) Alberta 194 

(b) England 196 

(c) Scotland 198 



IX 



4. Proposals for Reform 202 

(a) Introduction 202 

(b) The General Rule 202 

(c) Affirmation 203 

(d) Repudiation 203 

(e) Relief Under an Unenforceable Contract 204 

(f) Contracts in the Best Interests of the Minor 204 

(g) Executed and Executory Contracts 205 

(h) Judicial Approval of Contracts and Grants of Capacity . . . 206 

(i) Dispositions of Property 206 

(j) Agency 207 

(k) Guarantees 208 

(1) Tort Liability 208 

Recommendations 210 

Chapter 1 1 CONTRACTS THAT INFRINGE PUBLIC POLICY 215 

1 . Introduction 215 

2. The Present Law 215 

(a) Introduction 215 

(b) General 216 

(c) Contracts in Restraint of Trade 220 

3. Existing Law and Proposals for Reform in 

Other Jurisdictions 222 

(a) Introduction 222 

(b) General 223 

(i) New Zealand 223 

(ii) South Australia 225 

(iii) British Columbia 225 

(c) Contracts in Restraint of Trade 226 

(i) New South Wales 226 

(ii) New Zealand 227 

(iii) South Australia 228 

(iv) British Columbia 228 

4. Proposals for Reform 231 

(a) General 231 



(b) Restraint of Trade 233 

Recommendations 234 

Chapter 12 MISREPRESENTATION 235 

1 . The Legal Background 235 

(a) Introduction 235 

(b) Misrepresentation and Contractual Terms 235 

(c) Misrepresentation and Tort 237 

(d) Misrepresentation and Rescission 237 

2. Precedents for Reform 238 

(a) Solutions that Treat Representations as 

Contractual Terms 238 

(i) The United States 238 

(ii) Ontario 239 

(iii) New Zealand 239 

(b) Other Solutions 240 

(i) United Kingdom 240 

(ii) Ontario Business Practices Act 240 

3. Proposals for Reform 241 

Recommendations 242 

Chapter 13 WAIVER OF CONDITIONS 245 

1 . The Present Law and the Case for Reform 245 

2. Proposals for Reform 248 

Recommendation 250 

Chapter 14 MISTAKE AND FRUSTRATION IN 

THE LAW OF CONTRACT 251 

1 . Introduction 25 1 

2. Mistake in the Law of Contract 25 1 

(a) Mistakes in Assumption 253 

(i) Common Mistakes 253 

a. General Considerations 253 

b. Allocation of Risk 256 

c . Remedies 256 

d. Mistakes of Law 259 

(ii) Unilateral Mistakes in Assumption 259 



XI 



a. Unilateral Mistake Known to the Other Party or 
Where he or she had Reason to Know of it 259 

b. Unilateral Mistake not Known to the Other Party 
and Where he or she had No Reason to Know of 

it 263 

(iii) Conclusions 264 

(b) Mistakes as to Contractual Terms (Mistakes in 

Understanding) 266 

(i) Unilateral Mistake Not Known to the 

Other Party and Where he or she had No Reason 

to Know of it 266 

(ii) Unilateral Mistake Known to the Other Party or 

Where he or she had Reason to Know of it 267 

(iii) Agreements That Fail Because of Ambiguity 268 

(iv) Position of Third Parties 269 

(v) Apportionment of Losses 269 

(vi) Conclusions 270 

3 . Frustration in the Law of Contract 27 1 

(a) The Substantive Bases of Frustration 27 1 

(i) Introduction 27 1 

(ii) The Second Restatement Sections on Frustration 272 

(iii) Conclusions 278 

(b) Relief Following Frustration 279 

(i) The Common Law Position 279 

(ii) Legislative Developments 281 

(iii) Report on Sale of Goods 284 

(iv) Conclusions 285 

Recommendations 285 

Summary of Recommendations 29 1 

Conclusion 305 




Ontario 
Law Reform 
Commission 



Ontario 



The Honourable Ian G. Scott, QC 
Attorney General for Ontario 



Dear Mr. Attorney: 



We have the honour to submit herewith our Report on Amendment of the 
Law of Contract. 



[xiii] 



CHAPTER 1 



INTRODUCTION 



The present project arose directly from our project on the Sale of Goods, 
completed in 1979. • It became clear, in the course of that project, that a number 
of problems affected contract law generally, and insofar as reforms were 
recommended in the sales area, the question was bound to arise of the extension 
of them to all contracts. Accordingly, we determined to make a study of 
selected aspects of the law of contracts. 

It was decided at the outset that no attempt would be made to codify the 
whole law of contracts. This was a task that had been undertaken by the English 
and Scottish Law Commissions, but subsequently abandoned. 2 No other 
common law jurisdiction has made the attempt. Codification would raise very 
great difficulties which we did not think could be overcome. The approach 
adopted was, therefore, to examine areas of contract law that appeared to be in 
need of reform. 

We appointed Professors S.M. Waddams and J.S. Ziegel, both of the 
University of Toronto, as joint Project Directors, and they were responsible for 
the research design and for advising the Commission. A Research Team was 
also struck, consisting of Professor E. Belobaba of York University, Professor 
G.H.L. Fridman of the University of Western Ontario, the late Professor R.H. 
Hahlo of the University of Toronto, Professor J.D. McCamus of York 
University, Professor D.J. Mullan of Queen's University, Mr. B. Reiter, then 
professor at the University of Toronto, Professor Saul Schwartz of the 
University of Ottawa, Professor R.J. Sharpe of the University of Toronto, 
Professor D.A. Soberman of Queen's University, and Professor J. Swan of the 
University of Toronto. These individuals prepared a number of comprehensive 
research papers which were considered at meetings of the Research Team and 
formed the basis of subsequent recommendations from the joint Project 
Directors to the Commission. The joint Project Directors also had the benefit of 
advice on some of the research topics from a small Advisory Group of 
practising lawyers and judges, including Mr. David A. Brown, Q.C., His 
Honour Judge G.S.P. Ferguson, Mr. R.K. McDermott, the Hon. Mr. Justice J. 
Morden, Mr. Donald G. Pierce, Q.C., Mr. Richard B. Potter, Q.C., Mr. 
James M. Spence, Q.C., and Mr. David Stockwood, Q.C. 



Ontario Law Reform Commission, Report on Sale of Goods (1979). 

England, The Law Commission, Report No. 58, Eighth Annual Report 1972-73, paras. 
3-5, and Scottish Law Commission, Report No. 28, Seventh Annual Report 1971-72, 
para. 16. 

[i] 



To the joint Project Directors, the Research Team and the Advisory Group 
we wish to express our sincere appreciation for their devoted labours, while 
making it clear that the recommendations appearing in this Report are those of 
the Commission and do not necessarily reflect the views of all these parties. We 
also wish to thank Ms. Patricia Richardson, Counsel to the Commission, Mr. 
Eric Gertner, formerly a Legal Research Officer with the Commission, Ms. 
Marilyn Leitman, a Legal Research Officer with the Commission, and Mr. 
John Calcott and Ms. Cheryl Waldrum, former members of the contractual 
legal staff, for their contribution to the writing and editing of the Report. 

The research papers to which we have referred cover the following topics: 
consideration, third party beneficiaries, the Statute of Frauds, the seal, 
comparative aspects of consideration, unconscionability, mistake and 
frustration, penalty clauses, illegality, misrepresentation, minors' contracts, 
good faith, damages, equitable remedies, and waiver of conditions. In the cases 
of damages and equitable remedies we concluded that legislative reforms would 
be unlikely to improve the law and, accordingly, these topics are not included in 
our Report. The questions examined in this Report vary greatly from the very 
general to the very particular, and from the highly complex to the 
comparatively simple. In some cases much previous academic work has been 
done; in others very little. On some questions other law reform bodies have 
reported; on others, not. 

There has been much discussion in recent years among scholars about the 
basis and goals of modern contract law. We ourselves have not approached our 
task with any preconceptions about the right solutions to particular contract 
problems, preferring instead to deal with each issue on its own merits and in the 
light of its own history. It could hardly have been otherwise, given the wide 
diversity of the topics and the widely differing backgrounds of the 
Commissioners considering the questions. Insofar as a common thread runs 
throughout our recommendations, it is that certainty is not the only important 
value in contract law and that frequently it must be matched by flexibility in 
devising appropriate solutions where past doctrines have proved too rigid or, in 
some cases, have become obsolete, or where public policy militates against 
enforcement of all the terms of a bargain. 

Contract law touches every phase of the economy of a modern state. It 
embraces every conceivable type of commercial transaction from the smallest to 
the most significant. Fortunately, the overwhelming majority of contracts are 
completed successfully and without argument. Nevertheless, it remains of the 
first importance that those who are called upon to advise in the drafting of 
contracts, or to advise when difficulties have erupted between the parties, 
should know what the law is, and that the legal rules have a rational foundation 
and command general respect. 

The principles of contract law, like the principles of many other branches 
of Ontario law, are largely judge made. We think it right that this should 
continue to be the case. However, there are important branches of contract law 
where the rules have ceased to keep pace with changing needs and perceptions 
and where remedial legislation is a more certain cure than the unpredictable and 



uneven path of judicial self-correction. In other cases, where the rules are of 
statutory origin, the courts are in any event powerless to make the desirable 
changes. 

We venture to express the hope therefore that the legislative changes 
recommended in this Report will receive the early study and attention that, in 
our view, they deserve. 



CHAPTER 2 



CONSIDERATION 



1. INTRODUCTION 

Every legal system must have a criterion, or a set of criteria, for 
determining the enforceability of promises. The principal criterion of enforce- 
ability in Anglo-Canadian law is the bargain. Promises that are bargained for 
are prima facie enforceable. The name given to the exchange element in a 
bargain is consideration. 

Promises may also be enforceable at common law, notwithstanding lack of 
consideration, if made under seal. We return to the law of formal contracts in 
the next chapter, where we recommend that a witnessed and signed promise in 
writing should be enforceable without the requirement of a seal. 1 We mention 
this in the present context because a complete view of enforceability must 
include the law of formal contracts. 

It should be noted that the presence of consideration and compliance with 
any applicable formalities do not of themselves guarantee enforceability; they 
simply certify that the promise in question is prima facie enforceable. Thus, it is 
always open to the promisor to raise such defences as mistake, illegality, 
unconscionability, incapacity, and non-performance of conditions. Defences of 
this kind are necessary qualifications to any criterion of enforceability. 



2. THE PRESENT LAW AND THE CASE FOR REFORM 

Originally, consideration seems to have meant the promisor's reason or 
motive for making the promise. This meaning survives in certain legal phrases, 
such as "in consideration of natural love and affection". In 1671, consideration 
was defined as "the material cause of a contract without which no contract can 
bind the party". 2 By the mid-nineteenth century, however, the modern, and 
narrower, meaning of consideration was established. In Thomas v. Thomas 21 , a 
promise had been made by executors to give effect to an orally expressed desire 
of a recently deceased person to benefit the plaintiff. The promise was said to be 



1 Infra, ch. 3, sec. 4(a). 

2 Termes de la Ley (1671), at 171. 

3 (1842), 2 Q.B. 851, 114 E.R. 330 (subsequent reference is to 2 Q.B.). 

[5] 



"in consideration of such desire". Patteson J.'s comment reveals that the 
narrower meaning of consideration had by this date become established: 4 

Motive is not the same thing with consideration. Consideration means something 
which is of some value in the eye of the law, moving from the plaintiff .... 

The growth of modern contract law was closely linked with the developing 
needs of a commercial society. Since the typical commercial transaction is a 
bargain, there was good reason for adopting the bargain transaction as the 
principal test of enforceability. Furthermore, the doctrine of consideration is 
intimately linked with the remedies available for breach of contract. The 
disappointed promisee is entitled either to enforce the promise specifically 
(where specific performance is an available remedy), or to recover a sum of 
money equivalent to the value of the promised performance. It is, at least in 
part, because the promisee has bargained for and bought the right to perform- 
ance — in other words because the promisee has given consideration — that he 
or she is entitled to the remedies that the current law allows. Any radical 
enlargement of enforceability would require a review of the scope of the 
promisee's remedies. 5 

Nevertheless, asserting that, formal contracts aside, consideration is an 
absolute prerequisite to enforceability has given rise to difficulties. The cases 
that have generated serious difficulties fall into at least four classes: first, one- 
sided modifications of existing obligations; secondly, promises made in return 
for benefits previously received by the promisor or by a third party; thirdly, 
firm offers; and fourthly, cases of subsequent reliance. Each of these classes of 
case will be discussed below. 6 In all these cases, the promise is not bargained 
for, that is, there is no consideration. Difficulties arise because these are 
promises that, in some circumstances and to some extent at least, most persons 
would say ought to be enforced. 

As almost invariably happens when a legal doctrine stands in the way of 
results generally thought to be just, courts have developed devices to circum- 
vent the doctrine of consideration, and legislatures have intervened to alter it in 
particular circumstances in Ontario and in the other common law provinces. 
Thus, legislation provides that acceptance of part performance in satisfaction of 
a larger obligation extinguishes the obligation. 7 The courts have constructed an 



Ibid., at 859. In the latter part of the eighteenth century (see Pillans v. Van Mierop 
(1765), 3 Burr. 1663, 97 E.R. 1035), Lord Mansfield attempted to revive a broader view 
of consideration, but this "heresy" was rejected by Lord Denman in Eastwood v. 
Kenyon (1840), 11 A. & E. 438, 113 E.R. 482 (subsequent references are to 113 E.R.). 

See infra, this ch., sec. 4(d), for discussion of a limited measure of damages where a 
promise made without consideration is enforced by reason of subsequent reliance. 

See infra, this ch., sec. 4. 

See, for example, Mercantile Law Amendment Act, R.S.O. 1980, c. 265, s. 16. 



exchange element even where the facts do not readily suggest one. 8 Reliance on 
promises and representations has been protected by devices such as estoppel, 9 
liability in tort for misrepresentation, 10 and liability for the negligent perform- 
ance of gratuitous undertakings. 11 

The scope of the legislation dealing with part performance of obligations, 
however, is so narrow as to create its own anomalies. 12 In addition, the various 
judicial techniques for enforcing promises unsupported by consideration are not 
applied consistently, so that similar cases may receive dissimilar treatment. 13 
Nor are the devices for protecting reliance interests wholly satisfactory. Not 
every promise that could reasonably have been expected to induce reliance, and 
that in fact does so, will give rise to a remedy. Moreover, the scope of estoppel 
in this context is uncertain. Some cases suggest that it can only be used as a 
defence while others hold that it can operate to give a cause of action to a 
plaintiff. 14 For these reasons, the Commission favours some legislative enlarge- 
ment and clarification of the scope of enforceable promises. 



3. THE APPROACH TO REFORM 

It has sometimes been suggested that the doctrine of consideration should 
be abolished "root and branch". 15 In support of this proposal, it may be said 
that civil systems of law have managed satisfactorily without such a doctrine. 



8 Bank of Nova Scotia v. MacLellan (1977), 78 D.L.R. (3d) 1, 25 N.S.R. (2d) 181 (S.C., 
App. Div.). The defendant's cooperation in locating her spouse was sufficient considera- 
tion for an agreement to accept one-quarter of her indebtedness to the plaintiff in 
satisfaction of the whole amount. 

9 Crabb v. Arun District Council, [1976] Ch. 179, [1975] 3 W.L.R. 847 (C.A.) 
(subsequent reference is to [1976] Ch.), and Owen Sound Public Library Board v. Mial 
Developments Ltd. (1979), 26 O.R. (2d) 459, 102 D.L.R. (3d) 685 (C.A.). 

10 Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465, [1963] 3 W.L.R. 
101 (H.L.), and Haig v. Bamford, [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68. 

11 Baxter & Co. v. Jones (1903), 6 O.L.R. 360 (C.A.). 

12 See infra, this ch., sec. 4(a)(i). 

13 See Reiter, "Courts, Consideration, and Common Sense" (1977), 27 U. Toronto L.J. 
439, and Swan, "Consideration and the Reasons for Enforcing Contracts", in Reiter and 
Swan (eds.), Studies in Contract Law (1980) 23, at 39-40. 

14 Compare Gilbert Steel Ltd. v. University Construction Ltd. (1976), 12 O.R. (2d) 19, at 
23, 67 D.L.R. (3d) 606, at 610 (C.A.) (subsequent references are to 12 O.R.) , with 
Owen Sound Public Library Board v. Mial Developements Ltd. , supra, note 9. See, also, 
the comments of Lord Denning M.R. in Crabb v. Arun District Council, supra, note 9, 
at 187. 



15 



See England, Law Revision Committee, Sixth Interim Report (Statute of Frauds and the 
Doctrine of Consideration) (Cmd. 5449, 1937) (hereinafter referred to as "Sixth Interim 
Report"). The Committee, however, rejected abolition on the ground that the doctrine 
was too deeply embedded in English law. 



Our ability to examine civil systems is obviously limited, and we recognize 
the difficulties and dangers of drawing superficial conclusions from apparent 
rules in other legal systems. Without an intimate knowledge of the system in 
question, it is easy to be led astray. The information available to the Commis- 
sion indicates that many civil systems, though they do not have a doctrine of 
consideration as such, do have a rule that requires gift promises to comply with 
special formalities, such as notarization. They also admit of special defences, 
such as ingratitude and financial adversity. Some civil systems also have a 
requirement of "serious intention". So far as we know, there is no legal system 
that enforces all promises. 

In our opinion, it would be unwise to import into our law what would 
amount to a wholly new and unfamiliar framework for determining the 
enforceability of promises. The consequences would be decades of uncertainty, 
and, possibly, diminution rather than enlargement of enforceability. For exam- 
ple, it is not obvious that a requirement of "serious intention" would guarantee 
enforceability of all exchange transactions. A distinction between "gift 
promises" and other promises, while perhaps not corresponding precisely to 
the present test of consideration, would likely raise just as many difficulties in 
practice. Strict formalities for "gift promises" might reduce the scope of 
protection currently given to reliance on informal gratuitous promises. 

The results of reform are likely to be more predictable, in our opinion, if 
the current framework of the law is maintained. Where we consider that there is 
a case for enlarging the scope of enforceability, we think it the most prudent 
course to recommend legislation providing specifically for such an enlarge- 
ment. Accordingly, in the following sections, we turn to the specific areas 
where reform appears to be needed. 



4. PROPOSALS FOR REFORM 

(a) The Pre-Existing Duty rule 

The pre-existing duty rule, developed at common law, is to the following 
effect: where B is already bound by contract with A to render a certain 
performance, neither the promise by B to perform nor actual performance by B 
can be consideration for a promise from A in return. 16 In connection with this 
rule, we shall examine the two main areas of difficulty created by the present 
doctrine of consideration. The first concerns a very specific but very common 
problem, namely, the enforceability of an agreement whereby, in return for part 
performance of an existing obligation, the party to whom the performance is 
owed agrees to extinguish the obligation. The second problem — which in many 
ways encompasses the first — deals with modification of contracts in general 
where the agreement to modify is unsupported by consideration. 



16 Stilk v. Myrick (1809), 2 Camp. 317, 170 E.R. 1168; Foakes v. Beer (1884), 9 App. 
Cas. 605, [1881-85] All E.R. Rep. 106 (H.L.); and Gilbert Steel Ltd. v. University 
Construction Ltd., supra, note 14. 



(i) Part Performance and Agreements to Extinguish Existing 
Obligations 

a. Amendment of Section 16 of the Mercantile Law 
Amendment Act 

At common law, the most usual example of the operation of the pre- 
existing duty rule was the unenforceability of an agreement by a creditor to 
accept from a debtor partial payment of an outstanding debt as full satisfaction 
of the obligation owed. The reason the common law adopted this position would 
appear to be that "[a] promise by the debtor to pay only part of the debt 
provides no consideration for the accord, as it is merely a promise to perform 
part of an existing duty owed to the creditor". 17 Moreover, actual payment of 
the lesser sum would make no difference; the creditor would not be bound by 
the agreement and could seek full payment of the debt owed. 18 In 1884, the 
House of Lords, in the well known case of Foakes v. Beer, 19 approved the 
propositions of law just stated. 

The Ontario Legislature acted swiftly to reverse what was widely per- 
ceived as a commercially untenable position. Only a year later it passed The 
Administration of Justice Act, 1885, 20 section 6 of which sought to overcome 
the rule in Foakes v. Beer. Section 6 of that Act is now section 16 of the 
Mercantile Law Amendment Act, 21 which provides as follows: 

16. Part performance of an obligation either before or after a breach thereof 
when expressly accepted by the creditor in satisfaction or rendered in pursuance of 
an agreement for that purpose, though without any new consideration, shall be held 
to extinguish the obligation. 

While this provision has had the effect of negating the worst effects of the 
rule in Foakes v. Beer, it is not without its own problems. For example, section 
16 does not cover an outright forgiveness of an obligation. Moreover, because 
the section is worded in terms of acceptance of part performance rather than 
agreement to accept part performance, it is doubtful whether it applies to 
executory promises, that is, promises that are still to be performed. Thus, there 
is uncertainty whether and when an obligee, who has agreed to accept part 
performance in satisfaction of the whole obligation, may revoke the agree- 
ment. 22 While the Commission supports the general thrust of section 16, we 



17 Guest et al. (eds.), Chitty on Contracts (25th ed., 1983), para. 209. 

18 Ibid. 

19 Supra, note 16. 

20 48 Vict., c. 13 (Ont.). 

21 Supra, note 7. 

22 In Rommerill v. Gardener (1962), 35 D.L.R. (2d) 717, 40 W.W.R. 265 (B.C.C.A.) the 
Court left open the question whether an obligee could terminate at will an agreement for 
part performance before the agreement had been performed. In Bank of Commerce v. 
Jenkins (1888), 16 O.R. 215 (Comm. PI.), at 225 the Court suggested that once there 
was an agreement for part performance it could not be revoked. In Hoolahan v. Hivon, 



10 



believe that reform of the law is warranted in order to clarify these uncertainties 
or gaps in the law. 

(I) Executory Promises and Outright Forgiveness of a 
Debt 



The basis for the rule in Foakes v. Beer is generally agreed to be a concern 
to protect a creditor "against a debtor who too ruthlessly exploits the tactical 
advantage of being a potential defendant in litigation". 23 Once it is conceded 
that this justification for the rule should not prevent an obligee from accepting 
partial performance in full satisfaction of the obligation owed by the obligor, we 
can see no compelling reason to prevent the obligee from entering into an 
enforceable agreement to so modify the obligation. Such agreements are by no 
means uncommon, and are generally intended to be relied upon. As a matter of 
commercial reality, consideration theory notwithstanding, such agreements do 
generally enure to the obligee's benefit, because they encourage a debtor in 
financial difficulties to pay at least some of the debt, when otherwise he or she 
might be tempted to walk away from the agreement altogether. Consequently, it 
runs counter to reasonable expectations for our courts to refuse to enforce them. 
In our view, section 16 of the Mercantile Law Amendment Act should be 
amended to make it clear that, subject to actual performance, executory 
agreements to accept part performance in satisfaction of the whole are binding. 

Similarly, we would not prevent an obligee from agreeing to forgive the 
obligation entirely. It may be argued that such forgiveness is equivalent to an 
unexecuted gift, and so should meet the formalities required to make a 
gratuitous promise enforceable. But, unlike a gift, forgiveness of an obligation 
requires no further action, like delivery, to execute it. Moreover, it would be 
anomalous for the law to permit enforcement of an agreement to discharge a 
$1000 debt by the payment of one cent, but to render unenforceable a simple 
promise to forgive the debt. 

What is the law on this point in other jurisdictions? The common law rule 
in Foakes v. Beer is still good law in England. Interestingly, the English Law 
Revision Committee, in its Sixth Interim Report, proposed "[t]hat an agreement 
to accept a lesser sum in discharge of an enforceable obligation to pay a larger 
sum shall be deemed to have been made for valuable consideration". 24 
Arguably, forgiveness of a debt would not be covered by this recommendation, 

[1944] 4 D.L.R. 405, [1944] 3 W.W.R. 120 (Alta. S.C., T.D.), the Court held that an 
agreement for part performance could not be revoked so long as the agreement was being 
carried out according to its terms. In instances where the obligor fails to perform the 
agreement for part performance, the original obligation may be revived. See Udy v. 
Doan, [1940] 2 W.W.R. 440 (Sask. K.B.). 



23 
24 



Chitty on Contracts, supra, note 17, para. 210. 

Sixth Interim Report, supra, note 15, para. 50(3) (emphasis added). 



11 



since outright forgiveness calls for no payment. This recommendation, how- 
ever, must be read together with another general recommendation of the 
Committee: 25 

[A]n agreement shall be enforceable if the promise or offer has been made in 
writing by the promisor or his agent, or if it be supported by valuable consideration 
past or present. 

Under this proposal, an obligee's promise in writing to forgive an obligation 
would be enforceable. Consequently, it can be seen that implementing the 
recommendations of the English Law Revision Committee would go a long way 
towards minimizing the effect of the rule in Foakes v. Beer. It should be noted 
that to date none of the recommendations concerning the doctrine of considera- 
tion contained in the Sixth Interim Report have found their way into legislation. 

In the United States, the law varies from jurisdiction to jurisdiction, with 
some states providing that a Foakes v. Beer type of promise will not be invalid 
for want of consideration if the promise is reduced to writing and signed by the 
promisor against whom it is to be enforced. 26 

In our Report on Sale of Goods, 21 we recommended that good faith 
modifications of contracts of sale should be enforceable, whether or not 
supported by consideration. We return to this issue below. 28 Suffice it to say at 
this juncture that, in the sales context, we saw no need to retain any vestige of 



25 Ibid., para. 50(2). 

26 See, for example, McKinney's Consolidated Laws of New York Annotated, Vol. 23 A, 
General Obligations Law (1978) (subsequently referred to as "New York General 
Obligations Law"). Section 5-1103 provides as follows: 

5-1103. An agreement, promise or undertaking to change or modify, or to 
discharge in whole or in part, any contract, obligation, or lease, or any mortgage or 
other security interest in personal or real property, shall not be invalid because of 
the absence of consideration, provided that the agreement, promise or undertaking 
changing, modifying, or discharging such contract, obligation, lease, mortgage or 
security interest, shall be in writing and signed by the party against whom it is 
sought to enforce the change, modification or discharge, or by his agent. 

See, also, American Law Institute, Uniform Commercial Code, Official Text (9th 
ed., 1978) (hereinafter referred to as "Uniform Commercial Code"), § 1-107, for a 
provision similar in effect. It states: 

1-107. Any claim or right arising out of an alleged breach can be discharged in 
whole or in part without consideration by a written waiver or renunciation signed 
and delivered by the aggrieved party. 

It should be noted that both the provision in the New York General Obligations Law, set 
out above, and § 1-107 of the Uniform Commercial Code cover a promise to discharge in 
whole or in part any existing obligation. See, also, American Law Institute, Restatement 
of the Law, Second — Contracts, 2d (1979) (hereinafter referred to as "Second 
Restatement"), § 89, discussed infra, this ch., sec. 4(a)(ii). 

27 Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. Ill, Draft Bill, s. 4.8. 

28 Infra, this ch., sec. 4(a)(ii). 



12 



the doctrine of consideration for the modification of sales contracts. Nor did we 
see the need to require a "modification agreement" to be reduced to writing, 
except where the original agreement itself so provided. 29 

Later in this Report, 30 we shall recommend substantial repeal of the 
Statute of Frauds, 31 as well as the adoption of a general unconscionability 
doctrine. 32 We see no sufficient reason to require a writing in order to render 
enforceable a promise to forgive or to accept part performance of an obligation 
in satisfaction of an existing obligation where the original agreement itself 
imposed no such requirement. Accordingly, the Commission recommends that 
section 16 of the Mercantile Law Amendment Act should be amended to make it 
clear that an agreement, whether executed or executory, by an obligee to accept 
part performance of an obligation in place of full performance, as well as an 
agreement to waive performance of an obligation, need no consideration to be 
binding. 33 

(2) Revocation of a Promise Covered by the Mercantile 
Law Amendment Act 

A question arises whether an obligee should be able to revoke a promise to 
accept part performance where the obligor breaches the obligation of part 
performance. The English Law Revision Committee, in its Sixth Interim 
Report, recommended that, "if the new agreement is not performed then the 
original obligation shall revive". 34 

We agree. If the obligor has failed to comply with the new arrangement, 
the obligee should be entitled to enforce the rights under the original agreement. 
Our reason for this position is as follows: the obligee has agreed to accept less 
on the ground that "a bird in the hand is worth two in the bush". It would be 
unfair, in such a case, to limit the rights absolutely to the single bird of the 



29 Sales Report, supra, note 27, Vol. I, at 101-02. 

30 Infra, ch. 5. 

31 Statute of Frauds, R.S.O. 1980, c. 481. 

32 Infra, ch. 6. 

33 It should be noted that the Manitoba Law Reform Commission has recently considered s. 
6 of the Manitoba Mercantile Law Amendment Act, R.S.M. 1970, c. M120, which is 
similar to s. 16 of the Ontario legislation, except that it imposes a requirement that the 
creditor expressly accept the part performance in writing: see Manitoba, Law Reform 
Commission, Report No. 62, Report on Small Projects, Part 1 (1985) (hereinafter 
referred to as "Manitoba Report"). The Commission recommends repeal of the writing 
requirement (ibid., para. 1.14, Recommendation 2, at 10) except where the original 
contract or obligation requires that any modification be in writing (ibid., para. 1.15, 
Recommendation 3, at 11). The Commission further recommends that an obligation 
should not be extinguished by part performance where, upon application, the court finds 
that extinguishment of the obligation would be unconscionable (ibid., para. 1.18, 
Recommendation 4, at 1 1-12). The Report does not deal expressly with waiver, but does 
recommend that purely executory agreements should remain revocable in the absence of 
consideration (ibid., para. 1.20, at 13). 

Sixth Interim Report, supra, note 15, para. 50(3). 



34 



13 



subsequent agreement, for we believe that in most cases it would be an implicit 
understanding between the parties that failure to comply with the terms of the 
new agreement would revive the old one. At the same time, we are of the view 
that the obligee's right of revocation should not be available where the breach of 
the obligation of part performance by the obligor is merely trivial or technical, 
so as to prevent the obligee from using a technical breach of the new agreement 
to breathe life into the original agreement. 

Accordingly, we recommend that an agreement under the proposed revised 
section 16 of the Mercantile Law Amendment Act should be revocable by the 
obligee for breach, unless the breach of the obligation of part performance by 
the obligor is merely trivial or technical. 35 

(ii) Modification of Contracts 

The other context in which problems with the pre-existing duty rule should 
be addressed is that of modification of contracts in general. The application of 
the rule is perhaps best exemplified by the 1976 decision of the Ontario Court of 
Appeal in Gilbert Steel Ltd. v. University Construction Ltd. 36 

The facts of Gilbert Steel were as follows. The plaintiff and defendant had 
entered into a written contract for the delivery of fabricated steel by the plaintiff 
to three separate construction sites. The action concerned the delivery of steel to 
the third site. During construction on this site, the price of unfabricated steel 
increased, thereby increasing the plaintiffs costs. Discussions took place 
between the plaintiff and the defendant, and a "new contract" providing for 
higher prices for fabricated steel was agreed to by the parties. While the 
plaintiff sent the defendant a contract embodying the agreed changes in price for 
the fabricated steel, the written contract was never executed by the defendant. 
The defendant accepted deliveries of the steel, but payments against the 
invoices (reflecting the new arrangement) were rounded, with the result that 
there was a balance left owing by the defendant. The plaintiff sued for payment 
of this balance and the defendant denied liability on the ground that the new 
contract was not binding, since the plaintiff was already under an obligation to 
deliver the steel and the latest arrangement was not supported by new 
consideration. 

The Court of Appeal found for the defendant, relying on the "leading 
case" 37 of Sti Ik v. Myrick? % as the fount of the pre-existing duty rule. All efforts 
by plaintiffs counsel to point to consideration for the new agreement failed. 
Counsel's attempt to rely on the doctrine of promissory estoppel did not succeed 
because "estoppel can never be used as a sword but only as a shield" 39 and 



35 Compare Manitoba Report, supra, note 33, para. 1.21, Recommendation 6, at 14. 

36 Supra, note 14. 

37 See Gilmore, The Death of Contract (1974), at 23-28, where the author discusses how 
Stilk v. Myrick became the "leading case" in this area of the law of contracts. 

38 Supra, note 16. 

39 Gilbert Steel Ltd. v. University Construction Ltd., supra, note 14, at 23. 



14 



because the plaintiff had failed to prove two of the necessary elements of 
promissory estoppel. 40 The decision of the Ontario Court of Appeal in Gilbert 
Steel Ltd. v. University Construction Ltd. and the pre-existing duty rule have 
been the subject of considerable critical commentary. 41 

As stated above, it has been suggested that the reason for the pre-existing 
duty rule is the law's concern to discourage pressure being brought by one party 
to a contract for an increase in the exchange at a time when the other party is 
most vulnerable. 42 In the context of the Gilbert Steel case, it may be argued that 
enforcing the new contract would have rewarded the plaintiff for using the 
leverage of an incomplete building to gain an increase in the price of the steel to 
be delivered. However, the application of the pre-existing duty rule did not turn 
on evidence of duress, undue pressure, or unconscionability. It may well be that 
in many cases the courts have relied on the doctrine of consideration as an 
indirect means of giving relief against promises unfairly obtained. Unfortu- 
nately, the doctrine may also be applied to render an agreement unenforceable 
where no such unfairness exists and where the agreement is commercially 
sensible. 

Another criticism of the rule in Stilk v. Myrick is the broad exceptions to it, 
which allow courts to enforce promises where there is, in fact, no more 
consideration than that in Gilbert Steel Ltd. v. University Construction Ltd. One 
commentator has described 43 four major techniques used to avoid the rule in 
Stilk v. Myrick: 

1 . finding that 'on the facts of this case' the plaintiff promised to do more than he 
was obliged to do; 

2. finding that circumstances have so changed after the original agreement that 
the plaintiffs later promise to do exactly what he agreed to do before is 
consideration for a promise of more from the defendant; 

3. concluding that, because the plaintiff has seriously relied on the defendant's 
later promise, considerations of justice and equity require enforcement of the 
promise despite orthodox rules; and 

4. enforcing the modification if the parties have entered into a 'new agreement' 
and have not 'merely modified' the original agreement. 

Given the frequent judicial resort to these techniques, it is doubtful that the pre- 
existing duty rule actually prevents contracting parties from threatening to 
break contracts in order to secure further remuneration from the other party. 



40 



Ibid., at 23-24. The Court said that to found an estoppel the plaintiff had to show "that 
the conduct of the defendant was clearly referable to the defendant's having given up its 
right to insist on the original prices" as well as "that the plaintiff relied on the 
defendant's conduct to its detriment". 



41 See, for example, Reiter, supra, note 13. 

42 Chitty on Contracts, supra, note 17, para. 2. 

43 Reiter, supra, note 13, at 474. 



15 



American law has long recognized the enforceability of contract modifica- 
tions, even where the variation in the contract is not supported by consideraton. 
For example, section 5-1103 of the New York General Obligations Law 44 
provides as follows: 

5-1103. An agreement, promise or undertaking to change or modify, or to 
discharge in whole or in part, any contract, obligation, or lease, or any mortgage 
or other security interest in personal or real property, shall not be invalid because 
of the absence of consideration, provided that the agreement, promise or undertak- 
ing changing, modifying, or discharging such contract, obligation, lease, mortgage 
or security interest, shall be in writing and signed by the party against whom it is 
sought to enforce the change, modification or discharge, or by his agent. 

The Second Restatement of the Law of Contracts* 5 takes a somewhat 
different approach. Section 89 of the Restatement provides: 

89. A promise modifying a duty under a contract not fully performed on 
either side is binding 

(a) if the modification is fair and equitable in view of circumstances not 
anticipated by the parties when the contract was made; or 

(b) to the extent provided by statute; or 

(c) to the extent that justice requires enforcement in view of material 
change of position in reliance on the promise. 

Section 89(b) simply takes into account statutory provisions such as section 5- 
1103 of the New York General Obligations Law. Section 89(c) would permit 
enforcement to the extent justice requires where an obligor acts in reliance on a 
promise to modify a contract. In this respect, section 89(c) is but a specific 
instance of the principle found in section 90 of the Restatement, to which we 
shall return below. 46 

This Commission has already called for substantial changes to the pre- 
existing duty rule in the Report on Sale of Goods. 4,1 There, we observed as 
follows: 48 

In inflationary times, or in periods of shortages, the pressure for substantial 
modifications is particularly strong. One might have thought that the common law 
would have been content to respect a familiar business phenomenon without 
fettering it with the restrictive requirements of the doctrine of consideration. Such 
an attitude could reasonably be justified in terms of the difference between 
requiring consideration to support the enforceability of an original promise, and 



44 New York General Obligations Law, supra, note 26. 

45 Second Restatement, supra, note 26. 

46 Infra, this ch., sec. 4(d). 

47 Sales Report, supra, note 27. 

48 Ibid., Vol. I, at 96 (footnote reference omitted). 



16 



recognizing a freely and fairly adopted modification once the bargain has been 
struck. 

We accordingly proceeded to recommend adoption of the following provision: 49 

4.8.-(l) An agreement in good faith modifying a contract of sale needs no 
consideration to be binding. 

(2) An agreement that excludes modification or rescission except by a signed 
writing cannot be otherwise modified or rescinded but, except as between 
merchants, such a requirement on a form supplied by the merchant must be 
separately signed by the other party. 

(3) An attempt at modification or rescission that does not satisfy the 
requirements of subsection 2 may operate as a waiver or equitable estoppel. 

(4) A party who has waived compliance with an executory portion of a 
contract may retract the waiver by reasonable notification received by the other 
party that strict performance will be required of any term waived, unless the 
retraction would be unjust in view of a material change of position in reliance on 
the waiver. 

In our view, it is implicit in the above provision that agreements modifying 
or rescinding contracts would be binding, subject to a limited exception: 
revocation would be permissible in the case of an attempted modification that 
fails to comply with a contractually required formality. That is, section 4.8(4) 
was not intended to be of general application, so as to impinge on the operation 
of section 4.8(1). Rather, it was intended that section 4.8(4) be restricted to 
cases within section 4.8(3). Section 4.8 of our proposed Sale of Goods Act was 
based on section 2-209 of the Uniform Commercial Code. The Official 
Comment relating to section 2-209 contains a similar interpretation. 50 

The Uniform Sale of Goods Act, proposed by the Uniform Law Conference 
of Canada, 51 contains an amended version of section 4.8. Section 27 of the 
Uniform Act states: 

27. An agreement varying or rescinding a contract of sale needs no considera- 
tion to be binding, but a party may withdraw from an executory portion of the 
agreement made without consideration and revert to the original contract by giving 
reasonable notice to the other party, unless the withdrawal would be unjust in view 
of a material change of position in reliance on the agreement. 

Unlike the Uniform Law Conference of Canada, however, we do not 
believe that a party should generally be able to withdraw from a modified or 
varied contract on the ground that the contract, or some part of it, is executory 



49 Ibid., Vol. Ill, Draft Bill. 

50 Uniform Commercial Code, supra, note 26, § 2-209, Comment 4. 

51 Uniform Law Conference of Canada, Proceedings of the Sixty-fourth Annual Meeting 
(1982), Appendix HH (hereinafter referred to as "Uniform Sale of Goods Act"). 



17 



and no injustice would result from a withdrawal. 52 Rather, we recommend the 
adoption of a provision similar to section 4.8 of the proposed Sale of Goods Act. 
As we have stated, it is our view that a modified contract should be treated as a 
contract supported by consideration, and a party should not be able to resile 
from it merely because doing so would not result in an injustice. We believe 
that this view, while implicit in section 4.8 of our proposed Sale of Goods Act, 
should be made explicit. Accordingly, we recommend that a provision similar 
to section 4.8 should be enacted to provide as follows: 53 

(1) an agreement in good faith modifying a contract should not require considera- 
tion in order to be binding; 

(2) an agreement that excludes modification or rescission except by a signed 
writing should not be otherwise subject to modification or rescission but, 
except as between parties acting in the course of business, such a requirement 
on a form supplied by a party acting in the course of a business should be 
required to be signed separately by the other party; 

(3) an attempt at modification or rescission that does not satisfy the requirements 
of the preceding paragraph or that does not satisfy any statutory requirement of 
writing or corroboration should be capable of operating as a waiver or 
equitable estoppel; and 

(4) where paragraph (3) applies, a party who has waived compliance with an 
executory portion of a contract should be able to retract the waiver by 
reasonable notification received by the other party that strict performance will 
be required of any term waived, unless it would be unjust in view of a material 
change in position in reliance on the waiver to allow the waiver to be retracted. 
In the case of an equitable estoppel, a similar principle should apply. 

Before leaving the topic of the pre-existing duty rule, we wish to make a 
final observation. Given the general provision for modification of contracts that 
we have proposed, the need for an amended version of section 16 of the 
Mercantile Law Amendment Act 54 might be questioned. Any case of waiver of* 
part performance of an obligation within section 16 could conceivably be 
described as a "modification" falling within paragraph (1) above. Neverthe- 
less, we believe that an amended version of section 16 should continue to exist 
alongside a general modification provision. Section 16 has been part of the law 
of Ontario for approximately one hundred years, and isolates a situation that has 
proven troublesome. Repeal of the provision, and its replacement by the general 
modification provision that we have proposed, runs the risk of overlooking 
some nuance of section 16 of which we might be unaware. Furthermore, section 



52 The reasons for the Uniform Law Conference of Canada's departure from the position 
taken by the Commission on this point in its Sales Report are set out in Uniform Law 
Conference of Canada, Proceedings of the Sixty-third Annual Meeting (1981), at 190. 

53 It should be noted that although probably not affected by the recommendations set out in 
paragraphs (3) and (4), attempted modifications relating to increased payment or 
performance may be enforceable under our recommendations in sec. 4(d) of this chapter 
relating to reliance as a basis of enforcement. 

54 Supra, note 7. 



18 



16 of the Mercantile Law Amendment Act deals not only with contractual 
obligations, but also applies, for example, to tort claims reduced to judgment, 
so that it would not be wholly replaced by a provision dealing with modification 
of contracts. 

(b) THE PAST CONSIDERATION RULE 

The doctrine of consideration requires that there be a present consideration 
for a promise to be binding. As the editors of Chitty on Contracts have said, 
"[i]f the act or forbearance alleged to constitute the consideration has already 
been done before, and independently of, the giving of the promise, it does in 
law not amount to consideration". 55 

The leading case in this area of the law is Eastwood v. Kenyon. 56 The 
plaintiff, who was the guardian of a young woman, borrowed money to pay for 
the woman's education and maintenance and to manage her inherited property. 
After the young woman came of age and married, her husband promised to 
repay the guardian's loan. When that promise was not honoured, the plaintiff 
sued the husband. Lord Denman dismissed the plaintiffs claim on the ground 
that the promise was not supported by consideration except as a past benefit not 
conferred at the request of the defendant. 57 His Lordship justified the non- 
enforcement of such promises on the following basis: 58 

The enforcement of such promises by law, however plausibly reconciled by 
the desire to effect all conscientious engagements, might be attended with mischie- 
vous consequences to society; one of which would be the frequent preference of 
voluntary undertakings to claims for just debts. Suits would thereby be multiplied, 
and voluntary undertakings would also be multiplied, to the prejudice of real 
creditors. 

We believe that a case can be made for enforcing, at least to some extent, a 
promise such as that in issue in Eastwood v. Kenyon. The basis for enforcing a 
gratuitous promise made against a background of past consideration would be 
the desire to avoid unjust enrichment. Insofar as the value promised is 
approximately equivalent to the value of the benefit conferred on the promisor, 
enforcing the promise would seem justifiable. The law of restitution may or 
may not compel the recipient of an unrequested benefit to pay for it, but if the 
recipient recognizes an obligation to pay, puts a value on the benefit, and 
promises to pay, the making of the promise seems to be sufficient reason for 
enforcing payment. However, we do not mean to suggest by this that a promise 
supported by past consideration should be fully enforceable. Rather, we are of 
the view that such promises should be enforced only to the extent necessary to 
prevent unjust enrichment. 



55 Chitty on Contracts, supra, note 17, para. 162. For a recent examination of this 
question, see Pao On v. Lau Yiu Long, [1980] A.C. 614, [1979] 3 All E.R. 65 (P.C. 
(Hong Kong)). 

56 Supra, note 4. 

57 Ibid., at 487. 

58 Ibid. 



19 



This is the position taken in the Second Restatement of the Law of 
Contracts. 59 Section 86 of the Restatement reads: 

86. -(1) A promise made in recognition of a benefit previously received by the 
promisor from the promisee is binding to the extent necessary to prevent injustice. 

(2) A promise is not binding under Subsection (1) 

(a) if the promisee conferred the benefit as a gift or for other reasons the 
promisor has not been unjustly enriched; or 

(b) to the extent that its value is disproportionate to the benefit. 

It also may be useful to set out the rationale given in the Restatement for 
enforcing promises supported by past consideration: 60 

Although in general a person who has been unjustly enriched at the expense 
of another is required to make restitution, restitution is denied in many cases in 
order to protect persons who have had benefits thrust upon them. See Restatement 
of Restitution §§ 1,2, 112. In other cases restitution is denied by virtue of rules 
designed to guard against false claims, stale claims, claims already litigated, and 
the like. In many such cases a subsequent promise to make restitution removes the 
reason for the denial of relief, and the policy against unjust enrichment then 
prevails. 

The present law, through a number of exceptions, permits the enforcement 
of some promises supported only by past consideration. For example, the 
courts, on occasion, have characterized a subsequent promise as evidence of an 
earlier enforceable agreement for remuneration or as a new agreement fixing 
the amount of remuneration. 61 A subsequent promise by a discharged bankrupt 
to pay his or her debts notwithstanding the discharge may be enforced. 62 
Legislation provides for enforcement of a promise to pay a debt that is statute- 
barred, 63 and for enforcement of a promise made after a minor reaches majority 
affirming an unenforceable promise made for consideration during minority. 64 
It has been observed, and we would agree, that these statutory exceptions 
developed because justice required the results that were reached. 65 



59 Second Restatement, supra, note 26. 

60 Ibid., § 86, Comment b. 

61 Re Casey's Patents; Stewart v. Casey, [1892] 1 Ch. 104 (C. A.), and Kennedy v. Brown 
(1863), 13 C.B. (N.S.) 677, 143 E.R. 268. 

62 Austin v. Gordon (1872), 32 U.C.Q.B. 621 (Q.B.), and Adams v. Woodland (1878), 3 
O.A.R. 213 (C.A.). 

63 Limitations Act, R.S.O. 1980, c. 240, s. 51(1). 

64 Statute of Frauds, supra, note 31, s. 7. 

65 Waddams, The Law of Contracts (2d ed., 1984), at 137. 



20 



Accordingly, we recommend that any promise made in recognition of a 
benefit previously received by the promisor or any third party from the 
promisee, should be binding to the extent necessary to prevent unjust enrich- 
ment. Implicit in this recommendation is our view that such promises should not 
be enforceable where the promisee conferred the benefit as a gift or where for 
other reasons the promisor has not been unjustly enriched. Finally, the 
Commission recommends that promises supported by past consideration, where 
enforceable, should be enforceable only to the extent that the value of the 
promise is not disproportionate to the benefit. 

We would point out that, although our recommendations would allow a 
court to enforce a promise made in recognition of a benefit conferred on a third 
person in a case of unjust enrichment, it will only be in comparatively rare 
cases, like Eastwood v. Kenyon, 66 that the promisor can be said to be unjustly 
enriched by a benefit conferred upon a third party. 

The limitations on enforceability that we have proposed are intended to 
ensure that Ontario courts are given some guidance concerning the extent of 
enforceability of the kinds of promises in issue, and to guard against the over- 
enforcement of such promises. We believe that these recommendations, which 
correspond generally to the provisions of section 86 of the Restatement, will 
provide the courts with the flexibility necessary to do justice. 

(c) Firm Offers 

At common law, a firm offer — that is, an offer that is said to be 
irrevocable for a certain period of time or indefinitely — is nevertheless 
revocable by the promisor unless the offer is bargained for or is made under 
seal. 67 Such an offer will usually be a gratuitous promise, unsupported by 
consideration, and therefore subject to the same rules as all gratuitous promises. 
One object of the law is to protect the offeror from liability for hastily-made or 
ill-considered firm offers. The presence of consideration or a seal, it may be 
argued, helps to ensure that a promise to keep an offer open for a definite 
period of time or until the occurrence of a certain event will be made with due 
deliberation. Nevertheless, the existing rule gives rise to many difficulties and 
does not reflect the business community's understanding of the significance of 
firm offers. 

It is these perceptions that underlie past and recent reform efforts. The 
subject of firm offers was canvassed, for example, in the English Law Revision 
Committee's Sixth Interim Report. 68 It was there recommended "[t]hat an 
agreement to keep an offer open for a definite period of time or until the 
occurrence of some specified event shall not be unenforceable by reason of the 



66 Supra, note 4. 



67 Dickinson v. Dodds, [1875-76] 2 Ch. D. 463 (C.A.). See, also, McMaster University v. 
Wilchar Construction Ltd., [1971] 3 O.R. 801, 22 D.L.R. (3d) 9 (H.C.J.), affd (1973), 
12 O.R. (2d) 512n (C.A.). 



68 



Sixth Interim Report, supra, note 15. 



21 



absence of consideration". 69 It was the Committee's opinion that the common 
law rule was "undesirable and contrary to business practice". 70 The Committee 
explained that an offeror who desired consideration for keeping open an offer 
could demand it, but the absence of consideration did not justify allowing the 
offeror to revoke the offer with impunity. 71 The Committee argued that "the 
fixing of a definite period should be regarded as evidence of [the offeror's] 
intention to make a binding promise". 72 The converse of this argument was, of 
course, that the failure to fix a period for acceptance of an offer indicated that 
no contractual obligation was intended. 73 

As with all the subsidiary recommendations in the Sixth Interim Report, the 
recommendation concerning firm offers must be read subject to the Commit- 
tee's main recommendation. It will be recalled that the Committee favoured the 
enforceability of any promise or offer made in writing by the promisor or an 
agent, whether or not the promise or offer was supported by consideration. 74 
Accordingly, even an offer that stipulated no date for acceptance would be 
enforceable if made in writing by the promisor or an agent. 

In 1975, the English Law Commission issued a Working Paper on Firm 
Offers. 15 This Working Paper examined the criticisms levelled at the firm offer 
rule in the Sixth Interim Report. Noting that "it may be a fair criticism of this 
part of the law that it allows a lower standard of commercial behaviour than that 
to which reputable businessmen generally conform", the Law Commission 
called for an investigation of modern business practices in relation to firm 
offers. 76 The Law Commission observed, in summary, that "[t]he trend since 
1937, both nationally and internationally, seems ... to favour a modification of 
the [firm offer] rule ...". 77 

The Working Paper canvassed a number of options for reform. For 
example, it provisionally recommended altering the law to make firm offers 
binding only when made in the course of business. 78 Another matter discussed 
by the Law Commission was the length of time that a firm offer should be 
binding. 79 The Commission's provisional view was "that a promise of non- 
revocation that was expressed to run for a longer period should cease to be 



69 Ibid., para. 50(6). 

70 Ibid., para. 38. 

71 Ibid. 

72 Ibid. 

73 Ibid. 

74 Ibid., para. 29. 

75 England, The Law Commission, Working Paper No. 60, Firm Offers (1975). 

76 Ibid., para. 20. 

77 Ibid., para. 28. 

78 Ibid., para. 31. 

79 Ibid., para. 32. 



22 



binding after six years". 80 In the case of an offer that is not made irrevocable 
for a definite period of time, the Law Commission provisionally rejected a rule 
that would leave such firm offers open for a reasonable time, in favour of the 
approach suggested by the Law Revision Committee — that is, that this type of 
firm offer should be revocable at any time by the offeror. 81 Another possible 
requirement considered, but tentatively rejected, by the Law Commission was 
the need for the offer to be in writing. 82 The Law Commission also examined 
the question of remedies in some detail and provisionally proposed that an 
attempted revocation of an irrevocable offer should not prevent the offeree from 
accepting the offer, and that damages should be available to the offeree where 
the offeror is in breach of a firm offer. 83 

As the Law Commission's Working Paper noted, 84 there has been substan- 
tial reform of the common law firm offer rule in the United States. Section 2- 
205 of the Uniform Commercial Code 85 provides that a signed offer by a 
merchant to buy or sell goods, which by its terms assures that the offer will be 
held open for a specified period, is binding for the period specified. If no period 
is specified, the offer will be held open for a reasonable time, up to a maximum 
period of three months. Furthermore, if the term assuring that the offer will be 
held open is contained in a form supplied by the offeree, the form must be 
separately signed by the offeror. 

Under New York legislation, firm offers in writing signed by the offeror 
are binding whether or not made by a merchant, and no restriction is placed on 
the length of time for which a firm offer may be binding. The New York 
provision is made subject to provisions to the contrary in section 2-205 of the 
Uniform Commercial Code with respect to an offer by a merchant to buy or sell 
goods. 86 

In addition to these legislative reforms of the firm offer rule, there is a 
growing body of American case law calling for the enforcement of offers where 
enforcement is necessary to protect the offeree's reasonable reliance interest. 
This case law development is reflected in the Second Restatement of the Law of 
Contracts, section 87(2) of which provides: 

87. -(2) An offer which the offeror should reasonably expect to induce action 
or forbearance of a substantial character on the part of the offeree before 
acceptance and which does induce such action or forbearance is binding as an 
option contract to the extent necessary to avoid injustice. 



80 Ibid. 

81 Ibid., paras. 33-34. 

82 Ibid., para. 35. 

83 Ibid., paras. 41-50. 

84 Ibid., paras. 24-26. 

85 Uniform Commercial Code, supra, note 26. 

86 New York General Obligations Law, supra, note 26, § 5-1109. 



23 



This is, essentially, a specific application of section 90(1) of the Restatement, 
which seeks to protect reliance interests generally. 87 

In our own Report on Sale of Goods, m we canvassed most of these Anglo- 
American developments in respect of the present firm offer rule, and examined 
the issues considered by the Law Commission in its 1975 Working Paper. The 
following provision in our proposed Sale of Goods Act* 9 would give effect to 
our recommendation in the Report on Sale of Goods: 

4.3. An offer by a merchant to buy or sell goods which expressly provides 
that it will be held open is not revocable for lack of consideration during the time 
stated or, if no time is stated, for a reasonable time not to exceed three months. 

As will be apparent from this proposed provision, we agreed with some of 
the provisional recommendations of the Law Commission and rejected others. 
For example, we too did not favour a writing requirement in order for firm 
offers to be binding, on the ground that an "offeror usually has a sound 
business reason for his willingness to make [a] firm offer, or may be following 
an established business practice". 90 It should also be noted that our recommen- 
dation was restricted to offers by merchants. 91 

With respect to the period of time during which a firm offer should be 
irrevocable, we differed from the tentative position adopted by the Law 
Commission. We saw no reason to restrict the period for which an offer may be 
made irrevocable; nor did we wish to limit the enforceability of firm offers to 
those that are time limited. We stated in our Report on Sale of Goods: 92 

It appears to us that a merchant is quite capable of determining his own best 
interest, and that he should be free to set his own period of time, whether it is for 
more or less than six years. A firm offer that was expressed to remain open for 
more than six years would no doubt be a very unusual occurrence, but we see no 
overriding public policy that militates against its effectiveness. If it has been 
procured by improper means, the problem can be dealt with under other heads. 
Again, we see no justification, in terms of its effective duration, in drawing a 
distinction between a firm offer supported by consideration and an offer made 
without consideration. In the light of these factors, we have concluded that the 
revised Act should not impose a limit on the effectiveness of an offer expressed to 
remain open for a specified period, and so recommend. 

With respect to firm offers for an unspecified period, the Law Commission's 
Working Paper takes yet another approach. The Law Revision Committee was of 
the view that a firm offer for an unspecified period should not fall within the rule 



87 See discussion infra, this ch., sec. 4(d). 

88 Sales Report, supra, note 27, Vol. I, at 91-96. 

89 Ibid., Vol. Ill, Draft Bill. 

90 Ibid., Vol. I, at 94. 

91 Ibid., at 93. 

92 Ibid., at 93-94 (footnote references omitted). 



24 



making firm offers enforceable even though not supported by consideration. The 
Working Paper reaches the same conclusion on the ground that 'the need for 
certainty outweighs the other considerations'. We are not persuaded by this 
reasoning. It is well settled law that a simple offer is open for acceptance for a 
reasonable period, unless the offer provides otherwise. It is difficult to see why a 
different rule of construction should be applied to firm offers, or why it should 
create greater uncertainty than in the case of ordinary offers. As will have been 
noted, neither the Code nor, it would seem, the Uniform Law on Formation [of 
Contracts for the International Sale of Goods] distinguishes, in this context, 
between firm offers for a stated duration and firm offers for an unspecified period. 
Nevertheless, in order to accommodate, to some extent, the Law Commission's 
apprehensions, we recommend that, where the offer states no time for its duration, 
it shall remain irrevocable for a reasonable time not to exceed three months. 

Finally, we would note that we made no recommendations in our Report 
on Sale of Goods concerning the question of injurious reliance on firm offers 
outside the scope of our proposed section 4.3. While we recognized the merit of 
what is now section 87(2) of the Second Restatement of the Law of Contracts, 
we took the position that the doctrine of injurious reliance "raises much broader 
issues that are more appropriately discussed in the context of a Law of Contract 
Amendment Project". 93 

Before turning to our recommendations regarding the firm offer rule in the 
general law of contracts, we should point out that the Uniform Sale of Goods 
Act, 94 adopted in 1982 by the Uniform Law Conference of Canada, incorporates 
section 4.3 of our proposed Sale of Goods Act. 95 This provision is, however, 
qualified in the Uniform Sale of Goods Act by the requirement that an assurance 
of irrevocability of an offer in a form supplied by the offeree is not binding 
unless the assurance is separately signed by the offeror. 96 The qualification was 
borrowed from the Uniform Commercial Code and was adopted "to ensure that 
an offeror was not surprised by the presence of such a provision secreted in the 
midst of a boilerplate form". 97 

The Uniform Sale of Goods Act also includes a provision that gives effect 
to the doctrine of injurious reliance mentioned above. Section 23 of the 
Uniform Act states: 

23. Where an offer to buy or sell goods that the offeror should reasonably 
expect to induce substantial action or forbearance by the offeree before acceptance 
induces such action or forbearance and is revoked, the offeror is bound to 
compensate the offeree, and in any such case, the court may 



93 Ibid., at 96. 

94 Uniform Sale of Goods Act, supra, note 51. 

95 Ibid., s. 22(1). 

96 Ibid., s. 22(2). 

97 Uniform Law Conference of Canada, Proceedings of the Sixty-third Annual Meeting 
(1981), at 224. 



25 



(a) award damages on the same basis as if a contract had been completed 
between the parties, or 

(b) grant compensation limited to the restoration of any benefit conferred 
upon the offeror, to the recovery of any losses incurred as a result of 
reliance on the offer or generally, to the extent necessary to avoid 
injustice. 

In our view, insofar as firm offers made by a merchant or trader — in 
other words, in the course of business — are concerned, the same considera- 
tions would appear to be applicable outside the sales context and, therefore, the 
same conclusion seems appropriate. Accordingly, we recommend that an offer, 
made by a person in the course of a business, which expressly provides that it 
will be held open should not be revocable for lack of consideration during the 
time stated or, if no time is stated, for a reasonable time not to exceed three 
months. 

We have more difficulty with firm offers not made in the course of a 
business. Because of the potential financial significance of an option (another 
term for an irrevocable firm offer) and the possible lack of appreciation of this 
by a non-business person, we are reluctant to render enforceable any gratuitous 
firm offer made in a non-business context. Accordingly, we recommend that 
there should be no change in the law relating to firm offers not made in the 
course of business. In other words, in order to be enforceable, a firm offer, 
when made by a non-merchant, must be supported by consideration or comply 
with the formalities that, later in this Report, we recommend to replace the seal 
— a witnessed signed writing. 98 

Insofar as the doctrine of injurious reliance in the context of firm offers is 
concerned, we see no need to make a specific recommendation similar to 
section 87(2) of the Second Restatement of the Law of Contracts or to section 23 
of the Uniform Sale of Goods Act, set out above. The reason for this is that in 
the next section we shall propose the enactment of a provision similar to section 
90 of the Restatement, dealing with the enforceability of promises that may 
reasonably be expected to induce reliance. 

(d) Reliance as the Basis for the Enforcement of 
Promises 

Strict adherence to the doctrine of consideration would result in the 
unenforceability of a gratuitous promise even where the promisee has detrimen- 
tally relied on the promise. Because faithfulness to the doctrine of consideration 
in such cases would frequently lead to injustice, courts have developed a 
number of devices to enable them to protect the promisee's reliance interest. 
For example, courts have resorted to the doctrine of promissory estoppel to 



98 Infra, ch. 3, sec. 4(a). 



26 



prevent a promisor from taking advantage of a gratuitous promise that has 
reasonably induced reliance by the promisee." 

It was with the decision of Denning J., as he then was, in Central London 
Property Trust, Ltd. v. High Trees House, Ltd. 10 ° that the doctrine of promis- 
sory estoppel assumed a prominent place in the modern law of contracts. In that 
case, a landlord, having promised to reduce the rent payable under a lease and 
having accepted reduced payments in satisfaction of the lessee's rent obligation, 
was held to be bound by his gratuitous promise and unable to demand the 
original rent agreed to by the parties. The judgment was rendered in very broad 
terms, suggesting that reliance could be a nearly complete substitute for 
consideration. 

Limits on the High Trees doctrine, however, began to be drawn fairly 
quickly. In 1951, four years after High Trees, the English Court of Appeal 
decided the case of Combe v. Combe, m where a wife sought to enforce a 
promise of maintenance, unsupported by consideration, by resort to the doctrine 
of promissory estoppel. The Court ruled against the wife and, in so doing, 
stressed the continuing importance of consideration. Denning L.J., as he then 
was, commented as follows: 102 

Much as I am inclined to favour the principle of the High Trees case, it is important 
that it should not be stretched too far, lest it should be endangered. That principle 
does not create new causes of action where none existed before. It only prevents a 
party from insisting on his strict legal rights, when it would be unjust to allow him 
to enforce them, having regard to the dealings which have taken place between the 
parties. 



Seeing that the principle never stands alone as giving a cause of action in 
itself, it can never do away with the necessity of consideration when that is an 
essential part of the cause of action. The doctrine of consideration is too firmly 
fixed to be overthrown by a side-wind. Its ill-effects have been largely mitigated of 
late, but it still remains a cardinal necessity of the formation of a contract, though 
not of its modification or discharge. 

In the same vein, Birkett L.J. considered that the High Trees doctrine could be 
used "as a shield and not as a sword". 103 



99 See, for example, Owen Sound Public Library Board v. Mial Developments Ltd. , supra, 
note 9. 

100 [1947] 1 K.B. 130, [1956] 1 All E.R. 256n. 

101 [1951] 2 K.B. 215, [1951] 1 All E.R. 767 (C.A.) (subsequent reference is to [1951] 2 
K.B.). 

102 Ibid., at 219 and 220-21 (footnote references omitted). 

103 Ibid., at 224. 



27 



The Supreme Court of Canada, in a number of decisions, has considered 
and approved the doctrine of promissory estoppel. In Conwest Exploration Co. 
Ltd. v. Letain, 104 Mr. Justice Judson, speaking for the majority of the Court, 
relied on the case of Hughes v. Metropolitan Railway Co., 105 in which Lord 
Cairns stated: 

It is the first principle upon which all courts of equity proceed, that if parties, 
who have entered into definite and distinct terms, involving certain legal results — 
certain penalties or legal forfeiture — afterwards by their own act or with their own 
consent, enter upon a course of negotiation which has the effect of leading one of 
the parties to suppose that the strict rights arising under the contract will not be 
enforced, or will be kept in suspense, or held in abeyance, the person who 
otherwise might have enforced those rights will not be allowed to enforce them 
where it would be inequitable, having regard to the dealings which have thus taken 
place between the parties. 

The Supreme Court of Canada was called upon again to examine the 
doctrine of promissory estoppel in John Burrows Ltd. v. Subsurface Surveys 
Ltd. 106 Mr. Justice Ritchie, speaking for the Court, rejected the defence of 
promissory estoppel on the facts of the case, commenting: 107 

It seems clear to me that this type of equitable defence cannot be invoked 
unless there is some evidence that one of the parties entered into a course of 
negotiation which had the effect of leading the other to suppose that the strict rights 
under the contract would not be enforced, and I think that this implies that there 
must be evidence from which it can be inferred that the first party intended that the 
legal relations created by the contract would be altered as a result of the 
negotiations. 

It is not enough to show that one party has taken advantage of indulgences 
granted to him by the other for if this were so in relation to commercial 
transactions, such as promissory notes, it would mean that the holders of such 
notes would be required to insist on the very letter being enforced in all cases for 
fear that any indulgences granted and acted upon could be translated into a waiver 
of their rights to enforce the contract according to its terms. 

The actions of the plaintiff, Mr. Justice Ritchie concluded, were more in the 
nature of friendly indulgences. 108 



104 [1964] S.C.R. 20, at 28, 41 D.L.R. (2d) 198, at 206. 

105 (1877), 2 App. Cas. 439 (H.L.), at 448. 

106 [1968] S.C.R. 607, 68 D.L.R. (2d) 354 (subsequent references are to [1968] S.C.R.). 

107 Ibid., at 615. 

108 Ibid., at 617. See, also, Gillis v. Bourgard (1983), 41 O.R. (2d) 107, at 109, 145 D.L.R. 
(3d) 570, at 572 (C.A.), leave to appeal denied (1984), 51 N.R. 320n. The Court 
cautioned against transforming "normal dealings between parties attempting to resolve 
an insurance claim" into a promissory estoppel. 



28 



The Ontario courts in the last decade have also had an opportunity to 
discuss the nature and scope of the doctrine of promissory estoppel. In Gilbert 
Steel Ltd. v. University Construction Ltd. , 109 for example, the Ontario Court of 
Appeal decided that to apply the doctrine there had to be proof of detrimental 
reliance by the promisee on the representations of the promisor. 110 The Court in 
that case also seemed to accept the sword/shield dichotomy that has grown up 
around the doctrine of promissory estoppel. 111 However, in Owen Sound Public 
Library Board v. Mial Developments Ltd., 112 the same Court made no mention 
of the sword/shield distinction when it allowed the plaintiff to rely on promis- 
sory estoppel to recover damages from the defendant. 

Judges of the Ontario High Court of Justice have also grappled with the 
doctrine of promissory estoppel. In Re Tudale Exploration Ltd. and Bruce, m 
Grange J., as he then was, noted that the sword/shield distinction had been 
heavily criticized by academics and stated that he himself had "difficulty in 
seeing the logic of the distinction". Similar concerns were expressed in M.L. 
Baxter Equipment Ltd. v. Geac Canada Ltd. 1 14 and Edwards v. Harris Intertype 
(Canada) Ltd. 115 

It is interesting to note that, even before the recent judicial development of 
the promissory estoppel doctrine, there had been calls for reform. For example, 
the Sixth Interim Report of the English Law Revision Committee, published a 
decade before High Trees, proposed that "a promise which the promisor 
knows, or reasonably should know, will be relied on by the promisee shall be 
enforceable if the promisee has altered his position to his detriment in reliance 
on the promise". 116 

Another judicial device that may be said to give protection to a promisee 
who relies on a gratuitous promise is the tort of negligent misrepresentation, 
which came to the fore with the decision of the House of Lords in Hedley Byrne 
& Co. Ltd. v. Heller & Partners Ltd. 117 and was accepted by the Supreme Court 
of Canada in Haig v. Bamford. us Until Hedley Byrne, the law of torts permitted 
the recovery of damages only for fraudulent misrepresentations. We need not 
digress to examine in detail the new tort of negligent misrepresentation. What 
we do wish to point out is the relationship of this tort and the topic under 



109 Supra, note 14. 

110 Ibid., at 23-24. 

111 Ibid., at 23. 

112 Supra, note 9. 

113 (1978), 20 O.R. (2d) 593, at 597, 88 D.L.R. (3d) 584, at 588 (Div. Ct.). 

114 (1982), 36 O.R. (2d) 150, 133 D.L.R. (3d) 372 (H.C.J.). 

115 (1983), 40 O.R. (2d) 558 (H.C.J. ), aff d (1984), 46 O.R. (2d) 286 (C.A.). 

116 Sixth Interim Report, supra, note 15, para. 50(8). 

117 Supra, note 10. 

118 Supra, note 10. 



29 



discussion. Professor Waddams, in his text on The Law of Contracts, outlines 
this relationship: 119 

The relationship between the cases in tort that permit recovery for loss caused 
by reliance on negligent misstatements, and the law of contracts, is yet to be fully 
explored. It was suggested in the leading tort case that a 'special relationship' must 
exist between the parties in order to give rise to the duty of care and that such a 
special relationship would exist in circumstances 'analogous to contract' but where, 
for some reason, no contract happened to exist between plaintiff and defendant. 
The relevance to the matter at hand is clear. In the various cases of gratuitous 
promises, we are dealing with circumstances often very close to contract but 
where, according to the general rules of contract formation, no enforceable 
contract has been formed. There would seem to be no reason why the reasoning of 
the tort cases should not be extended to the case of a gratuitous promise inducing 
reliance. Just as in the case of negligent misstatement, the maker of the promise has 
acted in a way that he knows, or ought to know, may cause damage to the plaintiff. 
But the measure of damages in tort is generally agreed to be the plaintiff's loss, not 
his expectation. It is not to be deduced from this analogy that there is anything to be 
gained by labelling actions on gratuitous promises as tortious rather than contrac- 
tual. But it is suggested that it would be wise to preserve to the court the option of 
applying other measures of damages than the 'normal' contract measure. 

The use of promissory estoppel and the tort of negligent misrepresentation 
are examples of the inventiveness of our courts in creating devices to circum- 
vent the doctrine of consideration where justice appears to require it. It may 
also be contended that awards in restitution 120 and characterization of promises 
as unilateral contracts 121 — consideration being the performance of a requested 
act by the promisee — are other means available to avoid the rigours of the 
doctrine of consideration, thus ensuring that justice is done where there has 
been reliance or possible reliance on an otherwise unenforceable promise. 

It is in the United States, however, that the most dramatic developments 
have taken place in respect of the enforcement of promises such as those just 
described. The culmination of these developments is the adoption in the Second 
Restatement of the Law of Contracts 121 of the following provision: 

90. -(1) A promise which the promisor should reasonably expect to induce 
action or forbearance on the part of the promisee or a third person and which does 
induce such action or forbearance is binding if injustice can be avoided only by 
enforcement of the promise. The remedy granted for breach may be limited as 
justice requires. 



119 Waddams, supra, note 65, at 153-54 (footnote references omitted). 

120 Brewer v. Chrysler Canada Ltd., [1977] 3 W.W.R. 69, 4 A.R. 497 (S.C., T.D.). 

121 See, for example, Frankel Structural Steel Ltd. v. Goden Holdings Ltd., [19691 2 O.R. 
221, 5 D.L.R. (3d) 14 (C. A.), var'd on other grounds, fl971] S.C.R. 250, and Grant v. 
Province of New Brunswick (1973), 35 D.L.R. (3d) 141 (N.B.C.A.). 

122 Second Restatement, supra, note 26. 



30 



A number of features of section 90(1) are noteworthy. First, in order to be 
enforceable under this section, a promise must be one which "the promisor 
should reasonably expect to induce action or forbearance". A second require- 
ment for enforceability is evidence of action or forbearance induced by the 
promise. Thirdly, while a promise under section 90(1) may be binding if 
injustice can be avoided only by its enforcement, the relief ordered by a court 
"may be limited as justice requires". Accordingly, in some cases, the promisee 
will be able to recover expectation damages; in others, relief may be "limited to 
restitution or to damages or specific relief measured by the extent of the 
promisee's reliance rather than by the terms of the promise". 123 In addition to 
the general provision on detrimental reliance, the Restatement also contains a 
number of specific applications of the same principle. Reference has already 
been made, for example, to section 89 concerning modification of contracts 124 
and to section 87(2) concerning firm offers. 125 

Section 90 is a frequently cited section of the Restatement. 126 Moreover, 
the variety of cases adopting this section indicate that the formulation is a useful 
one, allowing the courts sufficient flexibility to do justice. 

We come, then, to the question whether the law in Ontario should be 
amended to recognize expressly the importance of protecting a promisee's 
reliance on a promise that might otherwise not be enforceable because of lack of 
consideration. This question is central to any reform of the doctrine of 
consideration. 

What are the arguments in favour of adopting a statutory provision along 
the lines of section 90(1) of the Restatement? It seems clear that, in practice, 
courts frequently protect reliance on a promise and it may be desirable for the 
sake of completeness, simplicity and clarity to empower courts to do directly 
what they have sought to achieve by other means. Secondly, it may be 
contended that consideration, while sufficient to justify the enforcement of 
promises, should not be the exclusive criterion of enforceability. 

A third reason to recognize reliance as a basis for the enforcement of 
promises is the desire to prevent unfairness. Assume that A promises B to 
convey to him a parcel of land, and that, on the basis of this promise, B builds a 
cabin on the land. To allow A to renege on the promise would result in A's 
being unjustly enriched by the value of the cabin. Avoidance of unfairness will 
not, however, necessarily require that A's promise be enforced to the full 
extent. If, in the above example, the land promised to be conveyed by A is 
worth $100,000 and the cabin built by B is worth $10,000, by requiring A to 
pay to B the value of the cabin, the law will not only prevent A from being 



123 Ibid., §90, Comment d. 

124 Supra, this ch., sec. 4(a)(ii). 

125 Supra, this ch., sec. 4(c). See, also, Second Restatement, supra, note 26, § 88(c). 

126 Second Restatement , supra, note 26, Appendix to the Second Restatement . See, also, 
Cumulative Annual Supplement (1984-85). 



31 



unjustly enriched but will also protect B's reliance interest. These two bases for 
relief — unjust enrichment and reliance — will not always be identical or 
coincide, but resort to either measure of damages, rather than the expectation 
measure of damages, will usually be sufficient to ensure fairness. 

In some cases, on the other hand, the reliance measure and the expectation 
measure will lead to the same result. For example, where an insurance policy 
holder is advised by the insurer that the policy will be changed to insure against 
a certain event, and where the insurer fails to make the change and the event 
occurs, the same damages will be appropriate whether one seeks to protect the 
reliance or the expectation interest of the insured. 

These examples are intended simply to show that the enforceability of 
reliance-based promises need not require full enforcement in all cases, but can 
be limited as justice requires. 

What are the arguments against the adoption of an equivalent to section 
90(1) of the Restatement'? One possible argument is that such a provision, when 
considered in conjunction with the other recommendations in this chapter, 
would all but abolish the doctrine of consideration. Secondly, it may be 
contended that a provision like section 90(1) would result not only in flexibility, 
but also in uncertainty in an area of law that requires certainty. 

The Commission does not find these arguments convincing. The doctrine 
of consideration is already subject to a great many exceptions. These exceptions 
have had the effect of minimizing the rigours of the doctrine and introducing 
flexibility into the law. We venture to surmise that few supporters could be 
found for giving effect to the pure doctrine of consideration: it is simply too late 
in the day for this to be a reasonable alternative. Moreover, we do not share the 
view that a provision similar to section 90(1) will introduce undue uncertainty. 
As we sought to point out above, the present law includes various devices to 
circumvent the strict doctrine of consideration, and does so without openly 
recognizing the basis for enforcing promises where there has been reliance by 
promisees. This we find to be an unsatisfactory state of the law of contracts. 

Accordingly, we recommend that a promise that the promisor would 
reasonably expect to induce action or forbearance on the part of the promisee or 
a third person and that does induce such action or forbearance should be binding 
if injustice can be avoided only by enforcing the promise. To ensure that justice 
is done, not only for promisees but also for promisors, we further recommend 
that the remedy granted for breach of a promise inducing reliance should be 
limited as justice requires. 

We recognize that such a provision would overlap with a number of 
existing principles and proposed statutory reforms. The former would include 
the principles of waiver and estoppel. Some of the statutory reforms proposed 
earlier in this chapter would give full enforceability to promises formerly held 
unenforceable, as in the case of modifications of contracts. Where such 
provisions would be applicable, a general provision protecting reliance would, 
of course, not be needed. Where existing concepts of estoppel apply, again a 



32 



general reliance provision would be unnecessary. But there are gaps in the 
present law. It is doubtful, for example, to what extent estoppel can be used by 
a promisee seeking positive enforcement, rather than seeking to raise the 
promise as a defence. Consequently, the general provision for the protection of 
reliance proposed here is to be regarded as an independent, as well as a 
residuary provision, empowering the court to protect reliance whether or not 
other legal doctrines prove incapable of doing so. 

The preceding discussion of the reliance provision of the Restatement has 
made no reference to section 90(2), which states as follows: 

90. -(2) A charitable subscription or a marriage settlement is binding under 
Subsection (1) without proof that the promise induced action or forbearance. 

Some American cases, going back to the nineteenth century, have enforced 
charitable subscriptions even without proof of reliance by the promisee. 127 In 
Canada, it has been clearly established since 1934 128 that no special rule applies 
to charitable subscriptions. They are unenforceable unless they are under seal 
or meet the test of consideration. In the Commission's view, there is no need 
for a change in the law on this point. The early cases enforcing such 
subscriptions go back to a period when institutions providing needed social 
services were wholly dependent on private subscriptions. Moreover, the effect 
of treating subscriptions as fully enforceable promises will be, where the 
promisor becomes insolvent, to rank the charity equally with creditors who 
have given full value, and ahead of the promisor's dependants, who may be in 
need. If it is generally sound to permit a promisor to withdraw a gratuitous 
promise, we see no reason to depart from this rule when the promisee is a 
charity. Further, in accordance with our proposal below, 129 a signed and 
witnessed writing will replace the seal as the test of enforceability of formal 
contracts. This, in our opinion, gives ample opportunity to charities to secure 
binding promises. 

Insofar as marriage settlements are concerned, again, we see no need for a 
special rule, especially in light of the fact that marriage settlements are rare in 
modern times. 



Recommendations 

The Commission makes the following recommendations: 

1 . Section 16 of the Mercantile Law Amendment Act should be amended to 
make it clear that an agreement, whether executed or executory, by an 
obligee to accept part performance of an obligation in place of full 
performance, as well as an agreement to waive performance of an 
obligation, need no consideration to be binding. 



127 Farnsworth, Contracts (1982), § 2.19, at 90-91. 

128 Dalhousie College v. Boutilier Estate, [1934] S.C.R. 642, [1934] 3 D.L.R. 593. 

129 Infra, ch. 3, sec. 4(a). 



33 



2. An agreement under the proposed revised section 16 of the Mercantile 
Law Amendment Act should be revocable by the obligee for breach, 
unless the breach of the obligation of part performance by the obligor is 
merely trivial or technical. 

3. A provision similar to section 4.8 of the proposed Sale of Goods Act 
should be enacted to provide as follows: 

(a) an agreement in good faith modifying a contract should not 
require consideration in order to be binding; 

(b) an agreement that excludes modification or rescission except by 
a signed writing should not be otherwise subject to modification 
or rescission but, except as between parties acting in the course 
of business, such a requirement on a form supplied by a party 
acting in the course of a business should be required to be 
signed separately by the other party; 

(c) an attempt at modification or rescission that does not satisfy the 
requirements of the preceding paragraph or that does not satisfy 
any statutory requirement of writing or corroboration should be 
capable of operating as a waiver or equitable estoppel; and 

(d) where paragraph (c) applies, a party who has waived compli- 
ance with an executory portion of a contract should be able to 
retract the waiver by reasonable notification received by the 
other party that strict performance will be required of any term 
waived unless it would be unjust in view of a material change in 
position in reliance on the waiver to allow the waiver to be 
retracted. In the case of an equitable estoppel, a similar 
principle should apply. 

4. A promise made in recognition of a benefit previously received by the 
promisor or by any third party from the promisee, should be enforceable 
to the extent necessary to prevent unjust enrichment. 

5 . A promise made in recognition of a benefit previously received by the 
promisor or by any third party from the promisee, should not be 
enforceable where the promisee conferred the benefit as a gift or where 
for other reasons the promisor has not been unjustly enriched. 

6. Promises supported by past consideration, where enforceable, should be 
enforceable only to the extent that the value of the promise is not 
disproportionate to the benefit. 

7. An offer, made by a person in the course of a business, which expressly 
provides that it will be held open should not be revocable for lack of 
consideration during the time stated or, if no time is stated, for a 
reasonable time not to exceed three months. 



34 



8. There should be no change in the law relating to firm offers not made in 
the course of business; that is, in order to be enforceable, a firm offer, 
when made by a non-merchant, should be supported by consideration or 
comply with the requisite formalities (See infra, ch. 3, Recommendation 

2). 

9. A promise that the promisor would reasonably expect to induce action or 
forbearance on the part of a promisee or a third person and that does 
induce such action or forbearance should be binding if injustice can be 
avoided only by enforcing the promise. 

10. The remedy granted for breach of a promise inducing reliance should be 
limited as justice requires. 

11. No special rule should be adopted for the enforceability of charitable 
subscriptions or promises to make a marriage settlement. 



CHAPTER 3 



FORMAL CONTRACTS 



1. INTRODUCTION 

An agreement that is not supported by consideration is enforceable if made 
under seal. The issue to be considered in this chapter is whether the use of seals 
to make a binding agreement should be discontinued and, perhaps, replaced by 
some other formality to give force to gratuitous promises. 

2. THE PRESENT LAW 

Holds worth's A History of English Law 1 contains the following passage on 
the origins and use of a sealed writing in the context of the law of contracts: 

The action of covenant was the action which was brought upon instruments 
which were enforceable by virtue of their form. After a period of hesitation it was 
settled in Edward I.'s reign that that form must be a writing which is sealed. 



In later days, when the doctrine of consideration had come to be the most 
distinctive feature of the English law of contract, these contracts under seal were 
thought to be brought into line with the general rule requiring consideration, by 
saying that the seal imports a consideration, and that the parties were therefore 
bound. This view that the seal imports a consideration was put forward as early as 
1566; but at that date the theory of consideration was not completely developed; 
and the expression was there used somewhat metaphorically to express the 
undoubted truth that the operation of the seal upon the agreement was similar to the 
operation of a consideration, in that it made it enforceable at law. But if the 
expression is used to mean that consideration is presumed, it obviously gives a 
wholly false view of the reason why the stipulations in an instrument under seal are 
enforceable. They are enforceable by reason, not of the presumption of considera- 
tion, but of the form of the instrument .... 

Most of the case law concerning promises under seal in the last one 
hundred years is concerned with determining the prerequisites of a promise 
under seal. 2 It is a question of fact in each case whether a document is 



1 Holdsworth, A History of English Law (rep. 1966), Vol. Ill, at 417 and 419 (footnote 
references omitted). 

2 Zwicker v. Zwicker (1899), 29 S.C.R. 527; Ross v. Ross (1977), 80 D.L.R. (3d) 377 
(N.S.S.C, T.D.); and Helm v. Simcoe Erie General Ins. Co. (1980), 108 D.L.R. (3d) 8 
(Alta. C.A.). 

[35] 



36 



effectively sealed. Particularly in recent years, the intentions of the party 
purported to have executed a sealed document appear to be more significant 
than the traditional or ceremonial aspects of sealing. This is illustrated by three 
recent Ontario cases, including a decision of the Court of Appeal, in which the 
elements necessary for sealing were considered. 

In Linton v. Royal Bank of Canada, 3 the validity of a guarantee was at 
issue. Although the guarantee document contained the phrase "signed, sealed 
and delivered", and the word "seal" appeared in parentheses opposite the 
space provided for signatures, no seal was affixed to the document at the time of 
execution. Subsequently, a seal was affixed in the appropriate place, without 
the knowledge or consent of the plaintiff. The plaintiff argued that the affixing 
of the seal by one of the bank's employees constituted an unauthorized material 
alteration to the contract, enabling the plaintiff to avoid the contract. Since he 
concluded that the document was a sealed document without the subsequently 
attached seal, Mr. Justice Hartt held that the addition of the seal did not 
constitute a material alteration. 4 In coming to this conclusion, Hartt J. relied on 
two earlier English decisions: Re Sandilands 5 and Stromdale & Ball, Ltd. v. 
Burden. 6 These cases support the proposition that no particular formality is 
necessary to constitute a sealing. 7 If a document contains some indication of a 
seal, the fact that a person intended to execute the document as a deed is 
sufficient adoption or recognition of the "seal" to amount to proper execution 
as a deed. 8 

Six months after the decision in Linton v. Royal Bank of Canada, the 
Ontario Court of Appeal gave judgment in Royal Bank of Canada v. Kiska, 9 
another case involving a guarantee. As in the case of Linton v. Royal Bank of 
Canada, at the time the guarantee was signed, "no wafer seal was affixed to it, 
the word 'seal' in brackets was printed upon the document immediately to the 
right of the space in which [the] signature was written and an attesting witness 
signed his name". 10 The majority of the Court decided that the guarantee was 
binding because it was supported by consideration, so that it was not necessary 
to decide whether the guarantee was made under seal. 



3 [1967] 1 O.R. 315, 60 D.L.R. (2d) 398 (H.C.J.) (subsequent reference is to [1967] 1 
OR). 

4 Ibid., at 318-19. 

5 Re Sandilands (1871), L.R. 6 C,P. 411. 

6 Stromdale & Ball, Ltd. v. Burden, [1952] Ch. 223, [1952] 1 All E.R. 59 (subsequent 
reference is to [1952] Ch.). 

7 Supra, note 5, at 413. 

8 Supra, note 6, at 230. 

9 Royal Bank of Canada v. Kiska, [1967] 2 O.R. 379, 63 D.L.R. (2d) 582 (C.A.) 
(subsequent references are to [1967] 2 O.R.). 

10 Ibid., at 381. 



37 



Laskin J. A. (as he then was) disagreed, however, with the majority's 
conclusion on the issue of consideration. As a result, he was obliged to 
determine whether or not the guarantee was valid as a contract under seal. Mr. 
Justice Laskin began by outlining the present day purpose of sealing: 11 

We are in the field of formality; and so long as the doctrine of consideration 
subsists with its present constituents, it is commercially useful to have an 
alternative method of concluding a binding transaction. The formal contract under 
seal is not as formal today as it was in the time of Coke; apart from statute (and 
there is none on the subject in Ontario relevant to the present case), there has been 
a recognized relaxation of the ancient common law requirement of a waxed 
impression .... A gummed wafer is enough when affixed by or acknowledged by 
the party executing the document on which it is placed. I would hold also that any 
representation of a seal made by a signatory will do. The present case is an 
invitation to be satisfied with less than the foregoing. We confront the question of 
how far we should, as a common law development, relax formality and still affirm 
that we are not enforcing a gratuitous promise merely because it is in writing. 

Turning, then, to the facts of the case before him, Laskin J. A. rejected the 
argument that the mere presence of the words "Given under seal at ..." and 
"Signed, Sealed and Delivered in the presence of or the bracketed word 
"seal", either individually or when considered together, were sufficient to 
enable a court to conclude that the guarantee had been executed under seal. He 
rested his finding on the following reasoning: 12 

The respective words are merely anticipatory of a formality which must be 
observed and are not a substitute for it. I am not tempted by any suggestion that it 
would be a modern and liberal view to hold that a person who signs a document 
that states it is under seal should be bound accordingly although there is no seal on 
it. I have no regret in declining to follow this path in a case where a bank thrusts a 
printed form under the nose of a young man for his signature. 

Another Ontario decision respecting the prerequisites for sealing is 
Procopia v. D'Abbondanzo. n This case involved a lease that was signed by the 
parties thereto, but to which no seal was affixed. The plaintiff was the assignee 
of the lessee; the defendants had purchased the leased premises from the 
original lessor. The defendants consented to the assignment of the lease and this 
assignment was made under seal. The defendants attempted to question the 
validity of the original lease since no seal had been affixed to it when executed. 
Mr. Justice Donnelly rejected the defendants' argument. While remarking that 
"[consideration must be given to the lack of seals on the original lease", 14 he 
concluded, relying on the judgment of Hartt J. in Linton v. Royal Bank of 



11 Ibid., at 390-91. 

12 Ibid., at 391-92. 

13 [1973] 3 O.R. 8, 35 D.L.R. (3d) 641 (H.C.J.) (subsequent references are to [1973] 3 
OR). 

14 Ibid., at 12. 



38 



Canada, that "[t]he parties executed the document with the intention that it be a 
lease under seal ... and cannot now deny that it is so". 15 

The three cases discussed above illustrate the tension in the existing law of 
contracts, which permits gratuitous promises to be enforced only if made under 
seal, yet strains to enforce such promises even though the parties to the 
agreement in question have not applied their minds to the elements of sealing. 
In other words, these cases raise the question whether the seal is the appropriate 
modern formality to make gratuitous promises binding. 

3. THE CASE FOR REFORM 

(a) GENERAL: THE NEED FOR FORMAL CONTRACTS 

Before turning to consider the arguments for and against retaining the seal 
as a means of rendering enforceable otherwise unenforceable gratuitous 
promises, a brief review of the Commission's recommendations respecting the 
doctrine of consideration is appropriate. The Commission has proposed that the 
doctrine of consideration in the law of contracts should be retained, but that the 
most troublesome consequences of the doctrine should be addressed. 16 In 
particular, the Commission has proposed that the pre-existing duty rule should 
be substantially abrogated and has proposed changes to the rule that modifica- 
tion of a contract is binding only if supported by consideration. 17 Similarly, the 
past consideration rule would be attenuated by our recommendations relating to 
this matter. 18 Extension of the proposals concerning firm offers made in our 
Report on Sale of Goods 19 to the law of contracts generally addresses another 
much criticized result of strict adherence to the doctrine of consideration. 20 
Finally, the adoption of a provision similar to section 90(1) of the Second 
Restatement of the Law of Contracts 21 would do much to soften the rigours of 
the doctrine of consideration. 22 

Given these proposed reforms, the question arises whether the seal or any 
other formality would continue to be necessary as a means of guaranteeing the 
enforceability of gratuitous promises. It is clear that the Commission's recom- 
mendations on consideration, if implemented, would do much to make 
enforceable otherwise unenforceable gratuitous promises. However, these rec- 
ommendations certainly would not render all gratuitous promises enforceable; 
nor would they provide a method of ensuring the enforceability of even those 



15 Ibid., at 13. 

16 See supra, ch. 2, sec. 3. 

17 Ibid., sec. 4(a). 

18 Ibid., sec. 4(b). 

19 Ontario Law Reform Commission, Report on Sale of Goods (1979), Vol. I, at 91-96. 

20 See supra, ch. 2, sec. 4(c). 

21 American Law Institute, Restatement of the Law, Second — Contracts, 2d (1979). 

22 See supra, ch. 2, sec. 4(d). 



39 



kinds of promises mentioned in the preceding paragraph. Ontario courts would 
have considerable flexibility in determining which promises should be enforced 
and which should not. Moreover, under our recommendations on consideration, 
enforceability would not always permit full enforcement and enable the prom- 
isee to recover expectation damages. The seal, on the other hand, does 
guarantee full enforceability of the promise thereunder as if the promise were 
supported by consideration. As a result of our recommendations concerning the 
doctrine of consideration, then, the scope for formal contracts would be 
reduced substantially, but not eliminated. 

Many legal systems permit or require some kind of formal contract to give 
effect to certain kinds of promises, gratuitous promises for the most part. There 
is no public policy against gifts, and a promise to make a gift can be made 
enforceable by the use of nominal consideration. There seems to be no objection 
to the use of a formality to achieve the same end. We believe that formal 
contracts should continue to have a place under an amended law of contracts. 
Promises unsupported by consideration but made with care and serious intent 
are generally expected to be binding, and the law should accord with such 
common and reasonable expectations. Formality in the making of such a 
promise is one way to evidence intent to bind and, at the same time, serves to 
caution the maker of the promise. 

The discussion that follows concerns the kind of formal contract our law of 
contracts should countenance and, more specifically, whether the seal should be 
retained as a means of creating a fully enforceable contract. 

(b) retention or abolition of the seal: reform 
Proposals from Other Jurisdictions 

The traditional method of making a sealed instrument at the time of Sir 
Edward Coke — the formal sealing of the document with hot wax and the 
making of an impression thereon — may have been a solemn performance 
calculated to impress persons with the significance of the step they were taking. 
The trend since then has been one of increasing informality, so that today there 
exist a great many judicially approved methods of sealing. We must decide 
whether the requirements of sealing that are acceptable under the present law 
are sufficient to impress upon the maker of a sealed instrument the nature of his 
or her act, whether the law of sealing should be made more rigorous, or 
whether some other formality might not more effectively fulfil the function of 
the seal. 

We are not the first law reform body to confront these issues. The seal and 
its place in the law of contracts have received substantial attention from law 
reformers and others. While, in all cases, alternatives to the seal as means of 
enforcing gratuitous promises have been considered, some would go further and 
deprive the seal entirely of its legal effect. 



40 



(i) The New York Law Revision Commission 

In the 1930's, as a result of legislation based on recommendations made by 
the New York Law Revision Commission, the common law effect of the seal 
was thought to be abolished in New York State. 23 The relevant legislation 
provided that "[a] seal upon a written instrument hereafter executed shall not be 
received as conclusive or presumptive evidence of a sufficient consideration", 24 
and that "[t]he common law effect heretofore given to a seal upon a written 
instrument is hereby abolished". 25 The New York courts, however, were 
reluctant to give full effect to these provisions and, instead, continued to give 
effect to the seal. 26 The New York Court of Appeals explained this judicial 
response in the following terms: 27 

Throughout the centuries, the rule as to the binding effect of the seal has been 
founded in reason and based on necessity. Today, in the face of the tremendous 
number of business transactions open to investigation of the courts, reason 
continues to dictate and necessity to require more forcefully than before that a party 
to a sealed instrument should be estopped to assert want of consideration. 

As a result of judicial resistance to the legislation, the New York Law 
Revision Commission reexamined the place of the seal in the law of contracts. 
The Commission opposed continued use of the seal on the ground of its 
inappropriateness as a method of guaranteeing solemnity and deliberateness on 
the part of the promisor, stating: 28 

The seal has degenerated into an L.S. or other scrawl which, in modern 
practice, is frequently a printed L.S. upon a printed form. To the average man it 
conveys no meaning, and frequently the parties to instruments upon which it 
appears have no idea of its legal effects. Moreover, under the present law, the 
character of an instrument which bears the magic letters, but which contains no 
recital of sealing, is left uncertain as to whether it is sealed .... 

In the background paper to the New York Law Revision Commission's 
Report, alternatives to the seal, such as notarization, a simple writing, or a 
writing that makes clear an intention to be legally bound by a promise contained 
in it, were considered. 29 However, the New York Commission rejected all three 
alternatives, doubting "the wisdom of any device that is applicable to all kinds 



23 New York, Law Revision Commission, Legislative Document No. 65, "Acts, Recom- 
mendation and Study Relating to the Seal and to the Enforcement of Certain Written 
Contracts", in Report of the Law Revision Commission (1941) (hereinafter referred to as 
"New York Report"), at 357. 

24 1935 N.Y. Laws, ch. 708. 

25 1936 N.Y. Laws, ch. 353. 

26 New York Report, supra, note 23, at 368-73. 

27 Cochran v. Taylor, 273 N.Y. 172, at 180, 7 N.E. (2d) 89, at 91 (1937). 

28 New York Report, supra, note 23, at 359 (footnote references omitted). The initials 
L.S., or locus sigilli, refer to "the place of the seal". 

29 New York Report, supra, note 23, at 376. 



41 



of promises under all circumstances". 30 Rather, the Commission favoured a 
regime that would provide specific solutions to problems related to the 
enforceability of specific kinds of promises, such as commercial promises 
unsupported by consideration, promises supported by past consideration, and 
firm offers. 31 

(ii) The English Law Revision Committee 

In contrast to the position taken by the New York Law Revision Commis- 
sion with respect to gratuitous promises, the English Law Revision Committee, 
in its Sixth Interim Report, proposed that "an agreement shall be enforceable if 
the promise or offer has been made in writing by the promisor or his agent". 32 
Although the Report does not deal with the seal as such, it should be apparent 
that the above recommendation, if it had been adopted, would have effectively 
obviated the need for such a formality. Indeed, one of the Commissioners, Mr. 
Justice Goddard, went further and appended a Memorandum to the Report in 
which he recommended the abolition of the seal. 

(iii) The Model Written Obligations Act 

The Model Written Obligations Act, promulgated by the National Confer- 
ence of Commissioners on Uniform State Laws in 1925, 33 has one substantive 
provision: 

1. A written release or promise hereafter made and signed by the person 
releasing or promising shall not be invalid or unenforceable for lack of considera- 
tion, if the writing also contains an additional express statement, in any form of 
language, that the signer intends to be legally bound. 

The Act is in force in only one state 34 and has been criticized by commentators. 
For example, the New York Law Revision Commission, in its study respecting 
the seal and contracts, commented that the question arising under the Act, — 
that is, what is an expression of intent to be legally bound — would be 
extremely difficult to decide. 35 As well, the New York Commission contended 
that the formality provided under the Act might well work against the intentions 
of the parties, stating as follows: 36 



30 Ibid., at 360. 

31 Ibid. 

32 England, Law Revision Committee, Sixth Interim Report (Statute of Frauds and the 
Doctrine of Consideration) (Cmd. 5449, 1937) (hereinafter referred to as "Sixth Interim 
Report"), para. 50(2). 

33 Model Written Obligations Act, National Conference of Commissioners on Uniform 
State Laws, Uniform Laws Annotated (1925), Vol. 9C. 

34 Pennsylvania (1927 Pa. Laws 33) has adopted the provision. Utah adopted the provision 
but subsequently repealed it. See, Williston (ed. Jaeger), Williston on Contracts (3d ed., 
1957), § 219, n. 20. 

35 New York Report, supra, note 23, at 381. 

36 Ibid., at 381-82. 



42 



The Act, like the doctrine of the seal, provides no reliable basis for 
distinguishing between promises which are made with added deliberation and 
thoughtfulness and those in which there is no such additional factor. On the one 
hand, promises which are in fact made with such deliberation and care will fail of 
enforcement where the promisor, not knowing of the requirement, omits the words 
of legal intent, and on the other hand, the fortuitous inclusion of words which may 
be interpreted by the court as expressing intent to be legally bound will make the 
promise enforceable though in fact the promise was made with no more delibera- 
tion and care than would characterize the making of any other promise. 

The New York Commission also suggested that the Model Written Obligations 
Act was too broad in its sweep, covering all gratuitous promises. 37 

(iv) Other Jurisdictions 

Before proceeding to outline our conclusion concerning retention of the 
seal, the recommendations of two other law reform agencies should be outlined 
briefly. The Law Reform Committee of South Australia, in a Report issued in 
197 1, 38 considered whether the South Australia Law of Property Act, 193& 9 
should be amended to include a provision like section 38 of the New South 
Wales Conveyancing Act. 40 Section 38, while not abolishing the seal, provides 
that "[ejvery instrument expressed to be an indenture or a deed, or to be sealed, 
which is signed and attested [by at least one witness not being a party to the 
deed], shall be deemed to be sealed". 41 Subject to certain amendments, the Law 
Reform Committee of South Australia favoured the New South Wales 
approach. Indeed, the Committee was prepared to go further, and recom- 
mended that, even where execution was defective, but the person to be charged 
therewith had intended to execute the deed and had in fact taken a benefit or 
benefits under it, "execution shall be deemed to be valid and binding in all 
respects on him". 42 

A 1975 Report issued by the Victoria Chief Justice's Law Reform 
Committee 43 proposed a regime in which there would be no need for the seal. 
While sealing was not to be deprived of its legal effect, the Committee's 
proposal would, if implemented, make "every instrument, executed by an 
individual and which is signed in the presence of an attesting witness and 
expressed to be delivered as a deed ... a deed, notwithstanding that it has not 
been sealed". 44 



37 Ibid., at 382. 

38 Law Reform Committee of South Australia, Sixteenth Report Relating to the Law on 
Sealing of Documents (1971). 

39 S. Austl. Stat. 1837-1936, No. 2328. 

40 Conveyancing Act, 1919, Stat. N.S.W. 1824-1957, No. 6. 

41 Ibid., s. 38(3). 

42 Supra, note 38, para. 6. 

43 Victoria, Chief Justice's Law Reform Committee, Sealing of Documents (1975). 

44 Ibid., para. 4. 



43 



(c) CONCLUSION 

While the law reform bodies that have examined the question of the seal 
and its place in the modern law of contracts have not all arrived at the same 
substitute for the seal, there would seem to be agreement that the seal has 
outlived its usefulness as the sole formality available to ensure the enforcement 
of gratuitous promises in the law of contracts. Because the magic or solemnity 
of the seal has diminished over the years, other formalities more relevant to 
current needs have been suggested. Perhaps no more succinct criticism of the 
seal is to be found than the following comments of Mr. Justice Cardozo, then 
Chief Justice of the New York Court of Appeals: 45 

In days when seals counted for a good deal, there may have been some reason in 
this recognition of a mystical solemnity. In our day, when the perfunctory initials 
'L.S.' have replaced the heraldic devices, the law is conscious of its own absurdity 
when it preserves the rubrics of a vanished era. Judges have made worthy, if 
shamefaced, efforts, while giving lip service to the rule to riddle it with exceptions 
and by distinctions reduce it to a shadow. A recent case suggests that timidity, and 
not reverence, has postponed the hour of dissolution. The law will have cause for 
gratitude to the deliverer who will strike the fatal blow. 

We believe that the seal no longer plays a useful role in the law of 
contracts, and should be abolished. It may be argued that this is too radical a 
step, and that, while an alternative to the seal should be authorized by law, the 
seal should be retained because of its familiarity. Some would contend that 
lawyers, if not laypersons, do appreciate the significance of the seal and, 
therefore, the seal should be retained as a formality, although not the exclusive 
formality, to give full force and effect to gratuitous promises. 

We are not convinced by this argument. If all persons making gratuitous 
promises were knowledgeable about the legal ramifications of the seal, retain- 
ing the seal might be sensible. But it is precisely because there are many 
individuals who do not appreciate the significance of a seal being affixed to a 
document, or of the words "signed, sealed and delivered" appearing on an 
agreement, that we believe the seal should be abolished. In our view, it would 
make little sense to retain the seal because of the legal community's attachment 
to what is generally agreed to be an anachronism. Accordingly, we recommend 
that the seal should be denied all legal effect in the law of contracts. 

4. A REPLACEMENT FOR THE SEAL 

(a) GENERAL 

Given the Commission's reasons for recommending the abolition of the 
use of the seal as a means of creating a fully enforceable contract, we are 
somewhat constrained in our selection of a substitute for the seal. It is our belief 
that the cautionary function once served by the seal would be better served by 
some other formality more generally understood by Ontario's citizens. 



45 Cardozo, 77?^ Nature of the Judicial Process (1921), at 155-56 (footnote references 
omitted). 



44 



In our view, the proposal of the English Law Revision Committee 46 that a 
promise or offer made in writing by the promisor or an agent should be binding 
would not be an adequate replacement for the seal. As a number of critics of 
this recommendation in the Sixth Interim Report have pointed out, 47 this type of 
formality would not serve the cautionary function generally ascribed to formali- 
ties, although it would serve the evidentiary function. 

We consider that a signed writing would not be much better than a writing 
requirement, since it too would not be sufficient to caution against the making 
of rash promises that are not intended to have legal consequences. For example, 
a signed writing requirement would be satisfied by a letter or a note from the 
promisor. This substitute for the seal, in our view, would cast too wide a net, 
catching many promises not intended to be legally binding. 

A further alternative is notarization, a method of creating legal obligations 
that is widely used in civil law systems. We reject this approach because it 
imposes too great a burden on those persons wishing to bind themselves legally. 
In many cases, it would require one to travel to the office of a notary and incur 
the expense associated with notarization. 

The formality that we favour as a substitute for the seal is a "witnessed 
signed writing". We would define a "witnessed signed writing" as a writing 
executed by the party to be bound in the presence of a witness and signed by the 
witness in the presence of the executing party. Unlike notarization, this 
alternative would be unlikely to result in any inconvenience to the public. At the 
same time, it would serve some cautionary purpose. Accordingly, we recom- 
mend that a witnessed signed writing should take the place of the seal for the 
purposes of contract law. 

We would emphasize that it is not our intention to give any countenance to 
gratuitous promises secured by unconscionable behaviour. In this respect, we 
draw attention to the fact that our recommendations respecting the doctrine of 
unconscionability 48 would apply to promises that would otherwise be enforce- 
able under the above recommendation. 

(b) Subsidiary issues 

Before we leave the topic of the seal, there are two subsidiary issues that 
should be addressed. The first concerns the limitation period applicable to 
witnessed signed writings. The second concerns the remedies available in 
respect of witnessed signed writings. 



46 Sixth Interim Report, supra, note 32, para. 50(2). 

47 The comments of many of the critics are summarized in Sutton, Consideration Reconsid- 
ered (1974), at 225-28. 

48 See infra, ch. 6. 



45 



(i) Limitation Period 

Under the present law, a promise under seal, also known as a specialty, 
attracts a twenty year limitation period. Section 45(1 )(b) of the Limitations Act 49 
provides as follows: 

45. -(1) The following actions shall be commenced within and not after the 
times respectively hereinafter mentioned, 



(b) an action upon a bond, or other specialty, except upon a covenant 
contained in an indenture of mortgage made on or after the 1st day of 
July, 1894; 



within twenty years after the cause of action arose .... 

In our Report on Limitation of Actions, 50 we proposed that this period be 
reduced to ten years. 51 It should be noted that, under the scheme envisaged by 
us, only judgments would attract a twenty year limitation period; 52 the next 
longest period would be ten years. 

In 1977, the Ontario Ministry of the Attorney General released a Discus- 
sion Paper on Proposed Limitations Act. 53 The Ministry's Discussion Paper 
favoured a six year limitation period for contracts under seal as opposed to the 
ten year period suggested by the Commission. The Discussion Paper contained 
the following rationale for the six year limitation period for such contracts: 54 

Actions on deeds may either be treated as an ordinary contract action or may be 
given a longer limitation period. After full discussion, the Ontario Law Reform 
Commission concluded that there were good but not compelling reasons for either 
choice, and on balance the limitation period applicable to actions on deeds should 
be ten years rather than the six-year period for contracts not under seal. 

The Law Reform Commission of British Columbia recommended that deeds be 
treated for limitation purposes the same as contracts not under seal and the 1975 
British Columbia Limitations Act implements that recommendation. The Uniform 



49 R.S.O. 1980, c. 240. 

50 Ontario Law Reform Commission, Report on Limitation of Actions (1969). 

51 Ibid., at 42-47. 

52 Ibid., at 47-51. 

53 Ontario, Ministry of the Attorney General, Discussion Paper on Proposed Limitations 
Act (1977). 

54 Ibid., at 38-39. See, also, Limitations Act, 1983, Bill 160, 1983 (32d Leg. 3d Sess.). The 
Bill, which received only first reading in 1983, has not been reintroduced. It provided 
five general limitation periods. Consistent with the Draft Bill proposed in the Discussion 
Paper, contracts under seal would have been governed by a six year limitation period 
(see s. 3(6)). 



46 



Limitations of Actions Act, adopted by four provinces and the two territories 
provides for a six-year period for both deeds (specialties) and contract. Once again, 
we believe that in the absence of strong reasons to the contrary, the arguments in 
favour of uniformity of limitations legislation should prevail and that the six-year 
period should apply to both deeds and contracts not under seal. However, if good 
reasons are found for retaining a ten-year period for actions with respect to charges 
on both real and personal property, a ten-year period should be applied to deeds. 

Having abolished the seal, the question arises whether the limitation period 
for its replacement — a witnessed signed writing — should be the same as that 
applicable to contracts generally, or whether a special limitation period is 
justified. In our view, a promise in a witnessed signed writing should be treated 
by the law the same as any other contract. We can see no convincing reason for 
an extended limitation period for such contracts. 

Accordingly, we recommend that an action for breach of a promise 
contained in a witnessed signed writing should be required to be brought no 
later than six years from the date that the cause of action arose, in accordance 
with the Commission's proposals concerning the limitation period for actions in 
contract in its Report on Limitation of Actions. This recommendation is also 
consistent with the limitation period governing contracts proposed by both the 
Ontario Ministry of the Attorney General in its Discussion Paper and the 
Ontario Government in its 1983 Bill. 55 

(ii) Remedies 

Under present law, equitable remedies may not be available for the 
enforcement of a gratuitous promise under seal. The position of the courts of 
equity in regard to sealed instruments was consistent with the general equitable 
approach to gratuitous promises. That is, the courts of equity required that any 
gift be completed before equity would intervene. 56 Equitable remedies were, 
therefore, frequently unavailable to the gratuitous promisee. 57 There would 
seem to be no basis for such a distinction now. The fusion of law and equity 
should have resulted in a unified approach to the enforcement of promises and 
there is nothing that would justify an award of damages for breach of a 
gratuitous promise that would not justify an award of specific performance. 58 

While we have recommended that the seal be abolished for the purposes of 
contract law, we are concerned that this restriction on the remedies available for 
the enforcement of gratuitous promises under seal might be held to apply to our 



55 Supra, notes 53 and 54. 

56 Milroy v. Lord (1862), 4 De G.F. & J. 264, 45 E.R. 1185. 

57 See Jejferys v. Jefferys (1841), Cr. & Ph. 139, 41 E.R. 443; Saverewc v. Tourangeau 
(1908), 16 O.L.R. 600 (Div. Ct.); and Riches v. Burns (1924), 27 O.W.N. 203 
(H.C.J.). But see Mountford v. Scott, [1975] 1 All E.R. 248 (C. A.), and Waddams, The 
Law of Contracts (2d ed., 1984), at 132. 



58 



Sharpe, "Specific Relief for Contract Breach' 1 , in Reiter and Swan (eds.), Studies in 
Contract Law (1980) 123, and Swan, "Damages, Specific Performance, Inflation and 
Interest" (1980), 10 R.P.R. 267. 



47 



proposed substitute for the seal. Accordingly, the Commission recommends 
that the Courts of Justice Act, 1984 59 should be amended to empower a court, in 
any action upon a gratuitous promise where it is determined that damages could 
be given for breach of such promise, to grant an injunction or order specific 
performance thereof if it considers it proper to do so, notwithstanding that the 
promise was gratuitous. 

Recommendations 

The Commission makes the following recommendations: 

1. The seal should be denied all legal effect in the law of contracts. 

2. (1) A witnessed signed writing should take the place of the seal for the 

purposes of contract law. 

(2) A witnessed signed writing should be defined as a writing executed 
by the party to be bound in the presence of a witness. and signed by 
the witness in the presence of the executing party. 

3. An action for breach of a promise contained in a witnessed signed 
writing should be governed by the same limitation period as that 
applicable to contracts generally, that is, six years from the date the 
cause of action arose. 

4. The Courts of Justice Act, 1984 should be amended to empower a court, 
in any action upon a gratuitous promise where it is determined that 
damages could be given for breach of such promise, to grant an 
injunction or order specific performance thereof if it considers it proper 
to do so, notwithstanding that the promise was gratuitous. 



59 



S.O. 1984. c. 11 



CHAPTER 4 



THIRD PARTY 
BENEFICIARIES AND 
PRIVITY OF CONTRACT 



1. INTRODUCTION 



The doctrine of privity is to the effect that only a party to a contracX may 
enforce it. A person not a party to a contract cannot claim any benefit under it 
or rely on it by way of defence to a claim. 1 The doctrine has been justified on 
the ground that contracts are very personal things and that only those who 
actually make them should be allowed to enforce them. 2 A related concern is 
that only those who give consideration should be permitted to sue to enforce 
contractual undertakings. 3 

The persuasiveness of these reasons may be questioned, particularly in 
view of the serious practical difficulties engendered by the doctrine of privity. 
The doctrine impairs the enforceability of sensible commercial and personal 
arrangements made on a daily basis. Not surprisingly, therefore, the courts 
have sought to by-pass the doctrine by resorting to trust law, agency notions, 
and the concept of collateral contracts to enable intended beneficiaries of 
contracts to enforce stipulations made for their benefit. As a result, this area of 
the law of contracts is in a very unsatisfactory state. 

The sanctity of the privity of contract rule has been further diminished by 
substantial statutory inroads. 4 This Commission, in at least two Reports, has 
recommended changes in the law that, if implemented, would result in 



1 See, for example, Canadian General Electric Co. Ltd. v. Pickford & Black Ltd., [1971] 
S.C.R. 41, 14 D.L.R. (3d) 372, and Greenwood Shopping Plaza Ltd. v. Beattie, [19801 
2 S.C.R. 228, 111 D.L.R. (3d) 257; and compare International Terminal Operators Ltd. 
v. Miida Electronics Inc., [1986] 1 S.C.R. 752, 68 N.R. 241. 

2 See, for example, Treilel, The Law of Contract (6th ed., 1983), at 458. 

3 See, for example, Dunlop Pneumatic Tyre Co., Ltd. v. Self ridge & Co., Ltd., [1915] 
A.C. 847, [1914-15] All E.R. Rep. 333 (H.L.) (subsequent references are to [1915] 
A.C.). 

4 See discussion infra, this ch., sec. 2(b)(v). 

[49] 



50 



additional erosion of the rule. 5 Consequently, the Commission believes that this 
is the proper time to reevaluate the principle of privity of contract. We begin 
with a review of the present law. 



2. THE PRESENT LAW 

(a) THE DOCTRINE OF PRIVITY 



The present law relating to contracts for the benefit of third parties is 
complex and difficult to state, owing to the considerable divergence between 
theory and practice. The exceptions to the doctrine of privity and glosses on it 
which the courts have developed have no rational basis except to avoid the 
application of the doctrine, so that it is easy to understand why the courts' 
attempts to reconcile the exceptions with the doctrine have resulted in confusion 
and complexity. It is these tendencies that appear to offer the best explanation of 
the current state of the law relating to third party beneficiaries. 



It was held in the 1861 English case of Tweddle v. Atkinson 6 that only a 
party to a contract could sue on it, and that only one who had paid for a promise 
could enforce it. This rule, although apparently contrary to some earlier 
common law authority, 7 has since been forcefully affirmed by the House of 
Lords 8 and the Supreme Court of Canada. 9 Such affirmations notwithstanding, 
judicial misgivings regarding the doctrine have been expressed with some 
frequency, particularly in England. Some of the law lords have called for 



5 See Ontario Law Reform Commission, Report on Consumer Warranties and Guarantees 
in the Sale of Goods (1972) (hereinafter referred to as "Consumer Warranties and 
Guarantees Report"), at 65-77 ', and Ontario Law Reform Commission, Report on Sale of 
Goods (1979) (hereinafter referred to as "Sales Report"), Vol. I, at 128, 132, and 243- 
55. 

6 (1861), 1 B. & S. 393, 121 E.R. 762. 

7 See, for example, Dutton v. Poole (1678), 2 Lev. 210, 83 E.R. 523, and Ferguson v. 
Kerr (1850), 5 U.C.Q.B. 261. See, also, Corbin, Corbin on Contracts (1951), Vol. 4, § 
839, h. 11. 

8 See Dunlop Pneumatic Tyre Co., Ltd. v. Selfridge & Co., Ltd., supra, note 3; Midland 
Silicones Ltd. v. Scruttons Ltd. , [1962] A.C. 446, [1962] 1 All E.R. 1 (H.L.); Beswick 
v. Beswick, [1968] A.C. 58, [1967] 2 All E.R. 1197 (H.L.) (subsequent reference is to 
[1968] A.C); and Woodar Investment Development Ltd. v. Wimpey Construction (U.K.) 
Ltd., [1980] 1 W.L.R. 277, [1980] 1 All E.R. 571 (H.L.) (subsequent reference is to 
[1980] 1 W.L.R.). 

9 Greenwood Shopping Plaza Ltd. v. Beattie, supra, note 1; Canadian General Electric 
Co. Ltd. v. Pickford & Black Ltd. , supra, note 1 ; and Vandepitte v. Preferred Accident 
Insurance Co., [1932] S.C.R. 22, [1932] 1 D.L.R. 107, affd [1933] A.C. 70 (P.C. 
(Can.)). 



51 



reform of the law in this area. 10 The doctrine has also attracted severe academic 
criticism. 11 

(b) EXCEPTIONS TO THE DOCTRINE OF PRIVITY 

Although Anglo-Canadian courts have repeatedly affirmed the doctrine of 
privity of contract, the same courts have created and employed a number of 
exceptions to it. In this section, we describe briefly the legal devices used to 
circumvent the privity of contract rule, and the limitations that have been 
imposed on their use. 

(i) Trust Law 

Up until the late nineteenth century, the common law courts were still in 
the process of settling the law. 12 The courts of equity had recognized rights of 
third party beneficiaries of contracts by the middle of the eighteenth century. In 
Tomlinson v. Gill, 13 the defendant had promised a widow that, if she would 
consent to his appointment as administrator of her deceased husband's estate, he 
would pay the debts of the deceased to the extent of any deficiency of the assets 
of the estate. The plaintiff, a creditor of the deceased, brought a bill in equity to 
enforce the promise. He obtained his decree on the ground that the widow was a 
trustee for the plaintiff since the promise was made for his benefit. Lord 
Hardwicke said: 14 

The plaintiff is proper for relief here .... He could not maintain an action at law, 
for the promise was made to the widow; but he is proper here, for the promise was 
for the benefit of the creditors, and the widow is a trustee for them. 

Tomlinson v. Gill was an early application of the trust concept for the 
advantage of a contract beneficiary. Later English judicial decisions continued 
to draw on trust notions to allow third party beneficiaries to recover. 15 Ontario 
courts availed themselves of the same technique to afford relief. 16 



10 See, for example, Lord Reid's comments in Beswick v. Beswick, supra, note 8, at 72, 
and Lord Scarman's comments in Woodar Investment Development Ltd. v. Wimpey 
Construction (U.K.) Ltd., supra, note 8, at 300-01. 

11 See, for example, Corbin, "Contracts for the Benefit of Third Persons" (1930), 46 L.Q. 
Rev. 12; Swan and Reiter, "Developments in Contract Law: The 1979-80 Term" 
(1981), 2 Sup. Ct. L.R. 125; and Waddams, "Third Party Beneficiaries in the Supreme 
Court of Canada" (1981), 59 Can. B. Rev. 549. 

12 See supra, this ch., sec. 2(a). 

13 (1756), Amb. 330, 27 E.R. 221 (subsequent reference is to 27 E.R.). 

14 Ibid., at 222. 

15 See, for example, Gregory v. Williams (1817), 3 Mer. 582, 36 E.R. 224; Fletcher v. 
Fletcher (1844), 4 Hare 67, 67 E.R. 564; Lloyd's v. Harper (1880), 16 Ch. D. 290, 50 
L.J. Ch. 140 (C.A.); and Les Affre'teurs Reunis Societe Anonyme v. Leopold Walford 
(London), Ltd., [1919] A.C. 801, 88 L.J.K.B. 861 (H.L.). 

16 See, for example, Mulholland v. Merriam (1872), 19 Gr. 288, aff d (1873), 20 Gr. 152, 
and Kendrick v. Barkey (1907), 9 O.W.R. 356 (H.C.J.). 



52 



In this century, however, English and Canadian courts have been more 
reluctant to discover a trust in order to allow third parties to sue directly. The 
English Court of Appeal sounded the death knell for wide use of trust law in this 
context in Re Schebsman. 11 Schebsman had made a contract of settlement with 
his employer whereby the employer promised to make payments to 
Schebsman's wife and daughter after his death. Schebsman died and the Court 
held that, with respect to the payments due to the widow and daughter, 
Schebsman was neither an agent nor a trustee. In his decision, du Parcq L.J. 
said: 18 

[U]nless an intention to create a trust is clearly to be collected from the language 
used and the circumstances of the case, I think that the court ought not to be astute 
to discover indications of such an intention. 

A number of more recent authorities have also refused to find trusts 
enabling third parties to sue directly, in the absence of evidence of a clear 
intention to create a trust. 19 

It will be seen therefore that the technique of finding a trust appears to 
have fallen into disfavour of late. While it is still theoretically available, since 
the existence of an intention to create a trust is always a question to be decided 
on the facts of the individual case, trust notions cannot be relied on as a means 
of recognizing third party rights. 

(ii) The Law of Agency 

A second method that courts have employed to avoid results dictated by 
strict adherence to the doctrine of privity is to conclude that the promisee has 
contracted with the promisor as an agent of the third party beneficiary. So long 
as the promisee is found to be an agent for the third party, it is clear that the 
third party can sue the promisor directly and the privity requirement is 
circumvented. 20 However, it is difficult to predict when the courts will make 
use of the agency concept to enforce the rights of a third party beneficiary of a 
contract, since the question whether some sort of agency relationship exists 
must be determined on the facts of each case. 21 The situation in respect of the 
agency device thus resembles that in respect of the trust device described above. 



17 [1944] Ch. 83, 11943] 2 All E.R. 768 (C.A.) (subsequent reference is to [1944] Ch.). 

18 Ibid., at 104. 

19 See, for example, Fournier Van & Storage Ltd. v. Fournier, [1973] 3 O.R. 741, 38 
D.L.R. (3d) 161 (H.C.J.), and Green v. Russell, [1959] 2 Q.B. 226, [1959] 2 All E.R. 
525 (C.A.). 

20 See, for example, International Terminal Operators Ltd. v. Miide Electronics Inc., 
supra, note 1; New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., [1975] 
A.C. 154, [1974] 1 All E.R. 1015 (P.C.(N.Z.)); and Ceres Stevedoring Co. Ltd. v. 
Eison und Metall A.G. (1976), 72 D.L.R. (3d) 660 (Que. C.A.). 

21 Compare Ceres Stevedoring Co. Ltd. v. Eison und Metall A.G., supra, note 20, and 
Calkins & Burke Ltd. v. Far Eastern Steamship Co. (1976), 72 D.L.R. (3d) 625, [1976] 
4 W.W.R. 337 (B.C.S.C). 



53 



(iii) Assignment of Contractual Rights to Third Party 
Beneficiaries 

An assignment creates a contractual right in one who is not a party to the 
original agreement and, as such, provides another way to avoid third party 
privity problems. If a court determines that a contractual right was validly 
assigned to a third party, that third party's rights become enforceable. 22 Equity 
has long recognized the validity of assignments of choses in action, 23 and 
legislation specifically recognizes a legal right arising from an assignment. 24 
However, the usefulness of this device is limited because not all contracts are 
assignable. For example, some contracts cannot be assigned as a matter of 
public policy. 25 In addition, with contracts that can be assigned, there must be 
sufficient evidence of the assignment in fact of the promisee's rights to the third 
party before the third party will be allowed to sue. 26 

(iv) Other Legal Techniques to Avoid the Privity of Contract 
Rule 

Other legal techniques that have been used by the courts to enable third 
parties to enforce contractual claims against promisors include recent develop- 
ments in tort law such as actions in negligent misstatement and the construction 
of collateral contracts. 

The creation of a right of action for negligent misstatement, and extensions 
of the neighbour principle enunciated in Donoghue v. Stevenson, 21 have at times 
served to circumvent the doctrine of privity of contract by making persons who 
assume a duty of care under a contract liable to persons other than the promisee. 
The principle enunciated by the House of Lords in Hedley Byrne & Co. Ltd. v. 
Heller & Partners Ltd. 28 and adopted by the Supreme Court of Canada in Haig 
v. Bamford, 29 has resulted, for example, in liability on the part of an auditor to a 
third party where it was reasonable to expect that the third party would rely on 
the financial statements prepared by the auditor. The case law includes 
examples of liability on the part of other professionals as well. 30 



22 See, for example, Andrews v. Moodie (1907), 6 W.L.R. 185, 17 Man. R. 1 (C.A.), and 
Moloney v. Campbell (1897), 28 S.C.R. 228. 

23 Row v. Dawson (1749), 1 Ves. Sen. 331, 27 E.R. 1064, and Fitzroy v. Cave. [1905] 2 
K.B. 364 (C.A.), at 372. 

24 Conveyancing and Law of Property Act, R.S.O. 1980, c. 90, s. 53. 

25 Re Robinson (1884), 27 Ch. 160 (C. A.). In that case an assignment of a right to alimony 
was invalid as being against public policy. 

26 Frontenac Loan & Investment Society v. Hysop (1892), 21 O.R. 577 (Ch. D.). 

27 [1932] A.C. 562, [1932] All E.R. Rep. 1 (H.L.). Atkin L.J. defined a neighbour at law 
to be a person who is so closely and directly affected by one's act or omission that one 
ought to contemplate that that person would be affected by the act or omission. 

28 [1964] A.C. 465, [1963] 2 All E.R. 575 (H.L.). 

29 [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68. 

30 See Linden, Canadian Tort Law (3d ed., 1982), at 436. 



54 



Beswick v. Beswick 3] provides an example of judicial enforcement of third 
party rights at the suit of the promisee. In that case, a nephew promised his 
uncle that, in consideration of the transfer of the uncle's business to the 
nephew, the nephew would pay his aunt an annuity after his uncle's death. The 
annuity was not paid, and the aunt sued the nephew in her capacity as 
administratrix of her husband's estate and personally. While it was assumed that 
the aunt could not succeed in her personal capacity, and while some judges 
conceded that, in a suit for damages, the aunt as administratrix would recover 
only nominal damages, nevertheless the House of Lords awarded specific 
performance to the widow in her capacity as administratrix. Some Canadian 
decisions have applied the approach used in the Beswick case in order to protect 
third party interests. 32 

Courts have also construed collateral contracts between the promisor and 
the third party in order to enforce third party rights. 33 However, the construc- 
tion of collateral contracts tends to require complex and artificial reasoning and 
is only feasible in limited fact situations. 

(v) Statutory Exceptions to the Doctrine of Privity 

In addition to judicial inroads on the doctrine of privity of contract, there 
are numerous legislative provisions in Ontario that enable someone other than a 
party to a contract to claim the benefit thereunder. Many of the statutory 
exceptions to the doctrine of privity may be found in the Insurance Act. 34 

For example, in Vandepitte v. Preferred Accident Insurance Co., 35 the 
Supreme Court of Canada dismissed an action against an insurer by a passenger 
injured in a motor vehicle accident on the ground that there was no privity of 
contract between the insured's daughter, who was driving the car, and the 
insurer. In response to this decision, the Insurance Act was amended to permit 
an action in circumstances similar to those in Vandepitte. 36 In a similar vein, 
section 172 of Ontario's Insurance Act permits a beneficiary under a life 
insurance policy to enforce the policy. 37 



31 Supra, note 8. 

32 See, for example, Gasparini v. Gasparini (1978), 20 O.R. (2d) 113, 87 D.L.R. (3d) 202 
(C.A.), and Waugh v. Slavik (1975), 62 D.L.R. (3d) 577, [1976] 1 W.W.R. 273 
(B.C.S.C). 

33 See, for example, The Satanita, [1895] P. 248 (C.A.), affd [1899] A.C. 59, and 
McConnell v. Mabee-McLaren Motors Ltd., [1926] 1 D.L.R. 282 (B.C.C.A.). 

34 Insurance Act, R.S.O. 1980, c. 218. 

35 Supra, note 9. 

36 Brown and Menezes, Insurance Law in Canada (1982), at 403, n. 208. And see the 
Insurance Act, supra, note 34, ss. 209(1), 210, and 213. 

37 Insurance Act, supra, note 34, s. 172. 



55 



Other examples of legislated deviations from the doctrine of privity of 
contract include legislation to enable a mortgagee to sue the assignee of a 
mortgagor who promises to assume the mortgage obligation, 38 and the right of a 
consignee to sue on a bill of lading pursuant to section 7(1) of the Mercantile 
Law Amendment Act. 39 

(vi) Conclusion 

The preceding discussion shows that it is difficult to state with confidence 
what the law is. The rule denying contractual rights to third party beneficiaries 
has been widely avoided by judicial devices and statutory provisions. While the 
courts have continued to pay lip service to the doctrine of privity of contract, 
they have often circumvented it through the use of the legal techniques 
described above. On the other hand, and particularly in light of the Supreme 
Court of Canada's recent uncritical affirmation of the doctrine of privity of 
contract in Greenwood Shopping Plaza Ltd. v. Beattie, 40 the possibility remains 
that meritorious claims will be defeated by the application of the doctrine. The 
uncertainty that pervades this area of the law of contracts is likely to continue 
unless legislative reform of the doctrine of privity is undertaken. 



3. AMERICAN DEVELOPMENTS 

In the United States, state legislation in several jurisdictions provides 
expressly that a third party beneficiary may enforce contractual rights made for 
his or her benefit. For example, California has legislation 41 simply overruling 
the common law privity of contract rule. California's Civil Code provides that 
"[a] contract, made expressly for the benefit of a third person, may be enforced 
by him at any time before the parties thereto rescind it". 42 This provision has 
been in force since 1872. 

There is some uniform legislation containing similar provisions. The 
Uniform Commercial Code 43 and the Uniform Land Transactions Act 44 both 
provide for enforcement by third parties of rights arising out of the contracts of 
others. In the case of the latter, section 2-312 ensures that warranties of title 
"run with the land", unless the parties have made an agreement to the contrary. 
The Uniform Commercial Code provides that the warranty of a seller of goods 



38 Mortgages Act, R.S.O. 1980, c. 296, s. 19. 

39 R.S.O. 1980, c. 265. 

40 Supra, note 1. 

41 West's California Codes, The Civil Code of the State of California (1985), § 1559. 

42 Ibid. 

43 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978) 
(hereinafter referred to as "Uniform Commercial Code"), § 2-318. 

44 Uniform Land Transactions Act, National Conference of Commissioners on Uniform 
State Laws, Uniform Laws Annotated: Civil Procedural and Remedial Laws (1975), 
Vol. 13 (hereinafter referred to as the "Uniform Land Transactions Act"), § 2-312. 



56 



extends to persons other than the person with whom the seller was in privity if 
the goods are defective and cause injury to the person or damage to property. 45 

A significant development in this area of the law of contracts was the 
publication of the Second Restatement of the Law of Contracts . 46 Section 304 of 
the Second Restatement sets out the substantive right of enforcement available 
to third party beneficiaries. It provides: 

304. A promise in a contract creates a duty in the promisor to any intended 
beneficiary to perform the promise, and the intended beneficiary may enforce the 
duty. 

Section 303 describes the kinds of promise covered by section 304. Both 
conditional and unconditional promises, as well as sealed and unsealed 
promises, are subject to the section. The scope of section 304 is also affected by 
section 302, which in essence defines the term "intended beneficiary". Section 
302(1) reads: 

302.-(l) Unless otherwise agreed between promisor and promisee, a benefici- 
ary of a promise is an intended beneficiary if recognition of a right to performance 
in the beneficiary is appropriate to effectuate the intention of the parties and either 

(a) the performance of the promise will satisfy an obligation of the 
promisee to pay money to the beneficiary; or 

(b) the circumstances indicate that the promisee intends to give the 
beneficiary the benefit of the promised performance. 

Paragraphs (a) and (b) deal with the "creditor beneficiary" and the "donee 
beneficiary", respectively, terms that were used in the initial Restatement.* 1 

Finally, in defining the scope of section 304 reference should be made to 
section 308, which provides that "[i]t is not essential ... that [the intended 
beneficiary] be identified when a contract containing the promise is made". 
However, as the Comment to section 308 indicates, the fact that a beneficiary 
cannot be identified at the time the contract is entered into may be a factor in 
determining whether the beneficiary is an intended beneficiary. 48 



45 Uniform Commercial Code, supra, note 43, § 2-318. 

46 American Law Institute, Restatement of the Law, Second — Contracts, 2d (1981) 
(hereinafter referred to as "Second Restatement"). 

47 See American Law Institute, Restatement of the Law, Contracts (1932) (hereinafter 
referred to as the "First Restatement"), §§ 133 and 141. The First Restatement 
expressly recognized contracts for the benefit of third parties and contained a substantial 
number of consequential provisions. The Second Restatement, while reaffirming the 
First Restatement on the issue of principle, has substantially changed some of the 
consequential rules. 

48 Second Restatement, supra, note 46, § 308, Comment a. 



57 



Insofar as the rights of the promisor, promisee, and third party inter se are 
concerned, section 305(1) prevents double recovery against the promisor, since 
"[wjhole or partial satisfaction of the promisor's duty to the beneficiary 
satisfies to that extent the promisor's duty to the promisee". This provision 
should be read in conjunction with section 310, which is concerned with the 
category of beneficiaries formerly known as "creditor beneficiaries", those 
now covered by section 302(1 )(a) of the Second Restatement. Section 310 
states: 

310.-(1) Where an intended beneficiary has an enforceable claim against the 
promisee, he can obtain a judgment or judgments against either the promisee or the 
promisor or both based on their respective duties to him. Satisfaction in whole or in 
part of either of these duties, or of a judgment thereon, satisfies to that extent the 
other duty or judgment, subject to the promisee's right of subrogation. 

(2) To the extent that the claim of an intended beneficiary is satisfied from 
assets of the promisee, the promisee has a right of reimbursement from the 
promisor, which may be enforced directly and also, if the beneficiary's claim is 
fully satisfied, by subrogation to the claim of the beneficiary against the promisor, 
and to any judgment thereon and to any security therefor. 

Turning to the defences that the promisor may raise in an action by the 
beneficiary, the Second Restatement proceeds from the concept that the third 
party's rights are derivative in character and, therefore, in general are no 
greater than the promisee's rights. The promisor may raise certain defences 
against the beneficiary involving the existence of an enforceable contract, 
including the defence that the contract was "voidable or unenforceable at the 
time of its formation", 49 or has ceased to be binding "because of impracticabil- 
ity, public policy, non-occurrence of a condition, or present or prospective 
failure of performance". 50 Moreover, the beneficiary's right against the prom- 
isor "is subject to any claim or defence arising from [the beneficiary's] own 
conduct or agreement". 51 However, except as provided in section 311 or by 
contract, the beneficiary's right against the promisor is not subject to claims or 
defences of the promisor that are personal against the promisee. 

Section 311(1) provides that, if the contract prohibits discharge or modifi- 
cation, any such attempt is ineffective. Sections 311(2) and (3) then stipulate 
that, in the absence of such a contractual term, the parties to the contract are 
free to discharge or modify it up until the time the beneficiary "materially 
changes his position in justifiable reliance on the promise or brings suit on it or 
manifests assent to it at the request of the promisor or promisee". It should also 
be noted that section 306 enables the beneficiary to disclaim any promise for his 
or her benefit within a reasonable time after learning of its existence. However, 
disclaimer is possible, it would seem, only before the beneficiary has assented 
to the promise. 



49 Ibid., § 309(1). 

50 Ibid., § 309(2). 

51 Ibid., § 309(4). 



58 



As will be apparent from the foregoing discussion, the privity of contract 
rule has been substantially eroded by legislative and judicial developments in 
the United States. 



4. PROPOSALS FOR REFORM AND STATUTORY RECOGNITION 
OF THIRD PARTY RIGHTS IN OTHER JURISDICTIONS 

(a) New Zealand 

The only other law reform body in the Commonwealth 52 to have examined 
the doctrine of privity of contract to date is the Contracts and Commercial Law 
Reform Committee in New Zealand. The Committee's Report on Privity of 
Contract 53 was published in 1981, and the recommendations contained in it 
have been given legislative effect by the Contracts (Privity) Act 1982. 54 

The New Zealand Report contains a description of the problems that arise 
from strict adherence to the doctrine of privity of contract. It then proceeds to 
outline the various legal techniques used by the courts to avoid the harsh or 
unjust consequences flowing from the doctrine. The New Zealand Committee 
rejected the approach of situation-specific statutory reform. 55 It did not agree 
with the suggestion that the courts are able to avoid the rigours of the privity 
doctrine and always give effect to the intentions of the contracting parties. 56 
Instead, unable to find any policy "justifying the frustration of contractual 
intentions", 57 the Committee recommended "changes in the law to enable the 
third party beneficiary to sue the promisor directly". 58 The objectives of the 
reforms proposed by the New Zealand Committee were stated to be as 
follows: 59 

The reform we propose is the enactment of legislation to enable a third party to 
enforce a term of a contract intended by the contracting parties to benefit him, or to 
give to him the benefit of any immunity or limitation of liability which the 
contracting parties intended to apply to him, in cases where it appears, as a matter 
of construction of the contract, that the contracting parties also intended that the 
beneficiary would have rights of enforcement of that term. We propose to leave 
unchanged the principle that no burden can be cast upon a third party by a contract 



52 This Commission has made recommendations in two separate Reports which would 
involve modification or repeal of the doctrine of privity. See Consumer Warranties and 
Guarantees Report, supra, note 5, at 65-77, and Sales Report, supra, note 5, at 128, 132, 
and 243-55. 

53 New Zealand Contracts and Commercial Law Reform Committee, Privity of Contract 
(1981) (hereinafter referred to as "New Zealand Report"). 

54 Contracts (Privity) Act 1982, Stat. N.Z., No. 132. 

55 New Zealand Report, supra, note 53, para. 6. 

56 Ibid. 

57 Ibid., para. 6.2. 

58 Ibid., para. 6.4. 
Ibid., para. 8.1. 



59 



59 



in which he is not joined, but it will be necessary to ensure that where the benefit, 
immunity or limitation is conditional, the third party should not be entitled to 
enforce it unless the conditions have been satisfied. 

The recommendations of the Committee are extensive. They deal not only 
with the kinds of promise that should be enforceable by a third party benefici- 
ary, but also with the need for a writing requirement, the right of the promisor 
or promisee to vary or cancel the contract, and the defences that should be 
available to the promisor in an action by a third party beneficiary. 

As mentioned above, the Committee's recommendations were imple- 
mented by the Contracts (Privity) Act 1982. 60 The key provision of the Act is 
section 4, which provides as follows: 

4. Where a promise contained in a deed or contract confers, or purports to 
confer, a benefit on a person, designated by name, description, or reference to a 
class, who is not a party to the deed or contract (whether or not the person is in 
existence at the time when the deed or contract is made), the promisor shall be 
under an obligation, enforceable at the suit of that person, to perform that promise: 

Provided that this section shall not apply to a promise which, on the proper 
construction of the deed or contract, is not intended to create, in respect of the 
benefit, an obligation enforceable at the suit of that person. 

The noteworthy features of section 4 are the following. First, it applies to 
both ordinary contracts and contracts under seal. While section 4 is not limited 
to contracts in writing, 61 it must be read subject to section 14(l)(b), which has 
the effect of leaving unaffected the New Zealand equivalent of our Statute of 
Frauds. 62 Secondly, while section 4 is not restricted in its application to express 
promises conferring a benefit on a third person, it may be relied upon only in 
cases of contracts or deeds intended ' 'to create ... an obligation enforceable at 
the suit of that [third] person". Thirdly, the right conferred by section 4 is 
available "whether or not the person [intended to be benefited] is in existence at 
the time when the deed or contract is made". Accordingly, the rights under the 
Act are available to those unborn at the time of the making of the agreement. 63 
Fourthly, the section permits the intended beneficiary to be identified by name, 
description or class. 

Sections 5, 6, and 7 of the Contracts (Privity) Act 1982 deal with variation 
or discharge of promises covered by section 4. Such promises may not be 
varied without the consent of the beneficiary where the beneficiary has obtained 
a judgment, or an award of an arbitrator, against the promisor upon the 
promise, or where the position of a beneficiary has been materially altered by 



60 Supra, note 54. 

61 Under section 2 of the Contracts (Privity) Act 1982, supra, note 54, a contract "includes 
a contract made by deed or in writing, or orally, or partly in writing and partly orally or 
implied by law". 

62 R.S.O. 1980, c. 481, discussed infra, ch. 5. 

63 New Zealand Report, supra, note 53, para. 8.2.3. 



60 



reliance on the promise by the beneficiary or any other person. 64 Further, a 
promise may be varied or discharged if there is an agreement to that effect 
between the parties to the contract and the beneficiary, 65 or if such variation or 
discharge is expressly permitted by the contract, the provision is known to the 
beneficiary, and the beneficiary has not materially altered his or her position in 
reliance on the promise before the provision becomes known to the 
beneficiary. 66 

Where a variation or discharge of a promise would be otherwise precluded 
by the reliance of the beneficiary or any other person on the promise or where 
there is uncertainty whether a variation or discharge is precluded, the court is 
empowered to make an order authorizing a variation or discharge of a promise 
if it is just and practicable to do so. 67 Such an order may be conditioned upon 
the payment of compensation to the beneficiary if the court is satisfied that the 
beneficiary has been injuriously affected by reliance of the beneficiary or any 
other person on the promise. 68 

Section 8 gives a beneficiary a right of action to enforce an obligation 
imposed by section 4 as if he or she were a party to the deed or contract in 
question. Such an action may not be refused on the ground that the beneficiary 
was not a party to the deed or contract, or that the beneficiary is a volunteer as 
against the promisor. Section 9 sets out the defences that are available to the 
promisor in an action under the Act. The promisor is entitled to raise any 
defence, counterclaim, or set-off that would have been available if the benefici- 
ary had been in privity with the promisor or if the action had been brought by 
the promisee. 69 The right of set-off, however, is restricted by section 9(3) to 
cases in which "the subject-matter of [the] set-off ... arises out of or in 
connection with the deed or contract in which the promise is contained". The 
same is true with respect to counterclaims, and a beneficiary's liability on a 
counterclaim may not exceed the value of the benefit conferred on him by the 
promise. 70 The beneficiary will be liable on the counterclaim only if he or she 
elects to proceed with a claim with full knowledge of the counterclaim. 71 

The last important feature of the New Zealand Act is section 14, which 
leaves intact ' ' [ajny right or remedy which exists or is available apart from this 
Act". 72 It specifically leaves unaffected the law of agency and the law of 



64 Supra, note 54, s. 5(1). 

65 Ibid., s. 6(a). 

66 Ibid., s. 6(b). 

67 Ibid., s. 7(1). 

68 Ibid., s. 7(2). 

69 Ibid., s. 9(2). 

70 Ibid., s. 9(4)(b). 

71 Ibid., s. 9(4)(a). 

72 Ibid., s. 14(1 )(a). 



61 



trusts, 73 thereby permitting a third party beneficiary to use the remedies that 
have been developed to date in those areas of the law. 74 

Ob) WESTERN AUSTRALIA 

Section 1 1 of the Western Australia Property Law Act, 1969 15 provides as 
follows: 

ll.-(l) A person may take an immediate or other interest in land or other 
property, or the benefit of any condition, right of entry, covenant or agreement 
over or respecting land or other property, although he is not named as a party to the 
conveyance or other instrument that relates to the land or property. 

(2) Except in the case of a conveyance or other instrument to which 
subsection (1) of this section applies, where a contract expressly in its terms 
purports to confer a benefit directly on a person who is not named as a party to the 
contract, the contract is, subject to subsection (3) of this section, enforceable by 
that person in his own name but — 

(a) all defences that would have been available to the defendant in an 
action or proceeding in a court of competent jurisdiction to enforce the 
contract had the plaintiff in the action or proceeding been named as a 
party to the contract shall be so available; 

(b) each person named as a party to the contract shall be joined as a party 
to the action or proceeding; and 

(c) such defendant in the action or proceeding shall be entitled to enforce 
as against such plaintiff, all the obligations that in the terms of the 
contract are imposed on the plaintiff for the benefit of the defendant. 

(3) Unless the contract referred to in subsection (2) of this section otherwise 
provides, the contract may be cancelled or modified by the mutual consent of the 
persons named as parties thereto at any time before the person referred to in that 
subsection has adopted it either expressly or by conduct. 

The legislation is noteworthy in a number of respects. First, insofar as the 
scope of the legislation is concerned, a third party beneficiary is only entitled to 
enforce a contract "where the contract expressly in its terms purports to confer 
a benefit directly". Accordingly, it would appear that a third party enjoys no 
statutory right of enforcement where the contract impliedly confers a benefit. 

Secondly, the section protects the promisor in a number of respects. 
Section ll(2)(a) stipulates that a promisor may, in an action brought by a third 
party to enforce a contract, raise any defences against the third party that would 
have been available to the promisor had the third party been named as a party to 
the contract. Section ll(2)(c) would seem to permit the promisor, in any such 
action, to enforce as against the plaintiff any obligations imposed on him or her 



73 Ibid., s. 14(1 )(d) and (e). 

74 See discussion, supra, this ch., sec. 2(b). 

75 W. Austl. Acts 1969, No. 32. 



62 



under the contract for the promisor's benefit. Section 11(3) authorizes the 
parties to the contract to cancel or modify the contract "at any time before the 
[third party] has adopted it either expressly or by conduct". 

Thirdly, with respect to the question of the procedure to be followed in an 
action brought by a third party beneficiary, section ll(2)(b) of the Western 
Australia Property Law Act, 1969 requires that each party named in the contract 
"be joined as a party to the action or proceeding". The New Zealand Report 
was critical of this requirement "because it could lead to unnecessary expense 
and possible problems as to service of the proceedings". 76 

(c) Queensland 

Section 55 of the Queensland Property Law Act 1974 11 provides another 
legislative precedent for reform of the doctrine of privity. That section reads as 
follows: 

55. -(1) A promisor who, for a valuable consideration moving from the 
promisee, promises to do or to refrain from doing an act or acts for the benefit of a 
beneficiary shall, upon acceptance by the beneficiary, be subject to a duty 
enforceable by the beneficiary to perform that promise. 

(2) Prior to acceptance the promisor and promisee may without the consent of 
the beneficiary vary or discharge the terms of the promise and any duty arising 
therefrom. 

(3) Upon acceptance — 

(a) the beneficiary shall be entitled in his own name to such remedies and 
relief as may be just and convenient for the enforcement of the duty of 
the promisor; and relief by way of specific performance, injunction or 
otherwise shall not be refused solely on the ground that, as against the 
promisor, the beneficiary may be a volunteer; 

(b) the beneficiary shall be bound by the promise and subject to a duty 
enforceable against him in his own name to do or refrain from doing 
such act or acts (if any) as may by the terms of the promise be required 
of him; 

(c) the promisor shall be entitled to such remedies and relief as may be 
just and convenient for the enforcement of the duty of the beneficiary; 

(d) the terms of the promise and the duty of the promisor or the 
beneficiary may be varied or discharged with the consent of the 
promisor, the promisee, and the beneficiary. 

(4) Subject to subsection (1), any matter which would in proceedings not 
brought in reliance on this section render a promise void, voidable or unenforce- 
able, whether wholly or in part, or which in proceedings (not brought in reliance 



76 New Zealand Report, supra, note 53, para. 7.1(d). 

77 Queensl. Stat., No. 76, s. 55. 



63 



on this section) to enforce a promissory duty arising from a promise is available by 
way of defence shall, in like manner and to the like extent, render void, voidable or 
unenforceable or be available by way of defence in proceedings for the enforce- 
ment of a duty to which this section gives effect. 

(5) In so far as a duty to which this section gives effect may be capable of 
creating and creates an interest in land, such interest shall, subject to section 12, be 
capable of being created and of subsisting in land under the provisions of any Act 
but subject to the provisions of that Act. 

(6) In this section — 

(a) 'acceptance' means an assent by words or conduct communicated by 
or on behalf of the beneficiary to the promisor, or to some person 
authorized on his behalf, in the manner (if any), and within the time, 
specified in the promise or, if no time is specified, within a reasonable 
time of the promise coming to the notice of the beneficiary; 

(b) 'beneficiary' means a person other than the promisor or promisee, and 
includes a person who, at the time of acceptance is identified and in 
existence, although that person may not have been identified or in 
existence at the time when the promise was given; 

(c) 'promise' means a promise — 

(i) which is or appears to be intended to be legally binding; and 

(ii) which creates or appears to be intended to create a duty 
enforceable by a beneficiary, 

and includes a promise whether made by deed, or in writing, or, 
subject to this Act, orally, or partly in writing and partly orally; 

(d) 'promisee' means a person to whom a promise is made or given; 

(e) 'promisor' means a person by whom a promise is made or given. 

(7) Nothing in this section affects any right or remedy which exists or is 
available apart from this section. 

(8) This section applies only to promises made after the commencement of 
this Act. 

Like the Western Australia provision discussed in the preceding section, 
section 55 of the Queensland statute is not restricted in its application to any 
particular type or class of contract. Like section 1 1 of the Western Australia 
Property Law Act, 1969,™ the Queensland provision enables the promisor to 
raise against the third party any defence that could have been raised against the 
promisee. The Queensland provision also permits the parties to the contract to 
"vary or discharge the terms of the promise and any duty arising therefrom". 

78 Supra, note 75. 



64 



The Queensland section differs from its Western Australia counterpart in 
certain vital respects. First, it appears to be broader in scope than section 1 1 of 
the Western Australia Property Law Act, 1969. Section 55(6)(b) of the 
Queensland legislation provides that "beneficiary" means "a person other than 
the promisor or promisee, and includes a person who, at the time of acceptance 
is identified and in existence, although that person may not have been identified 
or in existence at the time when the promise was given". Consequently, the 
beneficiary need not be in existence or identified at the time of the contract. 
Section 55 does not raise an obstacle to class identification, as long as at the 
time of acceptance the person or persons are identified and in existence. 
Moreover, in contrast to the Western Australia legislation, section 55 does not 
require that the contract expressly confer a benefit on the third party. 

Secondly, the Queensland legislation imposes no obligation on the third 
party beneficiary to join in an action all those persons who are parties to the 
contract. This is made clear by section 55(3)(a), which states that "the 
beneficiary shall be entitled in his own name" to such relief and remedies as 
may be just and convenient. 

(d) Quebec 

The Quebec Civil Code contains a general provision dealing with contracts 
in favour of third parties. Article 1029 of the Code states as follows: 

1029. A party in like manner may stipulate for the benefit of a third person, 
when such is the condition of a contract which he makes for himself, or of a gift 
which he makes to another; and he who makes the stipulation cannot revoke it, if 
the third person have [sic] signified his consent to it. 

While the Article does not expressly provide that the third party may enforce a 
contract for his or her benefit, the courts have read such a right into the 
provision. The Article, like legislation in other jurisdictions, deals with the 
right of revocation and restricts this right to the time prior to the third party 
having signified consent to the contractual benefit. 

The Draft Civil Code prepared by the Civil Code Revision Office contains 
a series of provisions dealing with "stipulations in favour of another". Articles 
85 to 93 of the Draft Civil Code read as follows: 79 

85. A person may stipulate by contract for the benefit of another. 

86. The stipulation gives rise to a direct right against the promisor in favour 
of the third party beneficiary. 

87. The third party beneficiary must exist at the time of the stipulation, 
subject to express provision of law. 



79 



See Civil Code Revision Office, Report on the Quebec Civil Code (1978), Draft Civil 
Code, Vol. I. 



65 



88. A stipulation may be revoked as long as the third party beneficiary has not 
advised the stipulator or the promisor of his will to accept. 

89. The stipulator alone may revoke a stipulation. 

However, he may not revoke a stipulation to the detriment of the promisor 
who justifies his interest in maintaining the stipulation. 

90. The stipulator's right of revocation may not be exercised by his heirs or 
creditors. 

Revocation or lapse of the stipulation benefits the stipulator. 

This article applies unless the law, the will of the parties or the nature of the 
contract provides otherwise. 

91. Revocation by the stipulator takes effect as soon as it is made known to 
the promisor. 

Revocation made by will, however, takes effect of right at the time of death. 

92. A third party beneficiary and his successors may validly accept the 
stipulation, even after the stipulator or the promisor has died, unless the law, the 
will of the parties or the nature of the contract provides otherwise. 

93. A promisor may set up against a third party beneficiary the exceptions 
which he could have set up against the stipulator, provided he was unaware that 
these exceptions existed when the stipulation was made. 

The Report on the Quebec Civil Code states that "it was thought right to insert 
in the Draft the rules evolved by judicial decisions based on Article 1029" of 
the Civil Code.™ 

A few comments on the provisions proposed to be included in the new 
Quebec Civil Code are in order. First, it should be noted that Article 87 would 
require the third party beneficiary to be in existence at the time the agreement is 
entered into. Secondly, the right of the stipulator (the promisee) to revoke the 
stipulation would be personal to the stipulator and, by virtue of Article 90, 
could not be exercised by his or her heirs or creditors, unless the contract 
provides otherwise. By contrast, Article 92 enables the successors of the third 
party beneficiary to accept the stipulation, unless the contract provides other- 
wise. Thirdly, Article 93 would allow the promisor to set up against the third 
party beneficiary those defences that he or she could set up in an action against 
the promisee. 



80 Ibid., Vol. II, at 616. 



66 



5. ARGUMENTS FOR AND AGAINST REFORM 

A number of arguments have been raised in defence of the rule barring 
third party beneficiaries from suing directly on their own behalf. Two of these 
justifications, mentioned above, 81 are closely related. It has been argued, with 
some circularity as will be discussed shortly, that only those in privity with 
another contractor should be allowed to sue in contract. 82 A related argument is 
that it is the providing of consideration that gives rise to the right to enforce a 
contract. 83 As it is very unlikely that someone who is not a party to a contract 
will give consideration, these first two arguments go hand-in-hand. 

The consideration argument is often associated with an apparent corollary. 
It has been suggested that the third party, not having bargained with the 
promisor for the rights in question, should not be entitled to them 84 on the 
ground that the absence of any bargain between the promisor and third party 
results in a lack of mutuality. That is to say, assuming that the third party could 
sue the promisor, the promisor would have no rights against the third party. 

Insofar as the first argument is concerned, it is the courts themselves that 
determine whether someone is a party to an agreement. For example, in one 
important case the Court concluded that a right of enforcement should accrue to 
someone who was named in the contract and who had signed the agreement; in 
other words, that person was found to be a party to the agreement. 85 Yet, there 
seems to be little difference between such a case and the case of one who is 
named in a contract as intended to benefit from performance of it, and who may 
detrimentally rely on receipt of the proposed benefit. Judicial distinctions based 
on privity tend to be circular, serving only to define the class not permitted to 
enforce agreements, rather than to give an explanation of why a particular class 
is to be denied rights of enforcement. 86 

Moreover, as pointed out in an earlier section of this chapter, 87 recent 
developments in tort law have resulted in a breaking down of the privity barrier 
in a large number of cases. While it might have been intended at some point to 
confer contractual benefits only on those who were parties to the agreement, 88 it 



81 Supra, this ch., sec. 1. 

82 See, for example, Winnett v. Heard (1928), 62 O.L.R. 61, [1928] 2 D.L.R. 594 (H.C. 
Div.). 

83 See Dunlop Pneumatic Tyre Co., Ltd. v. Selfridge & Co., Ltd., supra, note 3. 

84 A classic expression of this view may be found in Holmes, The Common Law (Howe ed. , 
1963), at 227-30. See, also, Gilmore, The Death of Contract (1974), at 18-21. 

85 See Coulls v. Bagot's Executor and Trustee Co. Ltd. (1967), 40 L.J.R. 471 (Aust. 
H.C). See, also, Midlands Silicones Ltd. v. Scruttons Ltd., supra, note 8, and New 
Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., supra, note 20. 

86 See Corbin, supra, note 11, at 28-31. 

87 See discussion supra, this ch., sec. 2(b)(iv). 

88 Winterbottom v. Wright (1842), 10 M. & W. 109, 152 E.R. 402. 



67 



is now clear that contracts between two persons may well give rights in tort to a 
large group of others. 

With respect to the consideration argument, in chapter 2 we examined in 
some detail the utility of the present consideration rule in the law of contracts 
and proposed a broadening of the category of agreements that should be 
enforceable. We have attempted to adopt a functional approach to the issue of 
consideration to ensure that those agreements that should be enforceable are 
indeed legally enforceable. In particular, we recognized the limits of the 
bargain theory and recommended, inter alia, that a person should be able, to a 
limited extent, to enforce a promise unsupported by consideration where there 
has been detrimental reliance. 89 The reduced importance of the bargain theory 
should be reflected throughout this Report. 

Moreover, since the promisee will generally have provided consideration 
for the promise in favour of the third party, it is difficult to see why 
consideration, the bargain theory, or mutuality should stand in the way of 
enforcement of a promise by the third party. Where the promise bears the 
hallmark of enforceability inter partes, we believe that the law should assist in 
implementing the clearly expressed intentions of the parties. 90 In our view, this 
can best be assured by allowing those with a direct interest in performance to 
sue to protect that interest. 91 

Another argument that may be raised against giving a third party benefici- 
ary the right to enforce a contract is the possibility of separate suits against the 
promisor being brought by the promisee and the third party beneficiary, thereby 
creating a potential for inconsistent verdicts. This apprehension about a change 
in the privity of contract rule is easily assuaged by pointing to existing 
procedural provisions. The Rules of Civil Procedure in Ontario already provide 
for the joinder of necessary parties. 92 The Rules of Civil Procedure also contain 
provisions that are addressed to the issue of multiplicity of legal proceedings. 93 
Of course, even if there were separate actions against the promisor, it does not 
follow that the promisor would have to pay full damages more than once. The 
law has always opposed double recovery, and there is no reason to think that 
this is a real danger in the present context. On balance, we do not regard as 
persuasive the concern of a promisor who has received a benefit from a 
promisee that he or she not be subject to suit by a third party. 

Abolishing the present third party beneficiary rule would, we believe, 
render the law more consistent internally, and more understandable by lay 
persons. As was pointed out previously, the courts have been able to circum- 
vent the doctrine of privity by one legal device or another when the desired 



89 Supra, ch. 2, sec. 4(d). 

90 To this effect, see Fuller, "Consideration and Form" (1941), 41 Colum. L. Rev. 799. 

91 To this effect, see Corbin, supra, note 11, at 25. 

92 O. Reg. 560/84, Rule 5.03. 

93 Ibid., Rule 5.02. See, also, Courts of Justice Act, 1984, S.O. 1984, c. 11, s. 148. 



68 



result was the enforcement of the promise by the third party beneficiary. The 
present state of the law, with its anomalies and unjustified distinctions, cannot 
and should not continue. 

We note the clear trend in other jurisdictions permitting third parties to 
enforce contracts made for their benefit. From the discussion of the law in other 
jurisdictions, 94 it should be apparent that there is almost universal agreement 
among those who have considered the question that the existing privity of 
contract rule must be abandoned. In the United States, through common law 
developments and legislative reform, the privity of contract rule has been 
rendered virtually obsolete. In Ontario, there are significant areas of the law 
where this rule no longer holds sway. 95 We believe that the time has come for 
Ontario to recognize that the doctrine of privity of contract is no longer 
appropriate as a general principle of contract law. 

It is the firmly held view of the Commission that the privity of contract 
rule should be abolished. In the next section, we shall canvass the two basic 
options for reform: the enactment of a general provision abolishing the 
doctrine, and the enactment of more detailed legislation not only permitting 
third parties to enforce contracts for their benefit, but dealing also with the 
subsidiary issues that arise as a result of the new legal regime. 



6. OPTIONS FOR REFORM 

If it is accepted that reform is appropriate, a preliminary question arises 
concerning the general nature of the legislation to be proposed. One option for 
reforming the doctrine of privity of contract is to enact detailed legislation 
concerning the rights of promisors, promisees, and third party beneficiaries 
with respect to contracts purporting to confer benefits on third parties. Such 
legislation could deal with, inter alia, the scope of the rule permitting third 
party beneficiaries to enforce contracts made for their benefit, the rights of the 
contracting parties to modify or terminate the contract, the defences available to 
promisors in actions brought by third party beneficiaries, and the kinds of relief 
available to third party beneficiaries in such actions. Such an approach can be 
found in the Second Restatement 96 and in the legislation in effect in Queens- 
land, 97 Western Australia, 98 and New Zealand 99 and proposed in Quebec. 100 



94 Supra, this ch., sees. 3 and 4. 

95 Supra, this ch., sec. 2. 

96 Second Restatement, supra, note 46, discussed supra, this ch., sec. 3. 

97 Supra, this ch., sec. 4(c). 

98 Ibid., sec. 4(b). 

99 Ibid., sec. 4(a). 
100 Ibid., sec. 4(d). 



69 



On the other hand, there is the approach adopted in many of the American 
states, and in effect in some civil law systems, such as Quebec. 101 These 
jursidictions, rather than attempting to formulate comprehensive legislation, 
have enacted a simple and general enabling provision to the effect that contracts 
for the benefit of third parties are not unenforceable solely for lack of 
consideration or want of privity. 

A general enabling provision would have the effect of permitting courts to 
enforce third party rights, if justice would thereby be served. This would 
simply abolish the impediment to enforcement and leave the courts free to 
fashion the principles to be applied on a case by case basis, without creating a 
new source of obligation. A detailed provision setting out the rights of third 
parties, on the other hand, would require the courts to enforce contracts at the 
suit of third parties. The statutory reformer who proceeds on these lines is then 
bound to attempt to foresee all possible cases in which enforcement might not 
be appropriate. As will be seen from the discussion which follows, this would 
be an exceptionally complex and difficult task. With this in mind, we favour the 
approach of a general enabling provision. 

Third party beneficiary problems arise in cases differing as widely as 
contract law itself. Familiar cases include family gift promises, 102 small 
business rearrangements, 103 banking transactions, 104 insurance, 105 shipping con- 
tracts, 106 employment contracts 107 and building contracts. 108 It is noteworthy 
that the American Law Institute substantially altered its position between the 
First and Second Restatements , 109 It is not likely that any legislation proposed 
would satisfactorily solve all the problems, and it is probable that through 
inevitable failure of foresight a detailed set of statutory exceptions to a 
mandatory rule of enforceability would produce anomalies in future cases. 

The principal difficulties facing the drafter of specific provisions would be 
first, the definition of the class of beneficiaries entitled to sue, and second, the 
problem of modification or rescission by the original parties. On the first 
question, everyone concedes that not all persons claiming to be damaged by 
breach of contracts between others should be entitled to a remedy. The usual 



101 Ibid. 

102 Mulholland v. Merriam, supra, note 16, and Beswick v. Beswick, supra, note 8. 

103 Snelling v. John G Snelling Ltd., [1973] 1 Q.B. 87, [1972] 1 All E.R. 79. 

104 McEvoy v. Belfast Banking Co. Ltd., [1935] A.C. 24, [1934] All E.R. Rep. 800 (H.L.), 
and Urquhart Lindsay & Co. Ltd. v. Eastern Bank Ltd., [1922] 1 K.B. 318, [1921] All 
E.R. Rep. 340. 

105 Vandepitte v. Preferred Accident Ins. Co., supra, note 9. 

106 jy ew Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., supra, note 20. 

107 Young v. Can. Northern Railway, [1931] A.C. 83, 144 L.T. 255 (P.C.). 

108 Town of Truro v. Toronto General Insurance Co. (1972), 4 N.S.R. (2d) 459, 30 D.L.R. 
(3d) 242 (N.S.C.A.). 

109 Supra, notes 46 and 47. 



70 



example given is that of a contract between a landowner and a builder for 
development of the land. It is generally agreed that a neighbour whose business 
would have benefited by the development should not be entitled to sue the 
builder for failure to perform. 110 A more difficult case is that of government 
contracts. Nevertheless, where a builder undertakes to improve a municipal 
street, it seems undesirable for each homeowner on the street to have an action 
on the builder's default. 111 

The First Restatement dealt with these cases by confining the right of 
action to two classes of beneficiaries, donee beneficiaries (where the promisee 
intended a gift of the benefit of performance) and creditor beneficiaries (where 
the promisee intended performance to discharge a prior obligation of his or her 
own). 112 This seems far too restrictive, but it is not easy to frame a satisfactory 
alternative. It is insufficient to require that the promisor must have manifested 
an intention to benefit the third party, because this test is probably met in both 
the building contract cases just mentioned. Although, in those cases, it is not the 
builder's motive to benefit the neighbouring business person or the individual 
homeowners (his or her motive is presumably to earn the price of performance 
from the promisee), the builder intends to do an act that he or she knows will 
certainly benefit the other persons, a sufficient state of mind to satisfy the usual 
test of intention. Similarly, a test based on expectation of benefit by the third 
party will not exclude the developer's disappointed neighbour. On the other 
hand, a test based on intention to create enforceable rights in the third party is 
too restrictive. Contracting parties rarely direct their minds consciously to 
enforceability, and the general law of contracts rightly does not require any 
such conscious subjective intention. 113 

The Second Restatement gives an action to the third party beneficiary "if 
recognition of a right to performance in the beneficiary is appropriate to 
effectuate the intention of the parties". 114 This formulation leaves the court free 
to judge whether or not an action by the third party is "appropriate", or just, in 
light of the agreement between the contracting parties. While this test would 
surely provide the courts with needed flexibility, it abandons the certainty that 
is supposed to be the chief merit of specific provisions. 

The question of modification or rescission has proven even more intract- 
able: some contracts for the benefit of third parties seem to be made with the 
expectation of permitting subsequent modification by the contracting parties; 
others seem to be designed to create immediate vested rights in the third party, 
so that modification should be impossible without the third party's assent. Many 
contracts can probably best be construed as permitting variation before some 



110 First Restatement, supra, note 47, § 133, illustration 11. 

111 Ibid., § 145 and illustrations. 

112 Ibid., § 133. 

113 See Smith v. Hughes (1871), L.R. 6 Q.B. 597, at 607, [1861-73] All E.R. Rep. 632, at 
637, per Blackburn J. 

114 Second Restatement, supra, note 46, § 302, discussed supra, this ch., sec. 3. 



71 



event, for example, the promisee's death, thus creating vested rights in the third 
party thereafter. 

Section 3 1 1 of the Second Restatement provides that the contracting parties 
may create rights that cannot be modified, but that otherwise they are free to 
modify unless the beneficiary "materially changes his position in justifiable 
reliance on the promise or brings suit on it or manifests assent to it at the 
request of the promisor or promisee". This provision raises difficulties that, in 
our view, illustrate the difficulty of highly specific legislation in this area. First, 
if reliance is the reason for enforcement, why is the recovery not limited to 
protection of the beneficiary's reliance? It should be noted that earlier in this 
Report we recommended adoption of the equivalent of section 90 of the Second 
Restatement, which permits protection of reliance of a third party on a 
contract. 115 Secondly, to return to section 311 of the Second Restatement, assent 
by the beneficiary does not seem obviously relevant to the question of the 
original party's power to modify the contract. If the contract is one that would 
ordinarily allow for modification it is difficult to see why the beneficiary's 
assent should affect the matter. The beneficiary, in hearing of a prospective 
benefit under a contract and signifying his or her satisfaction, assents to 
whatever benefits the contract may afford him or her, and if the contract, 
properly construed, allows for modification, the benefit afforded by the contract 
to the third party should fairly be described as conditional on failure of the 
contracting parties to modify it. There does not seem to be any reason why the 
beneficiary should be allowed to remove the conditional aspect of the benefit by 
manifesting an assent. 

To conclude, we believe that the general principle approach is to be 
preferred on the ground that it is more likely that the law will remain current if 
the courts are permitted some flexibility in dealing with the variety of issues that 
will undoubtedly arise. Accordingly, the Commission recommends that there 
should be enacted a legislative provision to the effect that contracts for the 
benefit of third parties should not be unenforceable for lack of consideration or 
want of privity. 

Recommendation 

The Commission makes the following recommendation: 

1. There should be enacted a legislative provision to the effect that 
contracts for the benefit of third parties should not be unenforceable for 
lack of consideration or want of privity. 



115 Supra, ch. 2, sec. 4(d). 



CHAPTER 5 



CONTRACTUAL ASPECTS OF 
THE STATUTE OF FRAUDS 



1. INTRODUCTION 

In 1677, the English Parliament adopted an Act, subsequently known as 
the Statute of Frauds, with the declared aim of "preventing many fraudulent 
practices which are commonly endeavoured to be upheld by perjury and 
subornation of perjury". 1 The original twenty-five sections of the Act covered a 
broad range of topics, only two of which, sections 4 and 17, involved writing 
requirements related to specified types of contracts. Other provisions in the Act 
imposed writing requirements for the creation, assignment, and surrender of 
interests in land and for the declaration or creation of trusts in land and the 
assignment of interests held in trust generally. This chapter is concerned only 
with those provisions of the Statute still in force in Ontario involving writing 
requirements relating to contracts and other obligations. We leave the other 
provisions to be dealt with on another occasion. 

Sections 4 and 17 were adopted in response to the particular political and 
legal conditions of the early Restoration period in England. However, this did 
not discourage the adoption of these and other provisions of the Statute, in their 
original or amended form, in many parts of the common law world, including 
all the common law provinces of Canada, the Australian states, New Zealand, 
and the United States. It may be assumed, therefore, that, originally, the 
legislatures in the adopting jurisdictions thought that sections 4 and 17 embod- 
ied enduring legal values. This assumption no longer prevails. 

Sections 4 and 17 have generated an enormous amount of litigation in all 
the adopting jurisdictions, and entire volumes have been devoted to interpreting 
the complex and frequently inconsistent jurisprudence concerning the provi- 
sions of the Statute of Frauds. The Statute has been the subject of critical 



29 Car. 2, c. 3 (U.K.). The history of the Statute is traced in Holdsworth, A History of 
English Law (2d ed., 1937), Vol. VI, at 383-97, and in Hening, "The Original Drafts of 
the Statute of Frauds (29 Car. II, c. 3) and their Authors" (1913), 61 U. Pa. L. Rev. 
283. See, also, Rabel, "The Statute of Frauds and Comparative Legal History" (1947), 
63 L.Q. Rev. 174. 

[73] 



74 



examination by law reform bodies in many parts of the Commonwealth 2 and, in 
many cases, their recommendations have been implemented. 

The availability of these studies and legislative precedents, particularly the 
excellent Report of the Law Reform Commission of British Columbia and the 
Background Paper prepared by the Alberta Institute of Law Research and 
Reform, 3 makes it unnecessary for us to retrace the same ground in detail. The 
main purpose of this chapter, therefore, is to express our own views on the 
desirability of reforming the provisions concerning contracts in the Statute of 
Frauds and to indicate our reactions to the recommendations of other law 
reform agencies. To lay the appropriate groundwork for this objective, we must 
begin with a short description of the evolution and current status of the relevant 
Statute of Frauds requirements in England and Ontario. This discussion will be 
followed by a description of the judicial interpretation and application of the 
statutory provisions. 



2. HISTORY OF THE STATUTE OF FRAUDS REQUIREMENTS IN 
ENGLAND AND ONTARIO 

(a) INTRODUCTION 

The original version of section 4 of the Statute of Frauds embraced the 
following types of contracts and promises: 

(i) A promise by an executor or administrator * 'to answer damages out of his own 
estate"; 

(ii) A promise to answer for the debt, default, or miscarriage of another person; 

(iii) An agreement made "upon consideration of marriage"; 

(iv) Contracts for the sale or any other disposition of an interest in land; and 

(v) Contracts not to be performed within one year from the making thereof. 



England, Law Revision Committee, Sixth Interim Report (Statute of Frauds and the 
Doctrine of Consideration) (Cmd. 5449, 1937) (hereinafter referred to as ""Sixth Interim 
Report'"); England, Law Reform Committee, The Statute of Frauds and Section 4 of the 
Sale of Goods Act (Cmd. 8809, 1953); Law Reform Commission of British Columbia, 
Report on the Statute of Frauds (1977) (hereinafter referred to as "British Columbia 
Report"); Alberta Institute of Law Research and Reform, Background Paper No. 12, 
Statute of Frauds (1977) (hereinafter referred to as "Alberta Background Paper"); 
Alberta Institute of Law Research and Reform, Report No. 44, The Statute of Frauds and 
Related Legislation (1985) (hereinafter referred to as "Alberta Report"); Manitoba Law 
Reform Commission, Report No. 41, Report on the Statute of Frauds (1980); Queen- 
sland Law Reform Commission, Q.L.R.C. 6, A Report of the Law Reform Commission 
on a Review of The Statute of Frauds (1970) (hereinafter referred to as "Queensland 
Report"); and Law Reform Committee of South Australia, Thirty-fourth Report Relating 
to the Repeal of the Statute of Frauds and Cognate Enactments in South Australia (1975) 
(hereinafter referred to as "South Australia Report"). 

British Columbia Report and Alberta Background Paper, supra, note 2. 



75 



In all these cases, the Statute provided and, except as hereinafter explained, in 
Ontario still provides, that no action could be brought to charge a person upon a 
promise or contract unless the agreement upon which the action was brought, or 
some note or memorandum thereof, was in writing and signed by the party to be 
charged or by his agent. 

Section 17 was restricted to contracts for the sale of goods, wares, and 
merchandise for the price of £10 (sterling) and upwards, but here, very 
significantly, the Statute recognized important evidentiary alternatives to writ- 
ing to prove the existence of the contract. These were acceptance and receipt of 
the goods by the buyer, part payment by the buyer, or the giving of an 
"earnest" 4 by the buyer. 

(b) Subsequent history in England 

In 1828, as a result of the enactment of Lord Tenterden's Act, 5 two new 
categories of transactions were required to be reduced to writing. These were, 
first, the ratification by a person, on attaining full age, of a contract concluded 
during infancy, and, secondly, a representation by a person concerning the 
credit worthiness of another and for which it was sought to hold the representor 
liable. 6 Section 17 was also amended by extending it to the sale of future 
goods. 7 The English Mercantile Law Amendment Act, 1856 % supplemented 
section 4 of the Statute in relation to contracts of guarantee by making it clear 
that the consideration for the guarantor's promise did not have to be included in 
the writing. 

In 1893, the United Kingdom Parliament adopted the Sale of Goods Act, 
1893, 9 and, with a minor change, section 4 of that Act replaced the evidentiary 
requirements in section 17 of the Statute of Frauds. A similar change occurred 
in 1925 with respect to contracts for the sale or other disposition of an interest 
in land, upon the adoption in that year of the Law of Property Act, 1925. 10 



4 "Earnest" is defined in Black's Law Dictionary (5th ed., 1979), at 456, as "[t]he 
payment of a part of the price of goods sold, or the delivery of part of such goods, for the 
purpose of binding the contract. A token or pledge passing between the parties, by way 
of evidence, or ratification of the sale". 

5 Lord Tenterden's Act, 9 Geo. 4, c. 14 (U.K.), ss. 5-6. 

6 Unlike the promises and contracts in section 4 of the original Statute, these categories of 
obligation were not enforceable unless the promise, contract, or representation, as the 
case might be, was in writing (and not merely evidenced by a note or memorandum 
thereof) and signed by the person to be charged therewith. 

7 Supra, note 5, s. 7. 

8 19 & 20 Vict., c. 97 (U.K.), s. 3. 

9 Sale of Goods Act, 1893, 56 & 57 Vict., c. 71 (U.K.). See now Sale of Goods Act 1979, 
c. 54 (U.K.). 



10 



Law of Property Act, 1925, 15 & 16 Geo. 5, c. 20 (U.K.), s. 40. 



76 



More significant changes, based on the recommendations of two law 
reform committees, 11 were introduced by the Law Reform (Enforcement of 
Contracts) Act, 1954. n This Act repealed section 4 of the Sale of Goods Act, 
1893 and the provisions in section 4 of the Statute of Frauds relating to a 
promise by an executor or administrator to answer damages out of his or her 
own estate, marriage contracts, and contracts not to be performed within one 
year. It will be seen, therefore, that, in England, the only section 4 contracts 
still required to be evidenced in writing are contracts for the sale or disposition 
of an interest in land and contracts of guarantee. 

(c) Ontario history 

The Statute of Frauds became part of the law of Upper Canada in 1792 as a 
result of the adoption in that year of The Property and Civil Rights Act. 13 The 
amendments in Lord Tenterden's Act affecting the ratification of infants' 
contracts and liability for misrepresentations of credit worthiness were adopted 
in 1850; 14 those in the English Mercantile Law Amendment Act, 1856 relating to 
contracts of guarantee in 1863. 15 The Statute of Frauds was formally enacted in 
Ontario in an amended form (but without the recited amendments of 1850 and 
1863) in the Revised Statutes of 1897. 16 A consolidating statute combining both 
these sources was enacted in 1913. 17 Finally, Ontario adopted the U.K. Sale of 
Goods Act, 1893 in 1920 18 and, following the U.K. precedent, exchanged 
section 5 of the Ontario Sale of Goods Act for section 17 of the original Statute 
of Frauds. 19 

The subsequent history of the Statute of Frauds in Ontario differs materi- 
ally from its history in England. In 1929, Ontario added an obscure gloss to 
section 4 in what is now section 5 of the Ontario Statute of Frauds. 20 In 1978, as 
a result of the adoption of The Family Law Reform Act, 1978, 21 Ontario deleted 
the section 4 requirements relating to marriage contracts. Section 55 of the 



1 Sixth Interim Report, supra, note 2, and England, Law Reform Committee, The Statute 
of Frauds and Section 4 of the Sale of Goods Act, supra, note 2. 

2 Law Reform (Enforcement of Contracts) Act, 1954, 2 & 3 Eliz. 2, c. 34 (U.K.). 

3 32 Geo. 3, c. 1 (U.C.), s. 3. See, now, Property and Civil Rights Act, R.S.O. 1980, c. 
395. 

4 13 & 14 Vict., c. 61 (Can.), ss. 5-6. 

5 26 Vict., c. 45 (Can.), s. 1. 

6 R.S.O. 1897, c. 338. 

7 3 & 4 Geo. 5, c. 27 (Ont.). 

8 The Sale of Goods Act, 1920, S.O. 1920, c. 40. 

9 The threshold figure of £10 in the English Act had previously been converted to $40 in 
Canadian currency. 

20 S.O. 1929, c. 23, s. 6. 

21 S.O. 1978, c. 2. See now Family Law Act, 1986, S.O. 1986, c. 4. 



77 



current Family Law Act, 1986 requires domestic contracts, as defined in the 
Act, to be in writing and signed by the persons to be bound and witnessed. 

Ontario has not adopted provisions corresponding to those in the Law 
Reform (Enforcement of Contracts) Act, 1954. 22 However, this Commission's 
1979 Report on Sale of Goods 23 recommended, inter alia, the repeal of section 
5 of the Ontario Sale of Goods Act 24 Changes involving the writing require- 
ments for leases and contracts of lease were also recommended in our earlier 
Report on Landlord and Tenant Law 25 Both these sets of recommendations 
await implementation. 

At the present time, therefore, all the writing requirements relating to 
contracts and other obligations contained in the original Statute of Frauds, 
except those with respect to marriage contracts, continue to apply in Ontario. 26 
We turn to consider the nature of these requirements and how they have been 
interpreted and applied by the courts. 



3. THE SCOPE AND NATURE OF THE WRITING 

REQUIREMENTS AND THEIR JUDICIAL INTERPRETATION 

(a) Types of Contracts and other Obligations Affected 

Judging by the number of reported cases, the requirements in section 4 of 
the Statute of Frauds involving contracts for the sale or other disposition of 
interests in land are unquestionably the most important; those relating to 
contracts of guarantee and contracts not to be performed within one year are a 
distant second and third. Litigation involving the other requirements is now 
rare. 27 It will be convenient to deal with the contracts and other obligations in 
the order in which they appear in sections 4, 5, 7, and 8 of the Ontario Statute. 



22 Supra, note 12. 

23 Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. 1, at 131, Recommendation 13. 

24 Sale of Goods Act, R.S.O. 1980, c. 462. 

25 Ontario Law Reform Commission, Report on Landlord and Tenant Law (1976), at 17- 
19. 

26 See Statute of Frauds, R.S.O. 1980, c. 481. 

27 A non-exhaustive tabulation of Canadian cases involving the Statute of Frauds in all 
provinces and reported between 1970-1979, which was carried out during the course of 
the Commission's research, reveals the following figures: 

Contracts involving land 26 

Contracts of guarantee 4 

Contracts not to be performed within one year 2 

Others _0 

Total 32 

The above list does not include contracts for the sale of goods. 



78 



We begin with the categories of contract covered by section 4, which reads 
as follows: 

4. No action shall be brought whereby to charge any executor or administra- 
tor upon any special promise to answer damages out of his own estate, or whereby 
to charge any person upon any special promise to answer for the debt, default or 
miscarriage of any other person, or to charge any person upon any contract or sale 
of lands, tenements or hereditaments, or any interest in or concerning them, or 
upon any agreement that is not to be performed within the space of one year from 
the making thereof, unless the agreement upon which the action is brought, or 
some memorandum or note thereof is in writing and signed by the party to be 
charged therewith or some person thereunto by him lawfully authorized. 

(i) Promise by Executor or Administrator to Answer Damages 
Out of His or Her Own Estate 

A modern reader may have difficulty in grasping the rationale for 
including this type of promise in a Statute of Frauds provision. It is explained in 
the Alberta Background Paper 28 as based on the ground that, "[a]t the time of 
the enactment of the Statute of Frauds, the executor or administrator of an estate 
took beneficially if there was no residuary gift, and the estate was not liable for 
the wrongful acts of the deceased. This placed moral pressure on the executor 
or administrator to make restitution out of his own funds, so that such special 
promises were common." The law, of course, has changed and a personal 
representative no longer has any claim to the residuary estate of the deceased, 
and therefore has little incentive to assume liability for the deceased's debts. 
Consequently, the provision is only of historical interest. It has been repealed in 
the United Kingdom, 29 British Columbia, 30 New Zealand, 31 Western Australia 32 
and Manitoba. 33 Its repeal has been recommended in Alberta, Queensland and 
South Australia. 34 Later in this chapter we make a recommendation to the same 
effect. 35 

(ii) Contracts of Guarantee 

The second category of contracts covered by section 4 of the Ontario 
Statute of Frauds involves any special promise to answer for "the debt, default 
or miscarriage of any other person". The meaning of these words is far from 



28 Supra, note 2, at 128. 

29 Law Reform (Enforcement of Contracts) Act, 1954, supra, note 12, s. 1. 

30 Statute of Frauds, 1958, S.B.C. 1958, c. 18, s. 7. 

31 Contracts Enforcement Act 1956, Repr. Stat. N.Z., 1979, Vol. 1, at 535, s. 2. 

32 Law Reform (Statute of Frauds) Act, West Austl. Acts 1962, No. 16, s. 2. 

33 An Act to Repeal The Statute of Frauds, S.M. 1982-83-84, c. 34. 

34 Alberta Report, supra, note 2, at 53; Queensland Report, supra, note 2, at 6; and South 
Australia Report, supra, note 2, at 5. 

35 See infra, this ch., sec. 6(a). 



79 



evident and they have required judicial clarification. 36 The following points 
emerge from the jurisprudence. "Debt" refers to a contractual liability already 
incurred, 37 whereas "default" refers to a future liability. 38 "Miscarriage" has 
been interpreted as applying to a liability in tort. 39 Further, it has long been well 
settled 40 that the Statute applies only to a contract of guarantee and does not 
include a promise of indemnity, that is, a promise in which the promisor 
assumes a primary and not a secondary or collateral liability arising out of a 
present or fijture event. While the distinction is a basic one, it is not always easy 
to determine on the facts of a particular case whether the promise falls into one 
or the other category. 

The courts have carved out further exceptions. The Statute does not apply 
to a guarantee that constitutes an incident of a larger transaction. Examples 
include cases where a del credere agent guarantees the performance of the 
contract and the solvency of a purchaser, 41 and cases where a person gives a 
guarantee to secure the release of an encumbrance against property in which he 
or she has a legal interest. 42 Significantly, the latter exception does not include 
the promise of a person who only has a personal interest -rather than a 
proprietary interest in the property, such as the interest of a shareholder in a 
company whose debt he or she is guaranteeing. 43 

(iii) "Any contract or [sic] sale of lands, tenements or 

hereditaments, or any interest in or concerning them" 

Preliminarily, we note a difficulty presented by the disjunctive "or" 
between "any contract" and "sale of lands". Read literally, it suggests that the 
provision applies to a conveyance (a "sale") as well as to a contract to sell or 
otherwise transfer an interest in land. This would be an anomalous construction, 
since section 1 of the Statute of Frauds addresses itself separately to the 
requirements for the transfer of interests in land. "Or" has, therefore, 



36 See Alberta Background Paper, supra, note 2, at 116-18; British Columbia Report, 
supra, note 2, at 37-40; and Halsbury's Laws of England (4th ed., 1978), Vol. 20, paras/ 
119-28. 

37 Castling v. Aubert (1802), 2 East 325, at 330-31, 102 E.R. 393, at 395. 

38 Re Young and Harston's Contract (1885), 31 Ch. D. 168 (C.A.). 

39 Kirkham v. Marter (1819), 2 B. & Aid. 613, 106 E.R. 490. 

40 Halsbury's Laws of England, supra, note 36, Vol. 20, para. 124. The cases are legion. 
See, for example, Birkmyr v. Darnell (1704), 1 Salk. 28, 91 E.R. 27; Lakeman v. 
Mountstephen (1874), L.R. 7 H.L. 17; and Yeoman Credit Ltd. v. Latter, [1961] 1 
W.L.R. 828, [1961] 2 All E.R. 294 (C.A.). 

41 Couturier v. Hastie (1852), 8 Exch. 40, rev'd on other grounds [1843-60] All E.R. Rep. 
280. A del credere agent is one who, for an additional commission, agrees to indemnify 
the seller of goods for any loss suffered as a result of credit extended to the buyers. See 
Black's Law Dictionary, supra, note 4, at 383. 

42 Halsbury's Laws of England, supra, note 36, Vol. 20, para. 127, and Fitzgerald v. 
Dressier (1859), 7 C.B. (N.S.) 374, 141 E.R. 861. 

43 Harburg India Rubber Comb Co. v. Martin, [1902] 1 K.B. 778 (C.A.), and Annarva 
Sales Ltd. v. Lunke, [1975] W.W.D. 32 (B.C.S.C). 



80 



traditionally been read as "for", 44 which conveniently glosses over a difficult 
point of exegesis. It is also not clear why the drafters added "tenements or 
hereditaments" to the description of the subject matter, for the words "lands" 
and "any interest in or concerning them" appear wide enough to include every 
known category of interest in realty. We assume, as others have done, 45 that the 
phrase "tenements or hereditaments" was added out of an abundance of 
caution. 

What constitutes an interest in land for the purpose of the Statute is not 
clear. 46 It would appear to depend, to a large extent, on judicial perceptions of 
the benevolent or obstructive role played by the writing requirements in section 
4. Important questions of characterization have arisen concerning contracts for 
the sale of products of the soil (which are subdivided into fructus naturales and 
fructus industriales) , 47 fixtures, and minerals and hydrocarbons. The picture 
has been complicated because the definition of "goods" in the Ontario Sale of 
Goods Act 4 * includes "things attached to or forming part of the land that are 
agreed to be severed before sale or under the contract of sale". This overlap has 
led to the suggestion that the same collateral may be classified as "land" or 
"goods", depending on whether or not the contract is governed by the Sale of 
Goods Act. 49 In the case of fixtures, further complications arise because of 
provisions in the Ontario Personal Property Security Act. 50 

A judicial disposition to read the statutory words narrowly manifests itself 
in decisions that hold that agreements to divide all or part of the proceeds of a 
sale of land, minerals, or hydrocarbons extracted from the land, do not fall 
within the Statute. 51 The same conclusion has been reached with respect to the 
sale of partnership assets, 52 even though the partnership assets include land, and 
may likewise be confidently assumed with respect to the sale of shares in a 
company owning land. The latter type of transaction is particularly striking 



44 Corbin, Corbin on Contracts (1960), Vol. 2, § 396. 

45 Ibid., § 391. 

46 See Alberta Background Paper, supra, note 2, at 24-30, and British Columbia Report, 
supra, note 2, at 8-13. 

47 Fructus naturales are the spontaneous products of the earth such as grass, trees and 
shrubs. Fructus industriales are products of the soil that are produced through labour and 
industry, such as crops of grain. 

48 Sale of Goods Act, supra, note 24, s. l(l)(g). See, also, Sales Report, supra, note 23, 
Vol. 1, at 53-55. 

49 Alberta Background Paper, supra, note 2, at 26. 

50 See Personal Property Security Act, R.S.O. 1980, c. 375, s. 36. This provision deals, in 
part, with the priority of security interests that attach to goods before they become 
fixtures. 

51 Harris v. Lindeborg, [1931] S.C.R. 235, [1931] 1 D.L.R. 945, and Emerald Resources 
Ltd. v. Sterling Oil Properties Management Ltd. (1969), 3 D.L.R. (3d) 630 (Alta. S.C., 
App. Div.). 

52 Archibald v. McNerhanie (1899), 29 S.C.R. 564. 



81 



because it demonstrates how easily the Statute of Frauds requirements can be 
by-passed by use of the corporate vehicle, and because of the fiction of the 
separate personality of the corporation. It is also well settled that agency 
contracts to sell or purchase land are outside the Statute. 53 In Ontario, as in 
many other provinces, such contracts are now governed by separate Acts 
imposing their own evidentiary requirements. 54 



A peculiar difficulty affects the status of agreements for the lease of lands. 
Prima facie, they fall within section 4. However, a complication arises because 
of the provisions of sections 1 and 3 of the Statute. Section 1(2) provides that 
"all leases and terms of years of any messuages, lands, tenements, or 
hereditaments are void unless made by deed". The requirement is qualified by 
section 3, which provides that sections 1 and 2 do not apply to a lease, "or an 
agreement for a lease", for a term not exceeding three years from the making 
thereof, if the rent amounts to at least two-thirds of the full improved value of 
the thing demised. The words "or an agreement for a lease" did not appear in 
the original Statute of Frauds and were apparently added in Ontario in the 
consolidation of 1913. 55 



Two questions arise. First, ignoring the additional language, does section 3 
exclude agreements to lease from the requirements of section 4? On a literal 
reading, the answer should be no, because section 3 only purports to exclude 
the requirements of sections 1 and 2, not section 4. However, the contrary view 
was advanced in Lord Bolton v. Tomlin, 56 in which it was reasoned that "it 
seems absurd to say that a parol lease shall be good, and yet that it cannot 
contain any specific stipulations or agreements." The reference here was to a 
lease that also contained contractual covenants. The Court's reasoning would 
appear to apply with equal force to an agreement to lease, yet Hudson Co. Ct. 
J. appears to have reached the opposite conclusion in Hoj Industries Ltd. v. 
Dundas Shepard Square Ltd. 51 Lord Bolton v. Tomlin does not appear to have' 
been cited to the Court, nor did Hudson Co. Ct. J. discuss the significance of 
the additional words in the Ontario version of section 3. 



The second question is what difference the additional words "or an 
agreement for a lease" make to the construction of section 3. It seems 
reasonable to surmise that they were inserted to confirm the interpretation of the 
section adopted in Lord Bolton v. Tomlin, but the difficulty remains that the 



53 Alberta Background Paper, supra, note 2, at 30. 

54 See, for example, the Real Estate and Business Brokers Act, R.S.O. 1980, c. 43 1 , s. 23. 

55 S.O. 1913, c. 27. 

56 (1836), 5 Ad. &E. 856, at 864, 111 E.R. 1391, at 1394. See, also, Ontario Law Reform 
Commission, Report on Landlord and Tenant Law, supra, note 25, at 12-13. 

57 (1978), 23 O.R. (2d) 295, 95 D.L.R. (3d) 354 (Co. Ct.). 



82 



drafter did not expand the section to include a reference to section 4. 
Presumably it was an oversight on the part of the drafter. Whatever be the 
correct interpretation of this part of section 3, 58 it seems clear that the section 
needs to be revised. We return to this question in a later part of this chapter. 59 



(iv) "Contracts not to be performed within a year from the 
making thereof 

It has been suggested or assumed that the reason for the inclusion of this 
category of contract in the original Statute of Frauds was that it was not deemed 
wise to trust the memory of witnesses for a period longer than one year. 60 
Whatever the justification, the courts have encountered numerous difficulties in 
construing the statutory language and the many fine distinctions that have been 
drawn. 61 



To illustrate, if a contract is for an indefinite period, but could be 
performed within a year, it has been held to fall outside the Statute. 62 However, 
if the contract provides for a specific period for performance of more than a 
year but also confers a power of determination that may be exercised within the 
year, it requires a written memorandum. 63 Again, if a contract is to be 
performed over a period of one year, commencing the day after the formation 
of the contract, it falls outside the Statute on the principle that the law takes no 
account of the parts of a day; 64 if, on the other hand, a contract of the same 
duration commences two days after the conclusion of the contract, the Statute 
will be deemed to apply even though the day immediately following the 
conclusion is a Sunday. 65 In addition to these constructional vagaries, it has 
been noted 66 that the statutory provision leads to the curious result that it is in 
the interest of the defendant to argue that the contract was to run for more than a 
year, whereas the plaintiff has an incentive to argue equally strenuously that the 
contract was for less than a year. 



58 The meaning of the rest of s. 3 is equally obscure. 

59 Infra, this ch., sec. 6(c)(iii). 

60 See, for example, Smith v. Westall (1698), 1 Ld. Raym. 316, 91 E.R. 1106, and Sixth 
Interim Report, supra, note 2, para. 10. For criticism of this assumption, see ibid., 
paras. 11(B) and 12. 

61 Alberta Background Paper, supra, note 2, at 123-24. 

62 Adams v. Union Cinemas, Ltd., [1939] 3 All E.R. 136 (C. A.), and Quance v. Brown 
(1926), 58 O.L.R. 578, [1926] 2 D.L.R. 824 (App. Div.). 

63 Hanau v. Ehrlich, [1912] A.C. 39 (H.L.). 

64 Smith v. Gold Coast and Ashanti Explorers, Ltd., [1903] 1 K.B. 285, affd [1903] 1 K.B. 
538 (C.A.). 

65 Britain v. Rossiter (1879), 11 Q.B.D. 123, 48 L.J.Q.B. 362 (C.A.). 

66 See, for example, the observations of du Parcq L.J. in Adams v. Union Cinemas, Ltd., 
supra, note 62, at 138. 



83 



(v) Section 5 Promises 

As has been previously noted, 67 section 5 of the Statute of Frauds is an 
Ontario innovation that was added in 1929. The section provides: 

5. A promise, contract or agreement to pay a sum of money by way of 
liquidated damages or to do or suffer any other act, matter or thing based upon, 
arising out of, or relating to a promise, contract or agreement dealt with in section 
4 is not of any greater validity than the last-mentioned promise, contract or 
agreement. 

We have not been able to determine the reason for the addition and there are no 
reported decisions that cast any light on the matter. It has been suggested that 
the section is directed to a compromise of claims involving the types of 
contracts enumerated in section 4. That may well have been its purpose, but its 
language is capable of supporting a wider range of agreements, such as an 
agreement to rescind a contract covered by section 4. A rescinding agreement 
has been held to fall outside section 4, 68 and we would regard its reinstatement 
via section 5 as a regressive measure. Whatever its proper meaning, section 5 
does not appear to have served any demonstrable purpose not already served by 
section 4. 

(vi) Ratification of Minors' Contracts (Section 7) 

The provision in the Statute of Frauds that deals with ratification of 
minors' contracts is section 7. It reads as follows: 

7. No action shall be maintained whereby to charge a person upon a promise 
made after full age to pay a debt contracted during minority or upon a ratification 
after full age of a promise or simple contract made during minority, unless the 
promise or ratification is made by a writing signed by the party to be charged 
therewith or by his agent duly authorized to make the promise or ratification. 

It will be recalled that this provision was one of two added by Lord Tenterden's 
Act of 1828. The purpose of what is now section 7 of the Ontario Statute of 
Frauds was to protect persons from ill-considered adoption of obligations 
contracted by them during infancy and not otherwise enforceable against them. 
The section, it should be noted, draws a troublesome distinction between a 
promise made by a person after full age to pay a debt he or she contracted in 
infancy and ratification by such a person of a promise or simple contract made 
during infancy. 

Apart from this feature, the law of minors' contracts is complex and 
uncertain. 69 Theoretically, such contracts fall into one of four categories: 
onerous contracts that are said to be void; voidable contracts that are not 
binding unless ratified by the minor on attaining majority; voidable contracts 
that are binding until repudiated by the minor; and contracts for necessaries and 



67 Supra, this ch., sec. 2(c). 

68 Morris v. Baron and Co., (1918] A.C. 1 (H.L.). 

69 See infra, ch. 10. 



84 



beneficial services that are binding per se. Section 7 of the Statute of Frauds 
addresses itself to voidable contracts that are not binding unless ratified by the 
minor on attaining majority. However, all the categories are now somewhat 
suspect, and the paucity of modern authority, coupled with conflicting dicta and 
decisions, make it difficult to predict with assurance how a particular contract 
will be categorized by the courts. Finally, there is substantial conflicting 
authority 70 for the view that a minor may be deemed to have ratified a contract, 
even without a writing, if he or she continues to derive benefit from the contract 
after attaining majority. 

These reasons, in our view, are more than sufficient to justify reassessment 
of the modern role of section 7. This reassessment forms part of our review of 
the law of minors' contracts in chapter 10 of this Report. 

(vii) Misrepresentation as to Credit Worthiness (Section 8) 

Section 8 is the second of the amendments introduced by Lord Tenterden's 
Act, and provides as follows: 

8. No action shall be brought whereby to charge a person upon or by reason 
of a representation or assurance made or given concerning or relating to the 
character, conduct, credit, ability, trade or dealings of any other person, to the 
intent or purpose that such other person may obtain money, goods or credit 
thereupon, unless the representation or assurance is made by a writing signed by 
the party to be charged therewith. 

This provision was originally added to prevent circumvention of the writing 
requirement in section 4 involving contracts of guarantee. 71 However, it is now 
firmly established that the section applies only to fraudulent representations 
concerning another's credit worthiness 72 and does not affect actions in contract 
or actions for damages for negligent misrepresentation. 73 Further, it does not 
apply to representations made to enable the representor to procure benefits for 
himself or herself. 74 



70 See, for example, Cornwall v. Hawkins (1872), 41 L.J. 435, and Re Hutton, [1926] 4 
D.L.R. 1080, [1926] 3 W.W.R. 609 (Alta. S.C., T.D.), criticized in Butterfield v. 
Sibbitt, [1950] O.R. 504, at 510-11, [1950] 4 D.L.R. 302, at 308 (H.C.J.). Compare 
Rowe v. Hopwood (1868), L.R. 4 Q.B. 1; Lynch Bros. Dolan Co. Ltd. v. Ellis (1909), 7 
E.L.R. 14 (P.E.I.S.C); and Louden Mfg. Co. v. Milmine (1907), 14 O.L.R. 532, aff d 
15 O.L.R. 53 (C.A.). 

71 See the comments of Lord Wrenbury in Banbury v. Bank of Montreal, [1918] A.C. 626, 
at 711-12, [1918-19] All E.R. Rep. 1, at 27 (H.L.) (subsequent reference is to [1918] 
A.C). 

72 Ibid., at 712. 

73 W.B. Anderson & Sons, Ltd. v. Rhodes (Liverpool) Ltd., [1967] 2 All E.R. 850 (Q.B.), 
and Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465, [1963] 2 All 
E.R. 575 (H.L.). 



74 



See British Columbia Report, supra, note 2, at 41. 



85 



As a result, the section has lost most, if not all, of its practical importance, 
since it is unlikely that aggrieved persons will assume the gratuitous burden of 
proving fraud if they can accomplish their objective just as readily by showing 
that a representor acted negligently or breached a contractual duty. Neverthe- 
less, we share the concern expressed by the Law Reform Commission of British 
Columbia 75 that the law not appear to shelter fraudulent conduct. For this 
reason, as well as others, we later endorse 76 their recommendation that section 
8 be deleted in any revision of the Statute of Frauds J 1 

(b) EVIDENTIARY REQUIREMENTS UNDER SECTION 4: SUFFICIENT 
MEMORANDUM OR NOTE 

Section 4 itself makes it clear that its evidentiary requirements may be 
satisfied if either the agreement upon which the action is brought or some 
memorandum or note thereof is in writing. In both cases, the section requires 
that the document be signed by the party to be charged or by some person 
lawfully authorized for that purpose. These undemanding requirements have 
been liberalized still further by a long line of decisions, the overall thrust of 
which has been to find compliance with the statutory requirements. 78 

So far as the memorandum or note is concerned, it was decided almost 
from the beginning that the writing need not be in any particular form and that it 
need not have been prepared with any contractual or other evidentiary intent. 
Thus, letters 79 or a direction in a will, 80 and even a writing repudiating the 
agreement, 81 will suffice, but not (obviously) a memorandum disputing the 
existence of the agreement or a writing expressed to be "subject to contract". 82 
It is equally well settled that the writing may come into existence at any time 
prior to the commencement of the action. 83 

The courts have encountered substantially greater difficulty in determining 
the required contents of the writing, since section 4 itself is conspicuously silent 
on the point. The original view was that the writing must show all the terms of 



75 Ibid., at 42. 

76 Infra, this ch., sec. 6(a). 

77 A similar recommendation was made in the Alberta Report, supra, note 2, at 53. The 
British Columbia equivalent of section 8 was repealed by the Law Reform Amendment 
Act, 1985, S.B.C. 1985, c. 10, s. 8. 

78 See Alberta Background Paper, supra, note 2, at 18-24, and British Columbia Report, 
supra, note 2, at 42-45. 

79 Maybury v. O'Brien (191 1), 25 O.L.R. 229 (H.C. Div.), rev'd on other grounds (1912), 
26 O.L.R. 628, 6 D.L.R. 268 (App. Div.). 

80 Re Hoyle, [1893] 1 Ch. 84, 62 L.J. Ch. 182 (C.A.). 

81 Thirkell v. Cambi, [1919] 2 K.B. 590, 89 L.J. K.B. 1 (C.A.). 

82 Tiverton Estates, Ltd. v. Wearwell Ltd. , (1975) Ch. 146, 1 1974] 1 All E.R. 209 (C.A.). 

83 Farr, Smith & Co., Ltd. v. Messers, Ltd., [1928] 1 K.B. 397, 97 L.J. K.B. 126. 



86 



the agreement, 84 but this strict test was subsequently relaxed — in contracts 
involving land in any event — in favour of the requirement that the writing need 
only disclose the material terms of the agreement. In contracts for the sale of 
land, this has been deemed to involve a recital of the "three PV — persons, 
property, and price. 85 However, other terms have also been held essential 86 and 
the "material terms" test is not as liberal as may appear at first sight. Indeed, it 
may constitute a trap for the unwary. Contracts of guarantee suffer from equal 
uncertainties. Section 6 of the Statute provides that a written promise of 
guarantee need not show the consideration given for the guarantee, thereby 
leaving the inference that all the other terms of the guarantee must be reduced to 
writing. Recent case law supports this construction. 87 

The courts have shown a remarkable willingness to facilitate proof of the 
terms of an agreement by permitting joinder of documents, 88 although the cases 
are not consistent in explaining the theory upon which such joinder is permitted. 
Apart from the joinder of documents, extrinsic evidence may also be admitted 
to explain a patent or latent ambiguity or, in the case of land contracts, to 
complete a description of the land. 89 

The same elasticity marks the courts' construction of the statutory require- 
ment that the writing must be signed by the person being sued or by his or her 
agent. 90 The party's signature need not appear at the end of the writing being 
relied upon; it may appear in any part of the writing and initials will suffice. 
Nor is the "signature" required to be handwritten, it being settled that a writing 
by the party to be charged on his printed letter head may satisfy the statutory 
requirement. 91 

(c) EFFECT OF AND RELIEF FROM NON-COMPLIANCE WITH THE 
STATUTORY REQUIREMENTS 

However easy to comply with, there will always be cases in which the 
party seeking to rely on the agreement has not met the statutory requirements. It 
is, therefore, necessary to determine the consequences of non-compliance, the 
circumstances in which the courts will grant relief to the defaulting party, and 
the kinds of relief available. 



84 Alberta Background Paper, supra, note 2, at 19. 

85 McKenzie v. Walsh (1920), 61 S.C.R. 312, at 313, 57 D.L.R. 24, at 25, and Harvie v. 
Gibbons (1980), 109 D.L.R. (3d) 559, at 565, 12 Alta. L.R. (2d) 72, at 79 (C.A.). 

86 For example, that the purchase price is payable in stages; the reservation of a life interest 
by the seller; or the buyer's responsibility for city taxes. See Alberta Background Paper, 
supra, note 2, at 20. 

87 Transco Mills Ltd. v. Louie (1975), 59 D.L.R. (3d) 665 (B.C.S.C), at 671. 

88 See the discussions in the Alberta Background Paper, supra, note 2, at 22-24, and the 
British Columbia Report, supra, note 2, at 43-44. 

89 Harvie v. Gibbons, supra, note 85. 

90 See Alberta Background Paper, supra, note 2, at 21-22. 

91 Schneider v. Norris (1814), 2 M. & S. 286. 105 E.R. 388. 



87 



(i) The Effect of Non-Compliance 

Section 4 of the Ontario Statute of Frauds provides that "[n]o action shall 
be brought" unless the writing requirements of the section have been met. 92 
The precise meaning of these words remained unsettled for a surprisingly long 
period of time. In Carrington v. Roots, 93 a unanimous Court of Exchequer 
declared that the words meant "that the contract shall be altogether void". This 
Draconian view was subsequently changed in favour of the interpretation that 
has prevailed since Leroux v. Brown 94 was decided in the middle of the last 
century, that is, that such insufficiently evidenced agreements are valid but 
unenforceable. This compromise has important consequences. 95 It means that 
an oral agreement can be relied on by way of defence, for example, to resist a 
claim by a defaulting purchaser of land to recover a deposit. It also means that 
the agreement, while unenforceable, may furnish sufficient consideration to 
support a negotiable instrument. Finally, it means that the writing may become 
enforceable in the future if the writing requirements are subsequently satisfied 
or if sufficient acts of performance occur to satisfy the equitable doctrine of part 
performance. 96 

(ii) Relief from the Effects of Non-Compliance 

A party who cannot satisfy the statutory writing requirements may be able 
to obtain relief from the effects of non-compliance by either making a 
restitutionary claim for benefits conferred on the other party or invoking the 
doctrine of part performance. 97 There are fundamental differences between 
these forms of relief. In principle, a restitutionary claim should generally be 
available where benefits have been conferred on a defendant in any case 
governed by the Statute of Frauds, whereas the doctrine of part performance is 
of equitable origin and only applies in cases concerning land and, arguably, 
those other types of contract subject to equity's jurisdiction. 98 Another impor- 
tant difference is that a successful restitutionary claim only results in the 



92 Section 7 provides that "[n]o action shall be maintained", but the meaning appears to be 
the same. 

93 (1837), 2 M. & W. 248, at 255, 150 E.R. 748, at 751. See Williams, The Statute of 
Frauds Section Four (1932), at 195-96. 

94 (1852), 12 C.B. 801, 138 E.R. 1119. 

95 Williams, supra, note 93, at 199 et seq. , and British Columbia Report, supra, note 2, at 
14. 

96 See infra, this ch., sec. 3(c)(ii)(b.). 

97 In the discussion that follows, we have omitted any reference to a third form of relief 
based on the defendant's "fraud" because it no longer appears to have much practical 
importance, assuming it ever did. See British Columbia Report, supra, note 2, at 25-26, 
and Alberta Background Paper, supra, note 2, at 40-41. 

98 The point still appears to be unsettled. For conflicting judicial views, see Britain v. 
Rossiter, supra, note 65, and McManus v. Cooke (1887), 35 Ch. D. 681, 56 L.J. Ch. 
662. 



88 



plaintiff recovering the actual benefits or value conferred on the defendant." 
The remedy falls far short of actual enforcement of the agreement, even where 
the plaintiff has fully performed his or her part of the bargain. Successful 
invocation of the doctrine of part performance, on the other hand, entitles the 
plaintiff either to have the agreement specifically enforced or, in appropriate 
circumstances, to recover damages in lieu of specific enforcement. 

a. Restitutionary Claims 

This head of relief is now fully recognized in Canada as a result of the 
decision of the Supreme Court of Canada in Deglman v. Guaranty Trust Co. 10 °. 
In that case, the plaintiff rendered services to the deceased in reliance on a 
contract that was unenforceable because of the operation of the Statute of 
Frauds. The Supreme Court nevertheless allowed the plaintiff to recover the 
fair value of his services, applying "the principle of restitution against what 
would otherwise be unjust enrichment". 101 However valuable the decision in 
Deglman may be in mitigating the rigours of the Statute of Frauds, it suffers 
from an important limitation. This is because the doctrine offers no relief to the 
plaintiff who has incurred expenditures, or who has otherwise relied on the 
contract to his or her detriment, but without conferring a benefit on the 
defendant. 

This problem does not appear to be addressed by the recommendations of 
the Alberta Institute of Law Research and Reform in its recent Report. The 
Institute recommended that if a contract was unenforceable, the court should be 
able to grant to the plaintiff such relief by way of restitution of any benefit 
received by the defendant as is just. 102 In British Columbia, on the other hand, 
the Law and Equity Act, which was recently amended to implement some of the 
recommendations of the Law Reform Commission of British Columbia, pro- 
vides that: 103 

54. -(5) Where a court decides that an alleged gift or contract cannot be 
enforced, it may order either or both of 

(a) restitution of a benefit received, and 

(b) compensation for money spent in reliance on the gift or contract. 



99 As in Deglman v. Guaranty Trust Co., [1954] S.C.R. 725, [1954] 3 D.L.R. 785 
(subsequent reference is to [1954] S.C.R.). 

100 Ibid. See, generally, Fridman and McLeod, Restitution (1982), and Klippert, Unjust 
Enrichment (1982). See, also, Lensen v. Lensen (1985), 14 D.L.R. (4th) 611 (Sask. 
C.A.), leave to appeal to the Supreme Court of Canada granted April 4, 1985. 

101 Supra, note 99, at 728. 

102 Alberta Report, supra, note 2, at 21. 

103 i aw an( i Equity Act, R.S.B.C. 1979, c. 224, as am. by the Law Reform Amendment Act, 
1985, supra, note 77, s. 7. 



89 



b. The Doctrine of Part Performance 

(1) General 

The doctrine of part performance 104 constitutes one of the most remarkable 
chapters in the history of the Statute of Frauds and represents a striking example 
of equity's willingness to ignore the seemingly clear language of a statute in 
order to prevent injustice. The doctrine was embraced within a decade of the 
Statute's enactment, 105 and its role is now formally recognized in the English 
Law of Property Act, 7925 106 and other Commonwealth legislation. The basis of 
equity's intervention was explained by Lord Selborne L.C. in the following oft- 
cited passage in his judgment in Maddison v. Alderson: 101 

In a suit founded on such part performance, the defendant is really 'charged' upon 
the equities resulting from the acts done in execution of the contract, and not 
(within the meaning of the statute) upon the contract itself. If such equities were 
excluded, injustice of a kind which the statute cannot be thought to have had in 
contemplation would follow .... The matter has advanced beyond the stage of 
contract; and the equities which arise out of the stage which it has reached cannot 
be administered unless the contract is regarded. The choice is between undoing 
what has been done (which is not always possible, or, if possible, just) and 
completing what has been left undone. 

Longevity, however, has not meant tranquillity, and the doctrine of part 
performance continues to suffer from important ambiguities and other 
unresolved difficulties. We deal below with the more important of these. 

(2) Sufficient Acts of Part Performance 

In the nineteenth century, in their anxiety to avoid the reproach that the 
statutory requirement was being flouted with impunity, the courts of equity 
adopted a strict test of what acts of part performance constituted acceptable 
evidence of the contract under consideration. Again, quoting from Lord 
Selborne L.C. 's judgment in Maddison v. Alderson, m the acts of part perform- 
ance had to be "unequivocally, and in their own nature, referable to some such 
agreement as that alleged". Lord Justice Fry advanced a still stricter test, and in 
his celebrated work Specific Performance of Contracts 109 contended that "the 
acts of part performance must be such as not only to be referable to a contract 



104 See, generally, British Columbia Report, supra, note 2, at 15-25; Alberta Background 
Paper, supra, note 2, at 31-40; Alberta Report, supra, note 2, at 14-17; Furmston (ed.), 
Cheshire & Fifoot's Law of Contract (10th ed., 1981), at 194-99; and Williams, supra, 
note 93, ch. 8. 

105 Butcher v. Stapely (1685), 1 Vern. 363, 23 E.R. 524. 

106 Supra, note 10. 



107 

108 

109 



(1883), 8 App. Cas. 467, at 475-76, [1881-85] All E.R. Rep. 742, at 747-48 (H.L.) 
(subsequent reference is to 8 App. Cas.). See, also, British Columbia Report, supra, 
note 2, at 15. 

Supra, note 107, at 479. 

Fry (ed. Northcote), Specific Performance of Contracts (6th ed., 1921), § 580. 



90 



such as that alleged but to be referable to no other title". These formulations 
have won the repeated support of the Supreme Court of Canada, and, with some 
recent exceptions, 110 have been followed consistently by other Canadian 
courts. 111 Accordingly, until reversed, they must be presumed to reflect the 
Canadian test at the present time. 

In England, a liberalizing trend began to emerge in the 1960s. In 
Kingswood Estate Co. Ltd. v. Anderson, 112 Upjohn L.J. rejected the argument 
that acts of part performance must be referable to no other title and regarded the 
proposition as "long exploded". He adopted another of the tests formulated by 
Fry L.J., according to which 113 "the acts in question be such as must be 
referred to some contract, and may be referred to the alleged one: that they 
prove the existence of some contract, and are consistent with the contract 
alleged". This test was actually applied in Wakeham v. Mackenzie U4 and was 
substantially approved, although not in identical words, by the majority of the 
House of Lords in Steadman v. Steadman. U5 The headnote in the official report 
succinctly summarizes the effect of the elaborate and detailed majority judg- 
ments in that case: 116 

(1) [T]hat the alleged acts of part performance had to be considered in their 
surrounding circumstances and, if they pointed on a balance of probabilities to 
some contract (per Lord Salmon, for the disposition of an interest in land) between 
the parties and either showed the nature of or were consistent with the oral 
agreement alleged, then there was sufficient part performance of the agreement for 
the purpose of section 40(2) of the Law of Property Act 1925. 



(2) That ... the act of part performance did not have to be referable to that part of 
the agreement for the disposition of an interest in land. 

The law lords also rejected 117 the long held view that part payment of the price 
cannot satisfy the test of part performance and held that such acts are governed 
by the same test as other acts of part performance by the plaintiff. The radical 
nature of the revised test of part performance approved by the House of Lords 



110 See Currie v. Thomas (1985), 3 C.P.C. (2d) 42 (B.C.C.A.). See, also, Lensen v. 
Lensen, supra, note 100. 

111 See Fridman, The Law of Contract in Canada (1976), at 222-23. 

112 [1963] 2 Q.B. 169, [1962] 3 All E.R. 593 (C.A.) (subsequent reference is to [1963] 2 
QB.). 

113 Ibid., at 189. 

114 [1968] 1 W.L.R. 1175, at 1181, [1968] 2 All E.R. 783, at 787 (Ch. D.). 

115 Steadman v. Steadman, [1976] A.C. 536, [1974] 2 All E.R. 977 (H.L.) (subsequent 
references are to [1976] A.C). 

116 Ibid., at 536-37. 

117 Ibid., at 541, per Lord Reid; at 565, per Lord Simon of Glaisdale; and at 570, per Lord 
Salmon. 



91 



requires no further emphasis, and it will come as no surprise that some English 
commentators 118 regard Steadman v. Steadman as having substantially repealed 
the Statute of Frauds in its application to dealings in land. 

Steadman v. Steadman has not yet received the approval of the Supreme 
Court of Canada, although it has been followed in a recent decision of the 
British Columbia Court of Appeal. 119 While it remains to be seen what 
influence Steadman v. Steadman will exert at the judicial level, its influence is 
clear in the recommendations of the Law Reform Commission of British 
Columbia 120 and in the statutory amendments arising out of those recommenda- 
tions. 121 Later in this chapter, we shall consider whether effect should be given 
to the Steadman decision in any statutory restatement of the doctrine of part 
performance. 

(3) Acts of Part Performance by the Defendant 

There has been much discussion over the years concerning the true basis of 
the doctrine of part performance. 122 The dominant view, now strongly rein- 
forced by Steadman v. Steadman, 123 is that it rests on the inequitable character 
of the defendant's conduct in refusing to perform his or her side of the bargain 
when the defendant has derived benefits under it, and on the hardship to the 
plaintiff if he or she is denied specific performance of the agreement. This 
equitable view of the nature of the relief has important implications. 124 It 
means, first, that acts of part performance by the defendant are irrelevant, 
however cogent their evidentiary value. 125 Secondly, it means that relief may be 
refused if the defendant has not derived benefits from the plaintiff's acts 126 or, 
perhaps, if the defendant is willing to and can make satisfactory restitution of 



118 Wade, Note, "Part Performance: Back to Square One" (1974), 90 L.Q. Rev. 433. 

119 See Currie v. Thomas, supra, note 110. See, also, Lensen v. Lensen, supra, note 100. In 
the earlier case of Toombs v. Mueller (1974), 47 D.L.R. (3d) 709, [1974] 6 W.W.R. 
577, rev'd without written reasons (1975), 54 D.L.R. (3d) 160/z (Alta. S.C., App. Div.), 
the trial judge held that he was bound by the earlier decisions of the Supreme Court of 
Canada. In Colberg v. Schumacher (1978), 8 Alta. L.R. (2d) 73, 12 A.R. 183 (S.C., 
App. Div.), Steadman v. Steadman was referred to, but without any indication of its 
status in Alberta. On the facts, it was not necessary for the Court to decide the question 
since the alleged acts satisfied neither the strict nor the more liberal test of part 
performance. 

120 British Columbia Report, supra, note 2, at 64 et *cq. 

121 Law and Equity Act, supra, note 103, s. 54, and Law Reform Amendment Act, 1985, 
supra, note 77, s. 8. 

122 Cheshire & Fifoot's Law of Contract, supra, note 104, at 194-95. 

123 Supra, note 115. 

124 Compare, however, British Columbia Report, supra, note 2, at 20-21. 

125 Caton v. Caton (1866), L.R. 1 Ch. App. 137, at 148, affd on other grounds (1867), 
L.R. 2 H.L. 127, 36 L.J. Ch. 886. 

126 Colberg v. Schumacher, supra, note 119. 



: 



the benefits. : " Thirdly, the essential ingredient off benefits conferred on the 
.ndant means that merely preparato: .ngaged in by the plaintiff, albeit 

with the knowledge and acquiescence of the defendant, will not suffice to ju> 

> intervene. The final implication off the equitable character of the 

rel;e nust appear in court with clean hands. Otru .the 

plaintiff may be refused reiie: 

The Scope of the Doctrine 

A> m e bsi e ahead) noted, it remains unsettled whether the doctrine of pan 
performanc. contracts relating to land, or whether it apphe 

all contracts ir . : off which specific performance is available. In any event. 

wiiile such a restriction may be readily explicable in historical terms, it ma 
little sense from a functional point off view. \Vh\ - example, should a 
plaintiff who. with the consent of the other parry, has embarked on pan 
performance of a contract mat is to run for more man a ye* x denied the 
court's iHrvrftiP™" because the contract is not specifically enforceable 



Damages in Lieu 



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adoption in 1858 of the Chance 
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equity had no power to award dams 
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ere: re :oun. in the acre sc 

rages instead. In England, prior to the 

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have been obvious, since the courts 
es in such cases. Only the common law 

w ould not have done so if the plaintiff 
nii " '-. / ' . " r Sec::?- 1 :: 

from this dilemma and provided . in the 

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c. 11. s. 112. 



93 



[w]here the court has jurisdiction to entertain an application for an injunction 
against a breach of covenant, contract or agreement, or against the commission or 
continuance of a wrongful act, or for the specific performance of a covenant, 
contract or agreement, the court may award damages to the party injured either in 
addition to or in substitution for the injunction or specific performance, and the 
damages may be ascertained in such manner as the court directs, or the court may 
grant such other relief as is considered just. 

Unfortunately, the section did not realize its full promise because the 
courts were not agreed on the meaning of the phrase "[w]here the Court has 
jurisdiction to entertain an application". 134 One interpretation was that the 
section did not apply unless, in the particular case before it, the court could 
actually have made an order of specific performance. Some Canadian courts 
adopted this narrow construction, 135 while others favoured the view that 
damages might be awarded under the section so long as the contract was of a 
type over which the courts of equity would have assumed jurisdiction. 136 A 
further difficulty arose because, in Wroth v. Tyler, 131 Megarry J. (as he then 
was) held that, in awarding damages under Lord Cairns' Act, a court of equity 
was not bound by the common law rules for the assessment of damages. The 
House of Lords has subsequently expressed reservations regarding this hold- 
ing, 138 and it may not survive scrutiny when the question arises for decision 
before the highest courts on both sides of the Atlantic. 

(d) CONCLUSIONS 

It will be convenient at this point to summarize some of the conclusions 
that appear to emerge from this review of the existing law. So far as the types of 
contracts, promises, and obligations governed by the Statute of Frauds are 
concerned, it is clear that several of them are obsolete or so obscurely described 
that they should be omitted from any revision of the Statute. This is true of 
promises by executors and administrators to pay damages out of their own 
estates, section 5 of the Statute, and representations concerning another 
person's credit worthiness. The ratification of minors' contracts is also prob- 
lematic, and reform in this connection is discussed in chapter 10 of this Report. 

112. A court that has jurisdiction to grant an injunction or order specific 
performance may award damages in addition to. or in substitution for, the 
injunction or specific performance. 

134 The conflicting case law is canvassed in the British Columbia Report, supra, note 2. at 
21-25, and in the Alberta Background Paper, supra, note 2, at 37-40. It should be noted 
that s. 112 of the Ontario Courts of Justice Act, 1984, supra, note 133, does not resolve 
this problem. 

135 Pearson v. Skinner School Bus Lines (St. Thomas) Ltd., supra, note 131; Bennett v. 
Stodgell (1915), 36 O.L.R. 45 (App. Div.); and Robinson v. MacAdam, [1948] 2 
W.W.R. 425 (B.C.S.C). 

136 Mclntyre v. Stockdale (1912), 27 O.L.R. 460, 9 D.L.R. 293 (H.C. Div.); Pfeifer v. 
Pfeifer, [1950] 2 W.W.R. 1227 (Sask. C.A.); and Dobson v. Winton and Rabbins Ltd., 
[1959] S.C.R. 775, 20 D.L.R. (2d) 164. 

137 [1974] Ch. 30. [1973] 1 All E.R. 897. 

138 Johnson v. Agnew, [1979] 1 All E.R. 883 (H.L.), at 896. 



94 



Section 17 of the original Statute (now reproduced in section 5 of the Ontario 
Sale of Goods Act) has already been dealt with in our Report on Sale of 
Goods. 139 

We therefore conclude that, apart from minors' contracts, only contracts in 
relation to land, contracts of guarantee, and contracts for more than one year 
retain substantial practical importance. 

So far as the writing requirements imposed by section 4 are concerned, the 
courts have generally been accommodating in finding compliance. An impor- 
tant exception involves the ambiguity surrounding the minimum contents of the 
required writing and the extent to which and the bases upon which documents 
may be joined in order to satisfy the statutory requirements. The doctrine of 
part performance is another matter. Judging by the frequency with which the 
doctrine is invoked in practice, 140 it plays a vital role in mitigating the rigours of 
the writing requirements. But, at the same time, the doctrine suffers from 
ambiguities and other shortcomings that prevent it from being a wholly 
satisfactory substitute for the statutory requirements. 

Overall, the need to revise and modernize the contractual and related 
provisions of the Statute of Frauds seems to us compelling. The critical 
questions are whether the provisions should be retained at all, and, if retained, 
how they should be revised. These are the issues to which we address ourselves 
in the balance of this chapter. 



4. ARGUMENTS FOR AND AGAINST RETENTION OF THE 
STATUTE OF FRAUDS WRITING REQUIREMENTS 

Debates on the merits of the provisions concerning contracts in the Statute 
of Frauds have continued intermittently for at least two centuries. The Statute 
has its detractors and its equally stout defenders. The arguments have varied in 
their nature, some addressing themselves only to particular facets of the writing 
requirements, while others have been more concerned with the rationale of 
imposing any type of writing requirement. We reproduce below, without 
seeking to evaluate them at this stage, the principal arguments that have been 
advanced in the past for and against retaining the requirements. 

(a) FUNCTION OF WRITING REQUIREMENTS 

In an influential article 141 written in 1941, Professor Fuller of the Harvard 
Law School identified the following three important functions served by writing 
requirements and similar formalities imposed by the law. 



139 Sales Report, supra, note 23, Vol. 1, at 107. 

140 The doctrine was invoked in 12 out of 26 land contract cases reported between 1970 and 
1979 in which the Statute of Frauds was pleaded as a defence. Ten of the 26 cases 
involved the sufficiency of the writing. 

141 Fuller, "Consideration and Form" (1941), 41 Colum. L. Rev. 799, at 800 et seq. 



95 



(1) Evidentiary function. This function is self-evident and, judging by the 
preamble to the Statute of Frauds, obviously weighed most heavily with the 
framers of the Statute in 1677. Writing not only avoids the risks of perjury but, 
more importantly, by providing an objective and permanent record of the 
parties' agreement, avoids reliance on fallible human memories and eliminates 
the need to weigh possibly conflicting evidence as to what was said and with 
what intention. 

(2) Cautionary function. The danger of parol agreements that are fully 
enforceable without being reduced to writing, it is said, is that they may result 
in imposing very significant obligations without the parties fully appreciating 
the consequences of their actions. A writing requirement introduces a note of 
deliberation and provides the parties with a period of reflection, thereby, it is 
argued, preventing unconsidered action. Equally important, a writing require- 
ment provides the parties with a shield behind which they may safely negotiate 
without the threat of being deemed to have concluded a binding contract. 142 

(3) Channelling function. According to Professor Fuller, 143 a legal formal- 
ity such as writing not only serves an evidentiary and cautionary function, but 
"serves also to mark or signalize the enforceable promise; it furnishes a simple 
and external test of enforceability." However, Professor Fuller also recog- 
nized 144 that the requirements of the Statute of Frauds serve only a negative 
effect — they indicate which promises are not enforceable without written 
evidence, but they do not impress the writing with the cachet of conclusive 
validity and effectiveness. This is because the written promise may be void or 
unenforceable for lack of consideration, lack of capacity, or because of duress, 
fraud, or other vitiating factors. 

(b) Criticisms of the Statute of Frauds Writing 
Requirements 

Having stated the main functions of a writing requirement, it remains to be 
determined how effectively the Statute of Frauds fulfills these functions and 
whether the criticisms levelled against the Statute outweigh the advantages of a 
writing requirement in these circumstances. The criticisms that have been raised 
are formidable. We begin with those criticisms that have been commonly made 



142 The importance of this function is stressed in the English practice of solicitors 
exchanging correspondence "subject to contract" concerning the details of an agreement 
for the sale of real property, the principal features of which have previously been agreed 
upon between the parties. After initially holding in Griffiths v. Young, [1970] Ch. 675, 
[1970] 3 A11E.R. 601 (C .A.), and Law v. Jones, [1974] Ch. 112, [1973] 2 All E.R. 437 
(C.A.), that "subject to contract" was only a suspensive condition and could be waived 
by the parties, thus making the correspondence admissible to satisfy the statutory writing 
requirements, the Court of Appeal subsequently reversed itself in Tiverton Estates, Ltd. 
v. Wearwell Ltd., supra, note 82. A dominant consideration in the Court's change of 
heart was the uncertainty caused by its earlier decisions and the fear of conveyancers that 
it would no longer be safe for solicitors to negotiate behind a "subject to contract" 
screen. 

143 Supra, note 141, at 801. 

144 Ibid., at 802. 



96 



in the past and then add several further arguments that could be made in the 
light of recent jurisprudential developments. 

(1) A product of conditions that no longer exist. As has been frequently 
observed, 145 the Statute of Frauds was enacted in response to a series of 
debilitating circumstances affecting the conduct of litigation in the seventeenth 
century that have long ceased to exist. At the time the Statute was enacted, 
parties were not free to give evidence on their own behalf; jurors were entitled 
to act on their own knowledge of the facts and were immune from effective 
judicial control; and England was just emerging from a turbulent period of 
social and political unrest in which there was much litigation and many 
unfounded claims. None of these conditions exists today in Ontario. Parties are 
competent witnesses; jury trials are rare in contract cases; and transactions 
involving many thousands of dollars are regularly proved in our courts with the 
aid of parol evidence without any apparent harm or ill effects. 146 With these 
factors in mind, the English Law Revision Committee has observed that "[a] 
condition of things which was advanced in relation to 1677 is backward in 
relation to 1937." 147 

(2) Arbitrariness. This alleged defect of the Statute — the absence of any 
relevant common qualities that identify the contracts governed by section 4 — 
carried considerable weight with the English Law Revision Committee, 148 but 
has attracted less attention in more recent reports. 

(3) Inconsistency. The complaint made under this heading is that the law is 
not consistent. Parol evidence, it has been held, is not admissible to enforce a 
Statute of Frauds transaction, but is admitted by way of defence and is 
admissible to recover payments made to the other party and to convict a person 
of perjury. 149 

(4) Not in accord with actual practices. It is very common for parties to 
enter into parol agreements of the kinds regulated by section 4. The law, it is 
argued, should respect such practices and should not penalize parties for 
adopting habits that they find congenial and appropriate to their 
circumstances. 150 



145 See, inter alia, Sixth Interim Report, supra, note 2, para. 9; British Columbia Report, 
supra, note 2, at 47-48; and Williams, supra, note 93, at xxx-xxxii. 

146 See, also, Alberta Report, supra, note 2, at 9. 

147 Sixth Interim Report, supra, note 2, para. 9(1). 

148 Ibid., paras. 10-13. 

149 See British Columbia Report, supra, note 2, at 49. 



150 



See Sixth Interim Report, supra, note 2, para. 9(4), and British Columbia Report, supra, 
note 2, at 49. While the reports generally focus on business practices, it should be 
emphasized that the problem is a wider one. Consumers are sometimes more strongly 
affected by a writing requirement than business persons, particularly when the consumer 
is not familiar with the statutory requirements. For example, research done in connection 



97 



(5) Hardship. This is perhaps the most persistent and serious criticism of 
the Statute. 151 An unsuccessful plaintiff whose claim is defeated by the absence 
of writing not only loses the expectation interest generated by concluding the 
agreement, but may also be denied compensation for substantial losses incurred 
in reliance on the bargain. In addition, a writing requirement, if not complied 
with, gives a contracting party a pretext to repudiate a contract that would 
ordinarily be expected to be enforceable. 152 

(6) Unnecessary Litigation. It is also argued, 153 that because the language 
of the Statute is far from clear in important respects, and because of the 
incrustations of three centuries of decisions, the parties are often forced to 
litigate to establish their legal position. Much of this litigation is directed to 
form rather than substance. 154 

(7) No cautionary or channelling effects. In light of our earlier discussion 
of the writing requirements in section 4, 155 it will be evident that the writing 
requirements do not, in fact, serve a cautionary or channelling function in the 
case of the Statute of Frauds. This is because section 4 does not require the 
agreement itself to be in writing, but rather requires only a note or memoran- 
dum evidencing the agreement. This note or memorandum can be produced at 
any time and under the most informal circumstances. In our view, this is one of 
the most significant, and also perhaps most neglected, features in the debate on 
the comparative merits and disadvantages of the statutory writing requirements. 
It would, of course, be possible to achieve the cautionary effect by requiring the 
agreement itself to be reduced to writing. However, this would involve a 
fundamental change in section 4 of the Statute, a change that has not so far 
recommended itself to any of the numerous agencies that have reported on the 
Statute. 

(8) The Effect of Steadman v. Steadman. The test of part performance 
adopted by the House of Lords in Steadman v. Steadman, 156 is sufficiently 
broad that only rarely will a plaintiff who has partially performed not be able to 
avoid the statutory writing requirement. In view of this fact, the question arises 
whether it is appropriate to retain the section 4 requirements for the small group 
of land contracts cases in which it is sought to enforce the contract before either 
party has proceeded to perform it. 

with this project indicates that in 17 of 26 land contract cases reported in Canada between 
1970-1979, both parties were consumers, and in only 4 were both parties business 
people. 

151 British Columbia Report, supra, note 2, at 49. 

152 See Alberta Report, supra, note 2, at 9. 

153 Sixth Interim Report, supra, note 2, para. 9(7), and Alberta Background Paper, supra, 
note 2, at 10-11. 

154 See Alberta Report, supra, note 2, at 9. 

155 Supra, this ch., sec. 3(b). 

156 Supra, note 115. 



98 



We recognize that Steadman v. Steadman has not so far been followed in 
Ontario. However, we note that its liberalizing approach has won the unani- 
mous support of the Law Reform Commission of British Columbia and that the 
case has been followed by the Court of Appeal of that Province. 157 Accordingly, 
we would expect it to exert at least an indirect influence in this jurisdiction. It 
would be possible to clarify the position in Ontario by recommending statutory 
entrenchment of the pre-Steadman test, but such a step does not seem to us to 
have much to recommend it. 



5. DEVELOPMENTS IN OTHER JURISDICTIONS 

Before turning to the Commission's own recommendations, it will be 
convenient to summarize the recommendations that have been made in other 
common law jurisdictions for revising the provisions concerning contracts in 
the Statute of Frauds and to indicate the extent to which they have been 
implemented by legislation. 

The most significant change to the Statute of Frauds has occurred recently 
in Manitoba. In its 1980 Report on The Statute of Frauds, the Manitoba Law 
Reform Commission proposed a radical overhaul of the legislation applicable in 
that Province, 158 but recommended retention in an amended form of a writing 
requirement for leases, promises of guarantee and indemnity, and contracts 
relating to land. The Manitoba Legislative Assembly took a less cautious 
approach and repealed the Act in toto. 159 

The provision in section 4 relating to contracts by executors or administra- 
tors to answer damages out of their own estates has been repealed in England, 160 
British Columbia, 161 New Zealand, 162 and Western Australia. 163 Its repeal has 
been recommended in Queensland, 164 South Australia, 165 and Alberta. 166 

Similarly, the provision relating to agreements not to be performed 
within a year has been repealed in England, 167 British Columbia, 168 and New 



157 Currie v. Thomas, supra, note 110. 

158 Supra, note 2. 

159 An Act to Repeal The Statute of Frauds, supra, note 33. 

160 Law Reform (Enforcement of Contracts) Act, 1954, supra, note 12, s. 1. 

161 Statute of Frauds, 1958, supra, note 30, s. 7. 

162 Contracts Enforcement Act 1956, supra, note 31, s. 2. 

163 Law Reform (Statute of Frauds) Act, supra, note 32, s. 2. 

164 Queensland Report, supra, note 2, at 6. 

165 South Australia Report, supra, note 2, at 5. 

166 Alberta Report, supra, note 2, at 53. 

167 Law Reform (Enforcement of Contracts Act), 1954, supra, note 12, s. 1 

168 Statute of Frauds, 1958, supra, note 30, s. 7. 



99 



Zealand. 169 Its repeal has been recommended in Queensland, 170 South 
Australia, 171 and Alberta. 172 



The provisions in section 4 dealing with contracts of guarantee and 
contracts relating to land have had a more varied history. The repeal of the 
provision relating to guarantees was recommended in England in 1937 by a 
majority of the Law Revision Committee. 173 Its retention was recommended by 
a minority of the Committee 174 and by the later Law Reform Committee in 
1953. 175 It was not repealed when the law was amended in 1954. 176 Retention of 
the original provision was recommended by the Queensland Law Reform 
Committee. 177 Its repeal was recommended by the South Australia Law Reform 
Committee. 178 



In British Columbia, the provision dealing with contracts of guarantee was 
extended in 1958 to cover indemnities as well as guarantees. 179 It now appears 
as section 54(6) of the Law and Equity Act, which reads as follows: 180 

54. -(6) A guarantee or indemnity is not enforceable unless 



(a) it is evidenced by writing signed by, or by the agent of, the guarantor 
or indemnitor, or 



(b) the alleged guarantor or indemnitor has done an act indicating that a 
guarantee or indemnity consistent with that alleged has been made. 



169 Contracts Enforcement Act 1956, supra, note 31, s. 2. 

170 Queensland Report, supra, note 2, at 7. 

171 South Australia Report, supra, note 2, at 8. 

172 Alberta Report, supra, note 2, at 53. 

173 Sixth Interim Report, supra, note 2, paras. 4-16. 

174 Ibid., at 33-34. The dissentients were Goddard J. (afterwards L.C.J.), Porter J. 
(afterwards Lord Porter), W.E. Mortimer, and A.F. Topham, K.C. 

175 England, Law Reform Committee, The Statute of Frauds and Section 4 of the Sale of 
Goods Act, supra, note 2, at 2. 

176 See Law Reform (Enforcement of Contracts) Act, 1954, supra, note 12. It has also been 
continued in force in New Zealand: see Contracts Enforcement Act, 1956, supra, note 
31, s. 2(l)(d). 

177 Queensland Report, supra, note 2, at 8. 

178 South Australia Report, supra, note 2, at 5-6 (a majority recommendation). The 
recommendation appears to be based on the reasoning that the "distinction between a 
guarantee and an indemnity is a disgrace to the law and merely a trap to the unwary". 

179 Statute of Frauds, 1958, supra, note 30, s. 5. See R.S.B.C. 1979, c. 393, s. 4, repealed 
by S.B.C. 1985, c. 10, s. 8. 

180 ijjw ana > Equity Act, supra, note 103, s. 54(6). 



100 



In Alberta, the writing requirement for a contract of guarantee applies to 
persons and corporations and is supplemented by the Guarantees Acknowledg- 
ment Act m which requires additional formalities for the giving of guarantees by 
persons who are not corporations. The Alberta Institute of Law Research and 
Reform has recently recommended that a guarantee, whether by a person or a 
corporation, 182 should not be enforceable unless there is some evidence in 
writing signed by the party to be charged, or by his or her agent, which 
indicates that the party to be charged has given a guarantee to the party alleging 
the guarantee and which reasonably identifies the third person whose debt is the 
subject of the guarantee. 183 The Institute further recommended that the govern- 
ment and the legislature consider whether or not the law should continue to 
provide for special formalities such as those in the Guarantees Acknowledgment 
Act for the effectiveness of guarantees by persons who are not corporations. 184 

With respect to indemnities, the Alberta Institute recommended 185 that the 
writing requirement should apply to an agreement under which one person 
enters into an obligation to another person to pay an existing or future debt of a 
third person, whether or not the obligation is conditional upon the default of the 
third person. 186 The Institute recommended several exemptions from the 
requirement of writing for both guarantees and indemnities. 187 The Institute also 
recommended the reversal of the common law position that a requirement of 
writing did not apply to a guarantee given to preserve the guarantor's 
property. 188 

Turning to the provision relating to contracts for the sale of land, the 
writing requirement has been retained in England 189 and New Zealand. 190 The 
British Columbia Law Reform Commission recommended the repeal of the 
provision and its replacement by a substantially revised version, 191 and this was 
accomplished by the Law Reform Amendment Act, 1985, m which amended the 



81 Guarantees Acknowledgment Act, R.S.A. 1980, c. G-12. 

82 Alberta Report, supra, note 2, at 50. 

83 Ibid., at 32. 

84 Ibid., at 42. 

85 Ibid., at 50. 

86 The Institute considered that this group of what it referred to as "guarantee-like 
indemnities" was a narrower group than those referred to in the British Columbia Report 
and the Manitoba Report: ibid., at 46-47. 

87 Ibid., at 51. 

88 Ibid., at 52. 

89 Law of Property Act, 1925, supra, note 10, s. 40. 

90 Contracts Enforcement Act 1956, supra, note 31, s. 2(l)(a), (b) and (c). 

91 British Columbia Report, supra, note 2, at 59-60 and 64-74. 

92 Supra, note 77, s. 7. 



101 



Law and Equity Act. 193 Its retention has been recommended in Queensland 194 
and, with some minor changes, in South Australia. 195 In Alberta, retention of 
the writing requirement was recommended, but certain substitutes for writing 
were also suggested. 196 

In the United States, significant changes in the formal requirements 
relating to land contracts appear in section 2-201 of the Uniform Land 
Transactions Act. 197 This section requires a writing signed by the party against 
whom enforcement of the contract is sought. The writing must contain a 
description of the property sufficiently definite to make identification of the 
property possible with reasonable certainty; it must state the price or a method 
of fixing the price; and it must be sufficiently definite to indicate with 
reasonable certainty that a contract to convey has been made by the parties. 
There are several exceptions to the writing requirement. These are where the 
buyer has taken possession and has paid all or part of the contract price; where 
the buyer has accepted a deed from the seller; where a party has changed its 
position to its detriment in reasonable reliance on the contract; and where the 
party against whom enforcement is being sought admits in the pleadings or in 
evidence that such a contract was made. It will be seen, therefore, that, under 
the Uniform Land Transactions Act, while the requirement of a writing is 
retained, as is the doctrine of part performance, both features differ substan- 
tially in concept and in detail from their Anglo-Canadian counterparts. 

In the state of New York, section 5-701 of the General Obligations Law 198 
applies to contracts that are required to be in writing or to be evidenced by some 
note or memorandum signed by the party to be charged or signed by a lawful 



193 Law and Equity Act, supra, note 103. 

194 Queensland Report, supra, note 2, at 8-9. 

195 South Australia Report, supra, note 2, at 8. Note, however, the minority view of Zelling 
J., at 11, that the provision should be repealed. 

196 Alberta Report, supra, note 2, at 20. Paragraphs (b), (c), (d), and (e) of Recommenda- 
tion 1 outlined the substitutes for writing as follows: 

(b) the party to be charged acquiesces in conduct of the party seeking to 
enforce the contract which indicates that a contract consistent with that 
alleged has been made between the parties, 

(c) the conduct of the party to be charged indicates that a contract 
consistent with that alleged has been made between the parties, 

(d) either the party to be charged or the party seeking to enforce the 
contract has made, and the other of the two parties has accepted, a 
deposit or payment of part of the purchase price, or 

(e) the party seeking to enforce the contract has, in reasonable reliance on 
the contract, changed his position so that, having regard to the position 
of both parties, an inequitable result can be avoided only by enforcing 
the contract. 

197 Uniform Land Transactions Act, supra, note 127. 

198 McKinney's Consolidated Laws of New York Annotated, Vol. 23 A, General Obligations 
Law (1978) (hereinafter referred to as "New York General Obligations Law"). 



102 



agent. While the Uniform Land Transactions Act makes contracts within its 
scope "not enforceable by judicial proceedings" unless the requirements of the 
Act have been complied with, the New York law makes agreements, promises, 
or undertakings within the statute "void" in the absence of the requisite 
writing. Among the contracts covered by the New York law 199 are those not to 
be performed within a year, those involving a special promise to answer for the 
debt, default, or miscarriage of another, some assignments (for example, an 
assignment of certain insurance policies), and contracts to pay compensation for 
services rendered in negotiating a loan or negotiating the purchase, sale, 
exchange, or renting of any real estate or interest therein. 

The foregoing brief survey indicates that a great majority of the law reform 
bodies that have reviewed the requirements concerning contracts in the Statute 
of Frauds have favoured retaining writing requirements relating to land con- 
tracts and contracts of guarantee, although, in several cases, in a form 
substantially different from the existing requirements, and also, in the case of 
land contracts, with extensive provisions relating to the acceptability of acts of 
part performance. A number of reports have also favoured deleting the other 
contractual requirements of section 4 on the ground that they no longer serve a 
useful function. 



6. PROPOSALS FOR REFORM 

In light of the preceding discussion, we are now in a position to offer our 
own proposals for reform of the provisions concerning contracts in the Statute 
of Frauds. Our proposals fall into five categories. 

(a) Repeal of Obsolete and Anachronistic requirements 

In our view, the writing requirements with respect to the following should 
be repealed in their entirety: first, promises by executors and administrators to 
pay damages out of their own estates (section 4); secondly, agreements 
governed by section 5; and thirdly, representations concerning another's credit 
worthiness (section 8). We so recommend. 

(b) Contracts not to be Performed Within One Year 

This type of contract differs from the transactions listed in our first 
category because long term contracts are both common and very important. 
Nevertheless, we have concluded that a writing requirement for long term 
contracts has outlived its usefulness and should be repealed. Our conclusion is 
based on a number of grounds. First, no other jurisdiction that has considered 
the question has recommended retaining this writing requirement. Secondly, we 
have found no support for its retention among the practitioners we have 
consulted. Thirdly, we are impressed by the English Law Revision Commit- 
tee's criticism of the assumption that, for the purposes of the Statute, the span 



199 Conveyances and contracts concerning real property that are required to be in writing are 
governed by § 5-703 of the New York General Obligations Law, supra, note 198. 



103 



of reliable human memory is only one year. 200 In addition, litigation in respect 
of a contract not to be performed within one year may commence the day after 
the contract is made in which case any argument regarding human memory 
would have no merit. The English Law Revision Committee further noted that 
the language of the section has forced courts to draw arbitrary distinctions 
between contracts that are included and those that are outside the section. 201 The 
latter criticism is perhaps not fatal and, if a writing requirement were otherwise 
desirable, the section could be revised to resolve some of its ambiguities. 
However, we do not consider that such a revision would be worthwhile. 

Our final reason for favouring repeal is that the requirement causes as 
much harm as it is designed to avoid. The reported cases indicate that the 
litigation often arises after the contract has been partly performed by one party 
or the other, so that the loss to the party who has partly performed, and who is 
denied enforcement of the contract, may be substantial. Because the contract 
usually lies outside equity's jurisdiction and because of the unresolved doubt 
about the scope of the doctrine of part performance, the party who has partly 
performed does not have the benefit of the doctrine. 202 Accordingly, while he or 
she may be entitled to claim compensation for benefits conferred on the other 
party, there will be no entitlement to reimbursement for pure reliance losses. It 
may be that a persuasive case can be made for requiring certain types of long 
term contracts to which consumers are a party to be reduced to, or evidenced 
by, writing, 203 but in our opinion the revised Statute of Frauds is not the right 
place for such provisions. Rather, they should be dealt with in more specifically 
consumer-oriented legislation. 

Accordingly, the Commission recommends that the provisions in section 4 
of the Statute of Frauds imposing writing requirements in respect of contracts 
not to be performed within one year should be repealed. 

(c) Land Contracts 

(i) General Recommendation 

The Commission has concluded that the existing writing requirements for 
contracts relating to land are inappropriate and should be repealed. Modern 
courts are quite capable of coping with parol agreements of all kinds. They do it 
successfully every day and in cases involving large sums of money. To admit 
the enforceability of unwritten land contracts would not, we believe, put 
defendants at the mercy of unscrupulous plaintiffs or the frailty of human 
memories. The resources of the law of contracts and evidence are sufficient to 
enable a court to decline enforcement in a particular case, where there is 
substantial doubt about whether the defendant intended to enter into a binding 



200 Sixth Interim Report, supra, note 2, paras. 11(B) and 12. 

201 Ibid., para. 13. See, also, supra, this ch., sec. 3(a)(iv). 

202 See supra, this ch., sec. 3(c)(ii). 

203 Compare Consumer Protection Act, S.B.C. 1977, c. 6, ss. 19-25 (now R.S.B.C. 1979, 
c. 65, ss. 19-25, ss. 20 and 25 not yet proclaimed in force). 



104 



contract and what the terms of the bargain were. Moreover, if the plaintiff has 
been guilty of overreaching, the doctrine of unconscionability that we shall 
recommend, in chapter 6 of this Report, be given statutory recognition would 
be a much more effective instrument to deal with such conduct than a writing 
requirement that affords the weaker party very little protection. 204 

We would draw attention, as well, to the hardship of imposing writing 
requirements on non-business people who are not familiar with them, and who 
may see no need to consult a lawyer in what may be a purely domestic 
transaction, or who may not do so until it is too late. To ameliorate the hardship 
that would otherwise arise, the courts of equity have added to section 4 glosses 
of formidable complexity and subtlety that are almost guaranteed to encourage 
litigation rather than avoid it. The net result has been to attenuate the writing 
requirements to such a degree that they retain their potency in only a small 
number of cases. Further, the repeal in the United Kingdom and other 
jurisdictions of what was formerly section 17 of the Statute of Frauds, relating 
to contracts for the sale of goods, does not appear to have had adverse effects 
and, so far as we have been able to ascertain, has not led to the difficulties 
usually associated with the absence of a writing. 

Finally, we are of the view that the existing requirements do little to 
promote the cautionary and channelling effects claimed for formal require- 
ments. Section 4 serves an evidentiary purpose only, and leads to the anomalous 
result that an entry in a diary by a deceased person may be sufficient proof of 
the alleged contract 205 while an admission in open court by the defendant that a 
contract has been concluded has no probative value at all. No doubt it would be 
possible to introduce the desired cautionary and channelling effects by imposing 
strict writing requirements, 206 but this would lead to a new set of difficulties 207 
and, significantly, no one has seriously recommended such a change. 

Once a determination has been made that the existing writing requirements 
for land contracts are inappropriate and should be repealed, there would appear 
to be three options for reform. First, the writing requirements could be repealed 
without qualification. Secondly, the writing requirements could be clarified and 
relaxed, with statutory recognition given to the doctrine of part performance. 
Thirdly, the writing requirements could be repealed subject to the proviso that a 
contract concerning land would not be enforceable unless the plaintiff's claim 
were corroborated by some other material evidence. 



204 



This is because the stronger party is often careful to observe legal formalities and the 
weaker party may be incapable of adequately protecting his or her interests. 

205 Re Hoyle, supra, note 80. 

206 As has been done for "executory" consumer contracts in the Consumer Protection Act, 
R.S.O. 1980, c. 87, s. 19, and for domestic contracts under the Family Law Act, 1986, 
supra, note 21, s. 55(1). It is notorious that, because of its wide reach, section 19 of the 
Consumer Protection Act is more honoured in breach than in observance. 

207 J. Schofield Manuel Ltd. v. Rose (1975), 9 O.R. (2d) 404 (Co. Ct.). 



105 



The simplicity of the first option is attractive. However, we are mindful of 
the degree to which contracts relating to land have received special treatment in 
law, and we are not averse to retaining some elements of this tradition provided 
undue rigidity is avoided. While we wish to avoid the complexities that have 
grown up around section 4 of the Statute of Frauds, we do consider it desirable 
to retain some safeguards against the pitfalls of self-serving evidence. Accord- 
ingly, we have rejected this option. 

The second option would, in essence, involve a substantially revised 
version of section 4. An important advantage to be gained from putting the 
doctrine of part performance on a statutory footing is that it would by-pass the 
difficulties of Lord Cairns' Act 208 and enable a court to award damages for 
breach of contract, whether or not an order of specific performance is sought by 
the plaintiff or is feasible. 209 Although, in the final result, the Commission 
rejected the second option, it received very careful consideration. Accordingly, 
we wish to comment upon it at some length. 

Matters to be addressed in this type of reform of section 4 include first, the 
nature of the writing necessary to comply with a writing requirement and, 
secondly, the "acts" of the party to be charged that would be sufficient to 
satisfy the part performance alternative to writing. 

With respect to clarification of the writing requirement, we have previ- 
ously noted 210 that existing law apparently requires all material terms of a land 
contract to be evidenced in writing. We believe that this requirement is too 
stringent and note the lengths to which courts have gone to admit the joinder of 
documents. 211 One alternative would be for a revised section 4 to spell out the 
minimum contents of the required writing, as has been done in the Uniform 
Land Transactions Act. This requires the writing to contain a description of the 
land, the price (where relevant) and to indicate that a contract to convey has 
been concluded. 212 A second alternative would be to provide that the require- 
ment is satisfied if the writing establishes the existence of some contract 
involving the land. The recommendations made in the British Columbia 
Report 213 and the Alberta Report 214 lean towards this alternative. 215 Ultimately, 
British Columbia adopted legislation requiring only that the writing show that a 



208 Supra, note 132. 

209 See discussion, supra, this ch., sec. 3(c)(ii)(b.)(5). 

210 Supra, this ch., sec. 3(b). 

211 Supra, note 88. 

212 Uniform Land Transactions Act, supra, note 127, § 2-20 1(a). 

213 British Columbia Report, supra, note 2, at 73. 

214 Alberta Report, supra, note 2, at 20. 

215 The Alberta Institute of Law Research and Reform recommended that there must be 
some evidence in writing which indicates that a contract has been made between the 
parties and reasonably identifies the subject matter of the contract and which is signed by 
the party to be charged or his or her agent: ibid. 



106 



contract has been made and that it reasonably indicates the subject matter of the 
contract. 216 We consider that the second of these alternatives would be more 
likely to obviate the difficulties of the existing law. 

Turning to the second matter that would have to be addressed in any 
revision of the section 4 writing requirements relating to land contracts, we 
have previously discussed the important shortcomings from which the doctrine 
of part performance suffers at present in Canada. 217 In particular, we have 
referred to the hardship caused by the retention of the unequivocal reference 
test and the doubt concerning the status in Canada of the decision in Steadman 
v. Steadman™ We believe that these shortcomings and doubts would have to 
be resolved to make the second reform option viable and that it would not be 
sufficient to provide, as is done in section 40 of the U.K. Law of Property Act, 
1925, m that the doctrine of part performance is retained. This would merely 
perpetuate its defects. 

Once again, there are two alternatives. The first is illustrated by section 2- 
201(b) of the Uniform Land Transactions Act 220 which reads as follows: 

A contract not evidenced by a writing satisfying the requirements of subsection (a), 
but which is valid in other respects, is enforceable if: 

(1) it is for the conveyance of real estate for one year or less; 

(2) the buyer has taken possession of the real estate, and has paid all or a part of 
the contract price; 

(3) the buyer has accepted a deed from the seller; 

(4) the party seeking to enforce a contract, in reasonable reliance upon the contract 
and upon the continuing assent of the party against whom enforcement is 
sought, has changed his position to his detriment to the extent that an unjust 
result can be avoided only by enforcing the contract; or 



216 Section 54(3)(a) of the Law and Equity Act, supra, note 103, reads as follows: 

54. -(3) A contract respecting land or a disposition of land is not enforceable 
unless 

(a) there is, in a writing signed by the party to be charged or by his agent, 
both an indication that it has been made and a reasonable indication of 
the subject matter 



The British Columbia statute also contains a supplemental provision to the following 
effect: 

54. -(7) A writing can be sufficient for the purpose of this section even though a 
term is left out or is wrongly stated. 

217 Supra, this ch., sec. 3(c)(ii)(b.). 

218 Supra, note 115. 

219 Supra, note 10. 

220 Uniform Land Transactions Act, supra, note 127. 



107 



(5) the party against whom enforcement is sought admits in his pleading, testi- 
mony, or otherwise in court that the contract for conveyance was made. 

The second is illustrated by the British Columbia Law and Equity Act. 22] 
The relevant provisions in that Act read as follows: 

54. -(3) A contract respecting land or a disposition of land is not enforceable 
unless 



(b) the party to be charged has done an act, or acquiesced in an act of the 
party alleging the contract or disposition, that indicates that a contract 
or disposition not inconsistent with that alleged has been made, or 

(c) the person alleging the contract or disposition has, in reasonable 
reliance on it, so changed his position that an inequitable result, having 
regard to both parties' interests, can be avoided only by enforcing the 
contract or disposition. 

(4) For the purposes of subsection (3)(b), an act of a party alleging a contract 
or disposition includes a payment or acceptance by him or on his behalf of a deposit 
or part payment of a purchase price. 

In the case of the Uniform Land Transactions Act automatic entitlement to 
enforcement of the contract only arises under certain limited circumstances. 222 
In all other cases, the remedy is essentially discretionary and the party seeking 
to enforce must show detrimental reliance to the extent that an unjust result can 
be avoided only by enforcing the contract. 223 

Section 54(3)(b) of the Law and Equity Act, on the other hand, gives effect 
to the decision in Steadman v. Steadman, but to some extent deprives it of its 
equitable character. The plaintiff need not always show that enforcement is 
necessary to avoid an inequitable result. Acts of part performance by the party 
to be charged, and acquiescence of the party to be charged in acts of the party 
alleging the contract, are both admissible to establish the contract. This is an 
important reversal of existing law 224 which treats such evidence as irrelevant for 
the purpose of the doctrine of part performance. 



221 Law and Equity Act, supra, note 103, ss. 54(3)(b), 54(3)(c), and 54(4). A similar 
recommendation is made in the Alberta Report, supra, note 2, at 20. Its provisions 
equivalent to sections 54(3)(b) and (c) require that the conduct indicate the existence of a 
contract consistent with that alleged between the parties. The Alberta Report also 
recommends that the contract be enforceable if either the party to be charged or the party 
seeking to enforce it has made, and the other of the two parties has accepted, a deposit or 
payment of part of the purchase price. 

222 See Uniform Land Transactions Act, supra, note 127, § 2-201(b)(l), (2), (3), and (5). 

223 Ibid., § 2-20 1(b)(4). 

224 Caton v. Caton, supra, note 125. 



108 



Attention should also be drawn to section 54(3)(c) of the British Columbia 
Act. This provision is directed to preparatory acts by the plaintiff not amounting 
to acts contemplated in section 54(3)(b) and therefore not providing the degree 
of proof necessary for per se enforcement of the contract. This provision gives 
the court a discretionary power to relieve against hardship that would otherwise 
be caused. 

We endorse the approach of section 54(3)(b) of the British Columbia Act. 
As former section 17 of the Statute of Frauds shows, 225 there is no need to link 
concepts of part performance to issues of fairness and conscionable conduct, 
although, no doubt, there is some overlap between the two. Once the doctrine 
of part performance is given statutory status, the defendant's acts of part 
performance and the plaintiff's acts, acquiesced in by the defendant, provide 
cogent support for the plaintiff's allegation of a parol agreement. Moreover, the 
discretionary element in the equitable doctrine of part performance no longer 
plays an active role in Anglo-Canadian law, and we think it would lead to 
greater certainty if it we're eliminated altogether. 226 

If Ontario were to adopt the second option, there would be no need, in our 
view, for a provision comparable to section 54(3)(c) of the British Columbia 
Act. 227 Its enactment might cause confusion, since it is not obvious why proof 
of an inequitable result is necessary under this section but not necessary under 
section 54(3)(b). Another difficulty is that a claim is apparently admissible 
under section 54(3) (c) even though the acts in question do not indicate any 
contract between the parties, and even though the defendant has not acquiesced 
in the acts. In our view, section 54(3)(b) is already so generously worded that 
only rarely will a plaintiff not be able to support his or her claim under it, even 
without the benefit of written evidence of the contract. 

Two other features of section 54(3)(b) require comment. First, it does not 
define the meaning of "an act of the party alleging the contract or disposition" 
or "an act" of the party to be charged. 228 It is clear from the British Columbia 
Report that what was contemplated were acts of part performance by the party 
in question. We do not think this needs to be expressly stated. Since section 
54(3)(b) serves only an evidentiary function it ought not to matter whether the 
acts are performance-oriented so long as they satisfactorily indicate the exis- 
tence of a contract. 



225 Now s. 5 of the Sale of Goods Act, supra, note 24. See discussion, supra, this ch., sec. 
2(a). 

226 This would not, of course, affect the discretionary element in the granting of an order for 
specific performance. 

227 A similar provision was recommended in the Alberta Report, supra, note 2, at 20, 
Recommendation 1(e). 

228 Section 54(4) of the Law and Equity Act, supra, note 103, merely enlarges the meaning 
that "an act of the party alleging the contract or disposition" normally bears. 



109 



The other noteworthy feature of section 54(3)(b) is that the acts in question 
need not prove the existence of a contract relating to land; it is sufficient if they 
indicate the existence of "a" contract. 229 This formulation clearly reflects the 
opinion of the majority in Steadman v. Steadman that it would be too 
restrictive, in a multipurpose contract, to require the acts to point unambigu- 
ously to the land component in the agreement. We agree with this approach. 

As previously noted, 230 section 2-201(l)(b)(5) of the Uniform Land Trans- 
actions Act allows a land contract to be enforced if, inter alia "the party against 
whom enforcement is sought admits in his pleading, testimony, or otherwise in 
court that the contract for conveyance was made". 231 While we accept the 
evidentiary value of formal admissions, it must be obvious that such a provision 
attenuates still further the cautionary role of writing requirements, 232 and 
encourages the plaintiff to litigate in the hope of extracting a damaging 
admission from the defendant. 233 The combined effect of the relaxed writing 
requirements and generous part performance rules should be sufficient, we 
would suggest, to prevent cases of hardship and should enable a plaintiff to 
prove his or her case without having to rely on the defendant's admission. We 
do not, therefore, see any need to adopt a similar provision. 

The third option for reform is the replacement of the present law by a 
requirement that a contract relating to land not be enforceable on the evidence 
of the party alleging the contract unless such evidence is corroborated by some 
other material evidence. The Commission favours this option. Under this 
proposal, a writing signed by or on behalf of the defendant (present in the 
overwhelming majority of cases) would constitute corroboration. So would 
many of the kinds of acts that have been held to constitute part performance. 
Our proposal would undoubtedly enlarge the enforceability of contracts, but in 
view of the wide scope given in recent cases to the doctrine of part perform- 
ance, our recommendation will not make so drastic a change as might appear at 
first sight. 

Evidence amounting to corroboration under our proposal would not 
infrequently support the application of the doctrine of part performance under 
existing law. But the scope, and indeed the purpose, of the doctrine of part 
performance are complex and obscure, and attempts to amend the doctrine (as 
under the second option discussed above) would only add further complexities. 



229 See, also, Alberta Report, supra, note 2, at 20, Recommendations 1(b) and 1(c). 

230 Supra, this ch., sec. 5. 

231 The Uniform Commercial Code contains an almost identical provision in relation to 
contracts for the sale of goods. See American Law Institute, Uniform Commercial Code, 
Official Text (9th ed., 1978), § 2-201(3)(b). 

232 Holahan, "Contract Formalities and the Uniform Commercial Code" (1958), 3 Vill. L. 
Rev. 1, at 9-12. 

233 There has been lingering doubt whether the Code provision covers involuntary, as well 
as voluntary, admissions. See, inter alia, Cargill Incorporated, Commodity Marketing 
Division v. Hale, 537 S.W. 2d 667 (Mo. Ct. App. 1976), and Farmers Elevator Co. of 
Reserve v. Anderson, 552 P. 2d 63 (Mont. Sup. Ct. 1976). 



110 



The principal merit of the third option is that it simplifies the law and puts it on 
a principled and consistent basis. 

We turn now to two other issues relevant to our recommendation. 

(ii) Definition of Land 

We have previously discussed 234 the uncertainty that surrounds the classifi- 
cation of certain types of contracts involving land. Nevertheless, we would not 
recommend including a definition of land in any provision requiring corrobora- 
tion by some other material evidence of any contract concerning land. We rest 
this conclusion on several grounds. First, the number of cases in which the 
problem has arisen is relatively small. Secondly, it would be difficult to frame a 
satisfactory definition that would be sufficiently flexible to allow for future 
developments. Thirdly, the definition of goods in our Report on Sale of 
Goods 235 should help to clarify important aspects of the relationship between 
"goods" and interests in land. Finally, the new requirements for the proof of 
land contracts can be met so easily that only exceptionally are issues of 
classification likely to arise for decision. 

(iii) Agreements to Lease 

We earlier commented 236 on the ambiguous wording of section 3 of the 
Statute of Frauds and noted that it is unsettled in Ontario whether agreements to 
lease for three years or less are excluded from the requirements of section 4. 
The Commission's Report on Landlord and Tenant Law recommended that all 
"tenancy agreements" 237 and all agreements to lease for a year or less should 
be excluded from the Statute of Frauds requirements, 238 and that tenancy 
agreements and agreements to lease for a longer period should be required to be 
in writing. 239 The Report also recommended that the provisions in the Statute of 
Frauds relating to leases should be deleted, that agreements to lease should be 
excluded from section 4, and that the revised provisions should be incorporated 
in the new Landlord and Tenant Act. 240 

These recommendations must be reconsidered in the light of the recom- 
mendations in this Report. First, the recommendation that agreements to lease 
as well as tenancy agreements be required to be in writing, and not merely 



234 Supra, this ch., sec. 3(a)(iii). 

235 Sales Report, supra, note 23, Vol. 1, at 64-65. The definition of "goods" provides that 
"goods" means "movable things, and includes the unborn young of animals, growing 
crops and other things attached to or forming part of land as provided in section 2.5, but 
does not include money in which the price is to be paid or things in action". 

236 Supra, this ch., sec. 3(a)(iii). 

237 This is the new terminology recommended in the Report to replace the term "lease": 
Report on Landlord and Tenant Law, supra, note 25, at 7. 

238 Ibid., at 14. 

239 Ibid., at 18. 

240 Ibid., at 15. 



Ill 



evidenced by a writing, introduces a novel feature into the Statute of Frauds 
requirements. It is also inconsistent with our own recommendations with 
respect to the evidentiary requirements for the enforceability of land contracts. 
In our view, it would lead to serious anomalies to impose writing requirements 
for agreements to lease that are more onerous than evidentiary requirements 
applied to other types of land contracts. 

It should be noted that, in Alberta, it was recommended that there be no 
requirement of writing for either the creation or the assignment of a lease, if the 
term granted by the lease together with any additional term provided for in the 
lease was three years or less, or for a contract to create or assign such a lease. 241 
In British Columbia, amendments to the Law and Equity Act provide that 
section 54 of that Act does not apply to a contract to grant a lease for a term of 
three years or less, or a grant of a lease of land for a term of three years or 
less. 242 

In light of this discussion, we recommend that any future legislation 
involving writing or other evidentiary requirements for agreements to t lease 
should be harmonized with the proposed revised evidentiary requirements for 
land contracts. 

(d) CONTRACTS OF GUARANTEE 

(i) General 

The majority of the law reform bodies that have considered the question 
have concluded that contracts of guarantee should continue to be subject to the 
Statute of Frauds requirements. The rationale for retaining the existing require- 
ments is put with seeming persuasiveness in the minority report of the English 
Law Revision Committee: 243 

[I]f oral contracts of guarantee are allowed, we feel that there is a real danger of 
inexperienced people being led into undertaking obligations that they do not fully 
understand, and that opportunities will be given to the unscrupulous to assert thaf 
credit was given on the faith of a guarantee which in fact the alleged surety had no 
intention of giving .... lT]he necessity of writing would at least give the proposed 
surety an opportunity of pausing and considering, not only the nature of the 
obligation he is undertaking, but also its terms .... [I]n the vast majority of cases 
the surety is getting nothing out of the bargain; hence the greater reason for 
securing, if possible, that no mistake shall occur. 

While we support the retention of a writing requirement for some contracts 
of guarantee, we do not entirely agree with the Committee's reasoning. First, 
section 4 is not restricted to guarantees given by inexperienced persons, nor is it 
always correct to claim that the guarantor derives no benefit from the guaran- 
tee. Many guarantees are given by business persons in order to promote a 
business interest, for example, a guarantee given by a shareholder or director to 



241 Alberta Report, supra, note 2, at 26-21. 

242 Law and Equity Act, supra, note 103, s. 54(2). 

243 Sixth Interim Report, supra, note 2, at 33. 



112 



secure an obligation of the company. To some extent, the case law already 
recognizes this fact because, as we have seen, 244 section 4 has been held not to 
apply where the guarantee is only incidental to a larger transaction or the 
guarantee is given to secure the release of property in which the guarantor has a 
proprietary interest. However, the decisions fall significantly short of excluding 
all business guarantees. We are of the view that a writing requirement should 
not apply to a guarantee "given by a person in the course of a business" and 
that this expression should be defined as including a shareholder, officer, or 
director of a company who guarantees a debt or other obligation of the 
company. 245 We believe that this extended definition is desirable in order to 
recognize a familiar form of business guarantee and to preclude the argument 
that the guaranteeing shareholder, officer, or director is not acting in the course 
of a business because of the doctrine of the separate personality of even closely 
held corporations. 246 

It seems to us equally questionable whether the reasoning of the minority 
members of the English Law Revision Committee applies to cases where the 
guarantee is given in a wholly domestic or other non-business context, for 
example, a guarantee given by one member of a family in favour of another. It 
is unlikely that either party will be acquainted with the formal requirements of 
section 4, and considerable hardship may be caused to the party receiving the 
guarantee if the parol agreement is not enforceable. 

Accordingly, we recommend that a writing requirement for guarantees 
should only be imposed where a guarantee is given by a person otherwise than 
in the course of business to a person acting in the course of business. 

This leads us to a further issue, identified in the British Columbia Report 
on the Statute of Frauds. 241 As that Report notes, consumers often need more 
than the protection of a formal requirement, since the existence of a signed 
guarantee (usually in standard form) provides no assurance that the consumer 
understood what he or she was doing. The British Columbia Commission, 
therefore, was of the opinion that special safeguards should be adopted for 
consumer guarantees, and it has since published a Report elaborating its 
proposals. 248 We have not considered whether similar safeguards are necessary 
in Ontario. It may be that the common law principles of undue influence and the 
expanding doctrine of unconscionability are sufficient to protect consumers 
against guarantees obtained by unfair means. In any event, it will be appreciated 
that, if more detailed legislation is thought to be desirable for consumer 



244 Supra, this ch., sec. 3(a)(ii). 

245 The Alberta Institute of Law Research and Reform specifically recommended that the 
writing requirement for guarantees continue to apply to corporations. See Alberta 
Report, supra, note 2, at 50. 

246 Salomon v. Salomon & Co., [1897] A.C. 22, [1895-99] All E.R. Rep. 33 (H.L.). 

247 British Columbia Report, supra, note 2, at 63. 

248 Law Reform Commission of British Columbia, Report on Guarantees of Consumer 
Debts (1979). 



113 



guarantees, then no office may be left for a writing requirement in respect of 
guarantees and the provisions relating to contracts of guarantee should be 
deleted in their entirety. 

We proceed now to discuss a number of consequential issues that arise as a 
result of our decision to retain formal requirements for the enforceability of 
some types of guarantee. 

(ii) Inclusion of Indemnities 

In light of the difficulty of distinguishing in practice between a contract of 
guarantee and a contract of indemnity, we recommend that our proposals 
relating to guarantees apply also to indemnities. This would be justified even if 
the difficulty did not exist because the need to protect inexperienced consumers 
is equally strong in both cases. We would note that contracts of indemnity were 
included in the British Columbia Statute of Frauds as a result of an amendment 
adopted in 1958. 249 When the British Columbia Statute of Frauds was repealed 
in 1985, 250 provisions regarding writing requirements for guarantees and 
indemnities 251 were added to the Law and Equity Act. The Alberta Institute of 
Law Research and Reform, on the other hand, recommended that the writing 
requirements apply only to "guarantee-like indemnities". 252 

(iii) Definition of Guarantee 

Section 4 of the Statute of Frauds does not use the word "guarantee". It 

speaks instead of a promise to answer for the "debt, default or miscarriage" of 

another person. The amended British Columbia Statute of Frauds substituted 

the term "guarantee" for the more descriptive language of the original 

Statute. 253 "Guarantee" is not a term of art and, without a definition, its 

t 
meaning could give rise to much litigation. We therefore recommend retaining 

the original language of section 4, and with it the benefit of the case law 

clarifying its meaning. 



249 Statute of Frauds, 1958, supra, note 30, s. 5. Section 5 provided: 

5.-(l) No guarantee or indemnity shall be enforceable by action unless 
evidenced in writing, signed by the party to be charged or by his agent, but any 
consideration given for the guarantee or indemnity need not appear in the writing. 

(2) This section does not apply to a guarantee or indemnity arising by operation 
of law. 

The section, with minor amendments, later became section 4 of the Statute of 
Frauds, R.S.B.C. 1979, c. 393. 

250 Law Reform Amendment Act, 1985, supra, note 77, s. 8. 

251 Law and Equity Act, supra, note 103, s. 54(6). 

252 See Alberta Report, supra, note 2, at 46-47. 

253 Statute of Frauds, 1958, supra, note 30, s. 5. 



114 



(iv) Scope of Writing Requirements 

Two questions must be considered under this heading. First, should the 
existing section 4 provisions be expanded to require that the agreement itself be 
reduced to writing in all cases? The British Columbia Law Reform Commission 
was sympathetic to the suggestion, but decided against it because of potential 
constitutional complications where the guarantee is incorporated in a negotiable 
instrument, and also because the Commission envisaged that its later proposals 
for consumer guarantees would provide the additional protection needed in such 
cases. 254 We agree with the Commission's conclusion, but on the simpler 
ground that stringent writing requirements would encourage unmeritorious 
defences and might compound some of the technical difficulties that have arisen 
in the past. 

If a guarantee or indemnity is not itself required to be reduced to writing, 
how much of the agreement must be evidenced in writing, and must it be signed 
by the guarantor or indemnitor, or an agent? The British Columbia Act 255 
provides little guidance on the point. Section 54(6)(a) simply provides that a 
guarantee or indemnity is not enforceable unless evidenced by a writing signed 
by, or by the agent of, the guarantor or indemnitor. In addition, the legislation 
contains a subsection, applicable to all writings governed by section 54, stating 
that ' ' [a] writing can be sufficient for the purpose of this section even though a 
term is left out or is wrongly stated". 256 In Alberta, the Institute of Law 
Research and Reform recommended that a guarantee should not be enforceable 
unless there was some evidence in writing signed by the party to be charged, or 
by his agent, which indicated that the party to be charged had given a guarantee 
to the party alleging the guarantee and which reasonably identified the third 
person whose debt was the subject of the guarantee. 257 

The British Columbia Act does not seem to us to go far enough, since it 
does not indicate the minimum amount of information required to be contained 
in the evidentiary writing. In our view, it should be sufficient that a contract of 
guarantee or indemnity is evidenced by some kind of writing signed by the 
person to be charged or an agent. In addition, the writing should identify the 
parties and reasonably indicate that a guarantee or indemnity is being or has 
been given, and we so recommend. 

(v) Relief in Cases of Non-Compliance 

We agree with the British Columbia Report on the Statute of Frauds 25 * that 
it would undermine the cautionary and protective purposes of a writing 
requirement if part performance by the party seeking to enforce the guarantee 



254 British Columbia Report, supra, note 2, at 76-77. 

255 j MW aru j Equity Act, supra, note 103. 

256 Ibid., s. 54(7). 

257 Alberta Report, supra, note 2, at 32. 

258 British Columbia Report, supra, note 2, at 77. 



115 



or indemnity were to be admitted as a substitute for the writing. 259 We have 
experienced greater difficulty in weighing the merits of section 54(6)(b) of the 
Law and Equity Act, 260 which provides that, even without a writing, the 
guarantee or indemnity may be enforceable if "the alleged guarantor or 
indemnitor has done an act indicating that a guarantee or indemnity consistent 
with that alleged has been made". This provision is similar to provisions 
adopted by British Columbia with respect to land contracts. The difficulty with 
it is that it is based solely on evidentiary grounds, and disregards the cautionary 
and protective functions usually given as the reasons for retaining the formal 
requirements for contracts of guarantee. Here, as elsewhere in the Statute of 
Frauds, there appears to be an unresolved conflict between the different policies 
sought to be achieved, and in particular between the desire to protect the 
guarantor and to afford equitable treatment to the person in whose favour the 
guarantee has been given. In view of the restricted role that we envisage in the 
future for writing requirements in relation to contracts of guarantee, we see no 
need to adopt a provision comparable to section 54(6)(b) of the British 
Columbia legislation. It also appears to us to be inconsistent to reject the 
evidentiary value of part performance when rendered by the promisee and to 
accept its admissibility when the performance is by the guarantor. 



(e) Disposition of non-Contractual Provisions 

As noted at the beginning of this chapter, 261 the Statute of Frauds contains 
a substantial number of provisions dealing with the creation, assignment, and 
surrender of interests in land, including leases of land, and with the creation or 
declaration of trusts in land or assignment of trusts generally. These provisions 
are not internally consistent and do not appear to be consistent with provisions 
in the Conveyancing and Law of Property Act. 262 These aspects of the Statute of 
Frauds are considered in the Alberta Background Paper 263 and in the Alberta 
Report 264 and the British Columbia Report. 265 In our opinion, they should also 
be reviewed in Ontario at an appropriate time. 



259 We would question, however, the Commission's other reason, namely, the comparative 
lack of reliance in many cases by the promisee upon the guarantee. We would have 
thought, on the contrary, that frequently the guarantee is the element without which the 
promisee would not be willing to proceed with the transaction. 

260 Supra, note 103. 



261 
262 



Supra, this ch., sec. 3. 

Supra, note 61, ss. 2, 3, and 9. 

263 Alberta Background Paper, supra, note 2. 

264 Alberta Report, supra, note 2. 

265 British Columbia Report, supra, note 2. 



116 



Recommendations 

The Commission makes the following recommendations: 

1. The writing requirements in the Statute of Frauds with respect to the 
following should be repealed: 

(a) promises by executors and administrators to pay damages out 
of their own estates; 

(b) agreements governed by section 5; and 

(c) representations concerning another's credit worthiness. 

2. The writing requirement for contracts not to be performed within one 
year should be repealed. 

3. (1) The existing writing requirements for contracts relating to land 

should be repealed subject to a requirement that a contract concern- 
ing land is not enforceable on the evidence of the party alleging the 
contract unless such evidence is corroborated by some other mate- 
rial evidence. 

(2) A definition of land should not be included in any provision 
requiring corroboration by some other material evidence of any 
contract concerning land. 

(3) Any further legislation involving writing or other evidentiary 
requirements for agreements to lease should be harmonized with the 
proposed revised evidentiary requirements for land contracts. 

4. (1) A writing requirement for guarantees should only be imposed where 

a guarantee is given by a person otherwise than in the course of 
business to a person acting in the course of business. 

(2) A guarantee "given in the course of a business" should be defined 
as including a guarantee given by a shareholder, officer or director 
of a company who guarantees a debt or other obligation of the 
company. 

(3) Recommendations with respect to guarantees should apply also to 
contracts of indemnity. 

(4) The original language of section 4 — that is, "debt, default or 
miscarriage" — should be retained in any legislation dealing with 
writing requirements for guarantees. 

(5) A contract of guarantee or indemnity that is required to be in 
writing should be evidenced by some kind of writing signed by the 
person to be charged or by an agent. In addition, the writing should 



117 



identify the parties and reasonably indicate that a guarantee or 
indemnity is being or has been given. 

(6) Part performance either by the party seeking to enforce the guaran- 
tee or indemnity or by the guarantor or indemnitor should not be 
admitted as a substitute for the writing. 

5. The provisions in the Statute of Frauds dealing with the creation, 
assignment and surrender of interests in land, including leases of land, 
and with the creation or declaration of trusts in land or assignment of 
trusts generally, should be reviewed in Ontario at an appropriate time. 



CHAPTER 6 



UNCONSCIONABILITY 



1. THE PRESENT LAW 

(a) JUDICIAL DEVELOPMENTS 

In our Report on Sale of Goods we recommended that a doctrine of 
unconscionability 1 be incorporated into a revised Sale of Goods Act, stating that 
"the doctrine is rapidly becoming, if indeed it has not already become, a 
thoroughly respectable landmark in the modern law of sales". 2 Consideration 
of the wisdom of a statutory formulation of the doctrine with respect to the law 
of contracts generally was deferred to the Law of Contract Amendment 
Project. 3 

Judicial intervention in contracts on the ground of unconscionability may 
be explicit, as when statute law allows judicial intervention on the specific basis 
that the bargain between the parties or some aspect of it is harsh and 
unconscionable. As well, the concept of unconscionability may serve to explain 
and unify a number of discrete parts of the law of excuse for non-performance 
of a contract that do not overtly refer to unconscionability but that do allow 
certain harsh consequences of particular contracts to be avoided. In light of the 
foregoing, the emergence of the modern doctrine of unconscionability does not 
signal a radical break with the past. 

Lord Denning, in Lloyd's Bank Ltd. v. Bundy, 4 discerned a common thread 
behind the long-established doctrines of undue influence, duress of goods, 
undue pressure, unfair salvage agreements and equity's protection of vulnerable 
persons such as expectant heirs. The unifying principle, he considered, was that 
the courts may provide relief against the consequences of inequality of bargain- 
ing power: 5 



1 For discussion of the doctrine, see Waddams, The Law of Contracts (2d ed., 1984), at 
326-407, and Trebilcock, "An Economic Approach to the Doctrine of Unconscionabil- 
ity", in Reiter and Swan (eds.), Studies in Contract Law (1980) 379, at 379-421. 

2 Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. 1, at 156. 

3 Ibid., at 32. 

4 [1975] Q.B. 326, [1974] 3 W.L.R. 501 (C.A.) (subsequent references are to [1975] 
QB). 

5 Ibid., at 339. 

[119] 



120 



By virtue of it, the English law gives relief to one who, without independent 
advice, enters into a contract upon terms which are very unfair or transfers 
property for a consideration which is grossly inadequate, when his bargaining 
power is grievously impaired by reason of his own needs or desires, or by his own 
ignorance or infirmity, coupled with undue influences or pressures brought to bear 
on him by or for the benefit of the other. When I use the word 'undue' I do not 
mean to suggest that the principle depends on proof of any wrongdoing. The one 
who stipulates for an unfair advantage may be moved solely by his own self- 
interest, unconscious of the distress he is bringing to the other. I have also avoided 
any reference to the will of the one being 'dominated' or 'overcome' by the other. 
One who is in extreme need may knowingly consent to a most improvident bargain, 
solely to relieve the straits in which he finds himself. Again, I do not mean to 
suggest that every transaction is saved by independent advice. But the absence of it 
may be fatal. 

It is possible to range even more widely, and find in other existing 
categories of excuse for non-performance of a contract an underlying principle 
of unconscionability. In particular, this principle may serve to explain such 
seemingly diverse matters as the rules against forfeiture of leases and against 
clogs on the equity of redemption, relief against penalty clauses and against 
certain contracts in restraint of trade, and the devices used by the courts to 
circumvent exemption clauses of various kinds. 6 

Some recent judicial decisions reflect an acceptance of a generalized 
doctrine of unconscionability, particularly with respect to cases of a consumer 
or quasi-consumer character. 7 In this vein, in a leading Ontario decision, Black 
v. Wilcox* Evans J. A. stated that, in order to set aside a transaction, the court 
must find as follows: 

. . . that the inadequacy of the consideration is so gross or that the relative positions 
of the parties is so out of balance in the sense that there is a gross inequality of 
bargaining power or that the age or disability of one of the contracting parties 
places him at such a decided disadvantage that equity must intervene to protect the 
party of whom undue advantage has been taken. 



See Waddams, supra, note 1, at 327-40, 345-47, and 393-94. 

See, for example, McKenzie v. Bank of Montreal (1975), 7 O.R. (2d) 521, 55 D.L.R. 
(3d) 641 (H.C.J. ), affd (1976), 12 O.R. (2d) 719 (C.A.); Beach v. Eames (1978), 18 
O.R. (2d) 486, 82 D.L.R. (3d) 736 (Co. Ct.), affd 18 O.R. (2d) 486« (C.A.); and 
Harry v. Kreutziger (1978), 95 D.L.R. (3d) 231, 9 B.C.L.R. 166 (C.A.). See, also, the 
recent decision of the British Columbia Court of Appeal in Dusik v. Newton (1985), 62 
B.C.L.R. 1. 

It should be noted that there are also a number of nineteenth century cases which 
suggest that contracts may be set aside on the ground of unconscionability. See, for 
example, Waters v. Donnelly (1884), 9 O.R. 401 (Div. Ct.); Gough v. Bench (1884), 6 
O.R. 702 (Div. Ct.); and Widdifield v. Simmons (1882), 1 O.R. 483 (Q.B. Div.). 

(1976), 12 O.R. (2d) 759, at 762, 70 D.L.R. (3d) 192, at 195 (C.A.). Leave to appeal to 
the Supreme Court of Canada refused [1976] 1 S.C.R. xi. 



121 



Nevertheless, although unconscionability is an issue in many cases, the 
doctrine has neither been clearly recognized by the Supreme Court of Canada, 
nor uniformly applied by lower courts. Many cases in which a general doctrine 
of unconscionability might have been applied continue to be decided on other 
grounds. 9 

We appreciate that, in a recent decision, 10 the House of Lords expressed 
reservations about the wisdom of a generalized doctrine of unconscionability, 
but in that case Lord Scarman expressly limited his observations to a judicially 
evolved doctrine and omitted any discussion of the merits of a legislatively 
prescribed doctrine of unconscionability. 11 This chapter addresses only that 
question. 



(b) LEGISLATION 

It has been observed that legislative control of unconscionability in 
Ontario comes in two forms. 12 First, there are statutory provisions prohibiting 
or rendering void certain clauses in particular types of contracts or, alterna- 
tively, requiring that certain clauses be included in particular types of contracts. 
Secondly, some statutes authorize the courts to give relief from specified 
contractual obligations on the basis that they are "harsh or unconscionable" or 
some similar general formula. The former approach may be appropriate where 
"it is possible to isolate desirable or undesirable terms in more or less 
standardized transactions". 13 The latter approach, involving judicial discretion, 
may be appropriate where it is not possible to specify what is unconscionable in 
advance. 



Of particular significance in the first category is section 34(2) of the 
Consumer Protection Act H which, in certain instances, voids written contrac- 
tual provisions that attempt to negative or vary any implied conditions and 
warranties applying to the sale of goods by virtue of the Sale of Goods Act. 15 
Among the restrictions on the operation of this section are that it does not apply 
to goods purchased for resale, purchases made in the course of carrying on a 
business, sales to associations of individuals, partnerships or corporations, or 



9 See, for example, Heffron v. Imperial Parking Co. (1974), 3 O.R. (2d) 722, 46 D.L.R. 
(3d) 642 (C. A.); Murray v. Sperry Rand Corp. (1979), 23 O.R. (2d) 456, 96 D.L.R. 
(3d) 113 (H.C.J.); and Beaufort Realties (1964) Inc. v. Chomedey Aluminum Co. Ltd., 
[1980] 2 S.C.R. 718, 116 D.L.R. (3d) 193. 

10 National Westminster Bank v. Morgan, [1985] 1 All E.R. 821. 

11 Ibid., at 830. 

12 Waddams, supra, note 1, at 395-96. 

13 Ibid., at 395. 

14 Consumer Protection Act, R.S.O. 1980, c. 87. 

15 Sale of Goods Act, R.S.O. 1980, c. 462. 



122 



sales by trustees in bankruptcy, receivers, liquidators or persons acting under a 
court order. 16 Moreover, the sale must be made "in the ordinary course of 
business" 17 and for the purchaser's own consumption or use. 18 Section 33 of the 
Consumer Protection Act 19 is also significant. It provides that the Act is to apply 
notwithstanding any agreement or waiver to the contrary. 

Examples of legislative provisions that prohibit specific types of clauses in 
specific types of contracts include section 84(1) of the Landlord and Tenant 
Act, 20 which states that a landlord shall not require or receive a security deposit 
from a tenant other than rent for a period not exceeding one month, and section 
207 of the Insurance Act 21 which states that no variation or omission of or 
addition to certain statutory conditions is binding on certain insured persons. 

Examples of legislative provisions that require specific types of clauses in 
particular types of contracts include the following: section 19 of the Consumer 
Protection Act 22 which requires certain specific information and certain types of 
clauses to be included in executory contracts; section 24 of the Consumer 
Protection Act 23 which requires disclosure of the cost of borrowing; and 
sections 125 and 207 of the Insurance Act 24 which require specified conditions 
to be included in certain types of insurance policies. 

An example of legislation permitting the courts to interfere in particular 
types of agreements on the general ground of unconscionability may be found in 
section 2 of the Unconscionable Transactions Relief Act 25 Under that statute, a 
court, after looking at the risks and all other circumstances, may reopen a 
money-lending transaction if the cost of the loan is excessive and harsh and 

16 Consumer Protection Act, supra, note 14, s. 34(1). 

17 Ibid. 

18 Ibid. 

19 Supra, note 14. 

20 Landlord and Tenant Act, R.S.O. 1980, c. 232. 

21 Insurance Act, R.S.O. 1980, c. 218. 

22 Supra, note 14. 

23 Ibid. 

24 Supra, note 21. 

25 Unconscionable Transactions Relief Act, R.S.O. 1980, c. 514. Related to this legislation 
is section 305.1 of the Criminal Code (R.S.C. 1970, c. C-34), which provides that it is 
an offence to enter into an agreement or arrangement to receive interest at a criminal rate 
or to receive a payment or partial payment of interest at a criminal rate. Subsection 
305.1(2) defines the term "criminal rate" as an effective annual rate of interest that 
exceeds sixty per cent. See Ziegel, "Bill C-44: Repeal of the Small Loans Act and 
Enactment of a New Usury Law" (1981), 59 Can. B. Rev. 188, and Ziegel, "The Usury 
Provisions in the Criminal Code: The Chickens Come Home to Roost" (1986), 1 1 Can. 
Bus. L.J. 233. An exception to the Criminal Code provisions, however, is the practice of 
tax rebate discounting, regulated by the federal Tax Rebate Discounting Act, S.C. 1977- 
78, c. 25, as am. by S.C. 1985, c. 53. 



123 



unconscionable features are present. As might well be expected, the jurispru- 
dence developed under the statute very largely parallels the developments in the 
case law on the equity unconscionability doctrine. 26 

Perhaps the most significant statutory provision (conceptually, at least) 
permitting interference by the courts on the general ground of unconscionability 
is section 2(b) of the Business Practices Act, 21 which provides that "an 
unconscionable consumer representation made in respect of a particular transac- 
tion" shall be deemed to be an unfair practice, entitling the consumer to 
rescission and damages under section 4 of the Act. Other statutory provisions 
taking this approach, but in a more limited compass, include section 26 of the 
Solicitors Act 1% which states that if it appears to the court that an agreement 
between a solicitor and client in respect of fees is not "fair and reasonable", the 
agreement may be declared void and the court may order an assessment, and 
section 247(2) of the Ontario Business Corporations Act, 1982, 29 which 
provides for interference by the courts in circumstances of oppression or unfair 
prejudice. 30 



2. THE POSITION IN OTHER JURISDICTIONS 

(a) UNITED STATES 

The Uniform Commercial Code 31 contains a general unconscionability 
provision, section 2-302, which provides: 

2-302. -(1) If the court as a matter of law finds the contract or any clause of 
the contract to have been unconscionable at the time that it was made the court may 
refuse to enforce the contract, or it may enforce the remainder of the contract 
without the unconscionable clause, or it may so limit the application of any 
unconscionable clause as to avoid an unconscionable result. 

(2) When it is claimed or appears to the court that the contract or any clause 
thereof may be unconscionable the parties shall be afforded a reasonable opportu- 
nity to present evidence as to its commercial setting, purpose and effect to aid the 
court in making the determination. 



26 For a good outline of the authorities interpreting such legislation, see the judgment of 
Grant J. in Adams v. Fahrngruber (1975), 10 O.R. (2d) 96, 62 D.L.R. (3d) 256 
(H.C.J.). 

27 Business Practices Act, R.S.O. 1980, c. 55. 

28 Solicitors Act, R.S.O. 1980, c. 478. 

29 Business Corporations Act, 1982, S.O. 1982, c. 4. 

30 A recent case has held that this section may give relief in the face of a provision in a 
contract valid between the parties: Re Bury and Bell Gouinlock Ltd. (1985), 12 D.L.R. 
(4th) 451 (Ont. H.C.J.). 

31 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978) 
(hereinafter referred to as "Uniform Commercial Code"). 



124 



The Code has been adopted in forty-nine states, the District of Columbia, 
the Virgin Islands, and Guam. Louisiana has only adopted certain parts of the 
Code. Section 2-302, which appears in the sales portion of the Code, has been 
included by Louisiana and all the adopting jurisdictions 32 except California. 33 
Despite this legislative acceptance of a general unconscionability provision, the 
section has generated an ever-increasing amount of academic literature, 34 some 
of it extremely critical. 

The general doctrine of unconscionability developed by equity was, for the 
most part, applied to dramatic examples of overreaching in the course of 
individual negotiations that commonly involved the sale of land. 35 It would 
appear that the intent of the drafters of the Code was a significant extension of 
the doctrine, particularly with respect to standard form contracts. This intent is 
borne out not only by the legislative history, 36 but also by the use of standard 
form examples in all the illustrative cases in the Official Comment. 37 However, 
the drafters of the legislation did little or nothing to assist the courts in the task 
of settling this old doctrine comfortably in its new and larger home. The 
Official Comment states: 38 

The principle is one of the prevention of oppression and unfair surprise . . . and not 
of disturbance of allocation of risks because of superior bargaining power. 

This is, however, no more than a statement of the competing interests involved. 
It does nothing to suggest how those interests might be accommodated. 

Given this background, it is not surprising to find that the courts, when 
they ultimately came to deal with litigation under section 2-302, had difficulty 
in formulating criteria for judgment and produced seemingly inconsistent 
results. 39 Later codifications, in the United States and elsewhere, have specified 
criteria that the courts should take into account. Thus, section 1-311 of the 
Uniform Land Transactions Act, 40 in dealing with real estate transactions, lists 



32 Ibid., Cumulative Annual Pocket Part 1985, at 1-2. 

33 Ibid. However, California has enacted an identical provision. See West's California 
Codes, The Civil Code of the State of California (1985), § 1670.5. 

34 See, for example, Dawson, "Unconscionable Coercion: The German Version" (1976), 
89 Harv. L. Rev. 1041; Ellinghaus, "In Defence of Unconscionability" (1969), 78 Yale 
L.J. 757; Leff, "Unconscionability and the Code — The Emperor's New Clause" 
(1967), 115 U. Pa. L. Rev. 485; and Schwartz, "A Reexamination of Nonsubstantive 
Unconscionability" (1977), 63 Va. L. Rev. 1053. 

35 See Leff, supra, note 34, at 537. 

36 Ibid., at 489-517. 

37 Ibid., at 503. 

38 Uniform Commercial Code, supra, note 31, § 2-302, Comment 1. 

39 Deutch, Unfair Contracts (1977), at 137. 

40 Uniform Land Transactions Act, National Conference of Commissioners on Uniform 
State Laws, Uniform Laws Annotated: Civil Procedural and Remedial Laws (1975) 
(hereinafter referred to as "Uniform Land Transactions Act"). 



125 



matters on which the parties may present evidence. In addition to the commer- 
cial setting, which is referred to in section 2-302 of the Uniform Commercial 
Code, section 1-31 1(b) lists the following as matters that are considered 
relevant: 

(2) whether a party has knowingly taken advantage of the inability of the other 
party reasonably to protect his interests by reason of physical or mental 
infirmity, illiteracy, or inability to understand the language of the agreement, 
or similar factors; 

(3) the effect and purpose of the contract or clause; and 

(4) if a sale, any gross disparity, at the time of contracting, between the amount 
charged for the real estate and the value of the real estate measured by the 
price at which similar real estate was readily obtainable in similar transactions, 
but a disparity between the contract price and the value of the real estate 
measured by the price at which similar real estate was readily obtainable in 
similar transactions does not, in itself, render the contract unconscionable. 

(b) New South Wales 

New South Wales adopted unconscionability legislation with its Contracts 
Review Act, 1980. 4] An important restriction on the scope of this legislation is 
that it does not apply to contracts entered into in the course of, or for the 
purpose of, a trade, business or profession, other than farming. 42 A court, on 
finding a contract to which the Act applies to be "unjust in the circumstances 
relating to the contract at the time it was made", 43 may do any one or more of 
the following: refuse to enforce all or any of the contract's provisions; declare 
the contract void in whole or in part; and vary in whole or in part any 
contractual provision. 44 Linked to these principal species of relief is a range of 
ancillary relief specified in Schedule 1 to the Act and including the possibility of 
damages by way of compensation or otherwise. 45 There is also provision for the 
appropriate Minister or the Attorney General to apply to the court for an order 
prescribing or restricting the terms on which a person may enter contracts of a 
particular class. Such an order may be granted if the court is satisfied "that a 
person has embarked, or is likely to embark, on a course of conduct leading to 
the formation of unjust contracts". 46 

"Unjust" is defined to include "unconscionable, harsh and oppressive". 47 
The legislation contains an extensive list of factors that the court must consider 
in making a decision under the Act, ranging from the public interest, through 



41 Contracts Review Act, 1980, Stat. N.S.W. 1980, Vol. 1, No. 16. 

42 Ibid., s. 6(2). 

43 Ibid., s. 7(1). 

44 Ibid. 

45 Ibid., Schedule 1, s. 1(b). 

46 Ibid., s. 10. 

47 Ibid., s. 4(1). 



126 



various types of conduct and status, to the intelligibility of the contractual 
language. 48 

(c) UNITED KINGDOM 

The most important legislation in the United Kingdom dealing with 
unconscionability is the Unfair Contract Terms Act 1977. 49 Despite the title, the 
Act is not, in fact, a general unconscionability statute. Rather, as revealed in the 
preamble, its purpose is "to impose further limits on the extent to which civil 
liability ... can be avoided by means of contract terms and otherwise". The Act 
prohibits outright certain limitation of liability clauses, 50 while others are made 
subject to a test of reasonableness. 51 Some content is given to the reasonable- 
ness requirement by section 1 1 , which provides that a term is reasonable if it is 
"fair and reasonable ... having regard to the circumstances which were, or 
ought reasonably to have been, known to or in the contemplation of the parties 
when the contract was made". Schedule 2 of the Act adds more specific 
guidelines as to reasonableness, 52 but these apply only with respect to those 
sections of the Act covering the sale or possession of goods. 53 

Accordingly, the Act contains a combination of various devices already 
identified 54 as potential methods for controlling unconscionability in general or 
specific instances thereof: namely, direct prohibition of certain types of clauses; 
adoption of a broad general standard against which to judge certain situations, 
with the development of that standard left to the discretion of the courts; and 
adoption, in certain circumstances, of guidelines to be referred to in determin- 
ing whether the general standard has been met. 

This overview of legislative developments in other jurisdictions would be 
incomplete without a brief reference to the important, and increasing, volume 
of civil law legislation in the postwar era. Of particular significance are the 
legal rules regulating unfair contracts that are found in Germany, where the 
1976 Act for the Regulation of the Law concerning Terms in Standard Form 
Contracts complements the general unconscionability provisions of the German 
Civil Code. 55 



48 Ibid., s. 9. 

49 Unfair Contract Terms Act 1977, c. 50 (U.K.). 

50 See, for example, ibid., ss. 2(1) and 6(1) and (2). 

51 See, for example, ibid., ss. 3 and 4(1). 

52 Matters listed include the relative bargaining strengths of the parties, whether an 
inducement was given to secure acceptance of the challenged term, whether there were 
alternative contracts available without the challenged term, and whether the customer 
should reasonably have known about the existence and extent of the challenged term. 

53 Unfair Contract Terms Act 1977, supra, note 49, ss. 6 and 7. 

54 See supra, this ch., sec. 1(b). 

55 See, generally, Hahlo, "Unfair Contract Terms in Civil Law Systems" (1979-80), 4 
Can. Bus. L.J. 429, esp. at 434-35. 



127 



3. THE CASE FOR LEGISLATIVE REFORM 

Since at least some courts have recognized a general doctrine of uncon- 
scionability, 56 it may be asked whether a statutory affirmation of the doctrine is 
necessary and whether it would serve a useful purpose. Our answer to both 
these questions is yes. As we mentioned above, the doctrine has not yet been 
clearly recognized by the Supreme Court of Canada, nor has it been uniformly 
applied by lower courts. No less important, even those courts that have 
accepted the doctrine of unconscionability as part of modern contract law have 
not addressed their minds comprehensively to the types of relief that should be 
made available in cases of unconscionability. 

In our view, statutory affirmation of the doctrine would stress its pervasive 
importance and encourage the courts to evaluate realistically the significance of 
standard form terms and manifestly unfair bargains. It ought also to encourage 
the courts to abandon such anachronistic tools as the doctrine of fundamental 
breach and adverse construction. Fictitious techniques of this kind do harm to 
the law, because they conceal the reasons for judicial decisions and prevent the 
development of clear principles. Statutory recognition of a generalized doctrine 
of unconscionability would fill the gaps in legislative intervention, and enable 
judges to direct their minds to the truly relevant criteria for decisions. 

Accordingly, we recommend that legislation should be enacted expressly 
conferring on the courts power to grant relief from unconscionable contracts 
and unconscionable terms in a contract and spelling out the remedies available 
where unconscionability is found. However, as was emphasized in our Report 
on Sale of Goods, 51 legislative recognition of the doctrine of unconscionability 
should not be construed as a life jacket for persons who have entered into a bad 
bargain; nor should it interfere with the right of parties to bargain freely with 
respect to the terms of their contract. The thrust of the legislative doctrine that 
we support is to redress the imbalance where parties are not bargaining from 
equal positions and where the stronger party has taken advantage of its superior 
power to impose harsh and oppressive conditions on the weaker party. 

We recognize the concerns of some critics of the doctrine of unconsciona- 
bility that its statutory adoption may lead to uncertainty and that it will enable 
judges to impose their view of public policy on the market place. In our view, 
both these concerns can be satisfactorily answered. The numerous jurisdictions 
that have now adopted some form of statutory unconscionability doctrine have 
not found it giving rise to a flood of uncertainty. In fact, the volume of litigation 
has been extremely modest. So far as the exercise of the judicial power is 
concerned, this would be subject to the statutory guidelines that we propose 
below, and also subject to the usual rights of appeal that are open to an 
aggrieved litigant. 



56 See supra, this ch., sec. 1(a). 

57 Sales Report, supra, note 2, at 162-63. 



128 



The balance of this chapter will focus on the design of a desirable set of 
statutory provisions that would empower the courts to grant relief from 
unconscionable contract provisions. 



4. SPECIFIC ISSUES 

(a) Substantive and Procedural Unconscionability 

In our Report on Sale of Goods, we did not favour drawing a rigid 
distinction between issues of procedural and substantive unconscionability, 
because of the difficulty of distinguishing between the two. 58 Procedural 
unconscionability would appear to refer to unconscionability in the process of 
making the contract. Substantive unconscionability would seem to refer to an 
unacceptable one-sidedness in the terms of the contract. We recognize that it 
may be argued that to allow an attack on the basis of substantive unconsciona- 
bility alone is to negate the concept of freedom of contract. It may be further 
argued that certain avenues of inquiry should be closed to the courts because the 
issues may be too complex, or inappropriate for handling by regular adjudica- 
tive methods. One example of this is provided by the prohibition in the Uniform 
Land Transactions Act on the use of inadequacy of consideration alone as a 
ground for giving relief on the basis of unconscionability. 59 

However, we note that the Business Practices Act, 60 the Consumer 
Protection Act, 61 and the Unconscionable Transactions Relief Act 62 do not draw 
distinctions between procedural and substantive unconscionability. We favour 
an approach which would allow the courts to consider all aspects of a bargain, 
without having to categorize particular aspects as either procedural or substan- 
tive. This becomes particularly important with respect to cases where one of the 
parties has no contractual alternatives. We believe that there is little danger of 
the courts jumping to hasty conclusions solely because of a disparity in 
bargaining power or a significant differential in value. 

Accordingly, we recommend that the proposed formulation of the doctrine 
of unconscionability should not distinguish between procedural and substantive 
unconscionability . 

(b) Decisional Criteria 

As discussed earlier, the general unconscionability provision of the Uni- 
form Commercial Code, section 2-302, provides only minimal guidance to the 
courts. Consequently, the courts have not formulated clear criteria by which 
unconscionability may be judged, and seemingly inconsistent results have been 



58 Ibid., at 157. 

59 Uniform Land Transactions Act, supra, note 40, § 1-31 1(b)(4). 

60 Supra, note 27. 

61 Supra, note 14. 

62 Supra, note 25. 



129 



reached. 63 It has been suggested that the difficulties involved in the invoca- 
tion of section 2-302 have contributed to continued resort by the courts to the 
covert method of rendering exemption clauses ineffective by restrictive 
interpretation. 64 

The American experience suggests the wisdom of including decisional 
criteria in legislation dealing with unconscionability. Statutory criteria would 
encourage the courts to be explicit about the bases of decisions. Such elabora- 
tion should provide some definition to the concept of unconscionability, without 
unduly limiting judicial flexibility. 

We therefore recommend that the proposed formulation of the doctrine of 
unconscionability should include a non-exclusive list of decisional criteria to 
guide the courts in determining questions of unconscionability. 

We now turn to the question of what those criteria should be. In 
formulating a set of criteria, we draw on statutory precedents, including section 
2(b) of the Ontario Business Practices Act, 65 Schedule 2 of the U.K. Unfair 
Contract Terms Act 1977, 66 and section 9 of the New South Wales Contracts 
Review Act, 1980. 61 The criteria that we favour are very similar to those found 
in section 5.2(2) of the Draft Bill included in our Report on Sale of Goods, 62, 
which were, in turn, approved with minor changes by the Sale of Goods 
Committee of the Uniform Law Conference of Canada. 69 

We therefore recommend that, in determining whether a contract or part 
thereof is unconscionable having regard to the circumstances obtaining at the 
time the contract was made, the court may have regard, among other factors, to 
evidence of the following factors: 

(a) the degree to which one party has taken advantage of the inability of 
the other party reasonably to protect his or her interests because of his 
or her physical or mental infirmity, illiteracy, inability to understand 
the language of an agreement, lack of education, lack of business 
knowledge or experience, financial distress, or because of the exis- 
tence of a relationship of trust or dependence or similar factors; 

(b) the existence of terms in the contract that are not reasonably necessary 
for the protection of the interests of any party to the contract; 



63 See supra, this ch., sec. 2(a). 

64 Deutch, supra, note 39, at 159. 

65 Supra, note 27. 

66 Supra, note 49. 

67 Supra, note 41. 

68 Sales Report, supra, note 2, at 161. 

69 Uniform Law Conference of Canada, Proceedings of the Sixty-fourth Annual Meeting 
(1982), Appendix HH, s. 31(2). 



130 



(c) the degree to which the contract requires a party to waive rights to 
which he or she would otherwise be entitled; 

(d) gross disparity between the considerations given by the parties to the 
contract and the considerations that would normally be given by 
parties to a similar contract in similar circumstances; 

(e) knowledge by one party, when entering into the contract, that the 
other party will be substantially deprived of the benefit or benefits 
reasonably anticipated by that other party under the contract; 

(f) the degree to which the natural effect of the transaction, or any party's 
conduct prior to, or at the time of, the transaction, is to cause or aid in 
causing another party to misunderstand the true nature of the transac- 
tion and his or her rights and duties thereunder; 

(g) whether the complaining party had independent advice before or at 
the time of the transaction or should reasonably have acted to secure 
such advice for the protection of the party's interest; 

(h) the bargaining strength of the parties relative to each other, taking 
into account the availability of reasonable alternative sources of 
supply or demand; 

(i) whether the party seeking relief knew or ought reasonably to have 
known of the existence and extent of the term or terms alleged to be 
unconscionable; 

(j) in the case of a provision that purports to exclude or limit a liability 
that would otherwise attach to the party seeking to rely on it, which 
party is better able to guard against loss or damages; 

(k) the setting, purpose and effect of the contract, and the manner in 
which it was formed, including whether the contract is on written 
standard terms of business; and 

(1) the conduct of the parties in relation to similar contracts or courses of 
dealing to which any of them has been a party. 

Factor (a) covers the traditional area of equity unconscionability. The 
reference to the existence of a relationship of trust or dependence does not 
appear in the relevant section of the draft legislation included in our Report on 
Sale of Goods.™ However, as indicated by the case law, 71 a relationship of trust 
or dependence can be a factor that contributes to unconscionability. 



70 Sales Report, supra, note 2, at 161, s. 5.2(2)(a). 

71 See, for example, McKenzie v. Bank of Montreal, supra, note 7, and Lloyd's Bank Ltd. 
v. Bundy, supra, note 4. 



131 



Factor (b) was not included in our proposed Sale of Goods Act, and deals 
with the imposition of terms not reasonably necessary for the protection of the 
interests of any party to the contract. This circumstance has been recognized as 
bearing on unconscionability in the New South Wales Contracts Review Act, 
1980 12 and in the case law. 73 It is but one kind of lack of equivalence that may 
arise in a contract, analogous to excessive waiver of rights by one party, and 
gross disparity in considerations exchanged. These last two circumstances are 
addressed in factors (c) and (d) respectively, and were included as criteria, 
relevant to unconscionability in the draft legislation that accompanied our 
Report on Sale of Goods. 14 

Factors (e) and (f) are also found in our proposed Sale of Goods Act. 15 
Factor (g), relating to independent legal or other expert advice, does not appear 
in the draft Sale of Goods Act, but is included as one of the criteria listed as 
relevant to unconscionability in the New South Wales Contracts Review Act, 
1980. 16 

Factors (h), (i) and (j) have their counterparts in our draft Sale of Goods 
Act. 11 Clause (k), insofar as it deals with the setting, purpose and effect of a 
contract, may also be found in our proposed Sale of Goods Act. 1 * Factor (k), 
however, goes on to include specifically "whether the contract is on written 
standard terms of business". This addition has been made because of problems 
posed by the pervasive use of standard form contracts, particularly relating to 
failure on the part of a party to read or understand all of the terms. As Lord 
Devlin has commented of certain standard form contracts: "This sort of 
document is not meant to be read, still less to be understood". 79 We note that 
this factor is listed in the Unfair Contract Terms Act 1977 as relevant to the 
enforceability of certain contractual terms. 80 

Factor (1), dealing with prior conduct of the parties, has no direct analogue 
in our proposed Sale of Goods Act and is drawn from the New South Wales 
Contracts Review Act, 1980. u We believe that, in appropriate cases, the way in 



72 Supra, note 41, s. 9(2)(d). 

73 See, for example, Laurin v. Iron Ore Co. of Canada (1977), 82 D.L.R. (3d) 634, 19 
Nfld. & P.E.I. R. 1 1 1 (Nfld. S.C., T.D.), and In Re Elkins-Dell Mfg. Co. , 253 F. Supp. 
864 (E.D. Pa. 1966), at 871, discussed by Deutch, supra, note 39, at 138-39. 

74 Sales Report, supra, note 2, at 161, s. 5.2(2)(d) and (b), respectively. 

75 Ibid., s. 5.2(2)(c) and (e), respectively. 

76 Supra, note 41, s. 9(2)(h). This factor was also stressed by Lord Denning in Lloyd's 
Bank Ltd. v. Bundy, supra, note 4, at 339. 

77 Sales Report, supra, note 2, at 161, s. 5.2(2)(f), (g) and (h), respectively. 

78 Ibid., s. 5.2(2)(i). 

79 McCutcheon v. David MacBrayne , Ltd., [1964] 1 W.L.R. 125, at 133, [19641 1 All E.R. 
430, at 436 (H.L.). 

80 Supra, note 49, s. 3(1). 

81 Supra, note 41, s. 9(2)(k). 



132 



which a party has behaved towards other contracting parties may be relevant to 
the determination of unconscionability, as, for example, where there is a pattern 
of contracting that demonstrates a situational monopoly (that is, circumstances 
give one contracting party abnormal market power over the other) or market- 
wide control. 82 

(c) power of the court to raise unconscionability of its 
Own accord 

Some of the factors that contribute to unconscionability in contract 
formation — for example, ignorance and lack of intellectual capacity — may 
also lead to a failure to argue unconscionability in court. We recommended in 
our Report on Sale of Goods that a court should be able, in the context of 
contracts for the sale of goods, to raise the issue of unconscionability of its own 
motion. 83 We see no reason why this recommendation should not apply also to 
the law of contracts generally, and we so recommend. 

(d) Scope of Provisions 

It would be possible to limit the application of the proposed provisions so 
as to exempt certain types of contract — for example, insurance and consumer 
contracts — that are already subject to extensive regulation. However, while it 
might be argued that contracts that are already highly regulated need not and 
should not be subject to the proposed unconscionability provisions, a limitation 
of this kind could lead to considerable complexity. It might also be argued that 
the proposed provisions should not apply to executed contracts, on the ground 
that reopening such contracts on the basis of unconscionability would lead to 
uncertainty and lack of finality. We have concluded, however, that certainty 
and finality should yield to flexibility and the avoidance of injustice. In our 
view, the doctrine of unconscionability should be statutorily recognized as a 
basic and pervasive contract norm. We therefore recommend that the proposed 
provisions on unconscionability should apply to all types of contracts. 

In chapter 2 of this Report, we recommended changes to the doctrine of 
consideration that would enlarge the class of promises that are enforceable. We 
believe that the doctrine of unconscionability should apply to all enforceable 
promises. Accordingly, we further recommend that the term "contract" in the 
proposed provisions on unconscionability should be defined to include any 
enforceable promise. 

(e) Remedies 

(i) Rescission, Restitution and Expectancy Damages 

Section 2-302 of the Uniform Commercial Code provides that, if a court 
makes a finding of unconscionability, it may refuse to enforce the contract, 
enforce the unoffending part of the contract, or limit the application of any 



82 Situational and market-wide monopolies are discussed in relation to unconscionability by 
Trebilcock, supra, note 1, at 392-404. 

83 Sales Report, supra, note 2, at 159. 



133 



unconscionable clause to avoid an unconscionable result. 84 Power to order 
rescission of unconscionable contracts, with accompanying restoration of the 
parties to their pre-contractual position, is not provided. In contrast, the New 
South Wales Contracts Review Act, 1980 does provide for rescission, allowing 
the court to "make an order declaring the contract void, in whole or in part". 85 
In addition, as noted above, 86 Schedule 1 to the New South Wales statute allows 
for "the payment of money (whether or not by way of compensation) to a party 
to the contract". 87 

In our Report on Sale of Goods, we considered that the remedies provided 
in section 2-302 of the Uniform Commercial Code were insufficient. 88 Given 
the range of circumstances in which the courts may be called upon to intervene, 
including not only the type of contract and unconscionability involved but also 
the timing of the intervention, it seemed to us desirable that the courts be given 
flexible remedial alternatives. Accordingly, we included the following provi- 
sion in our proposed Sale of Goods Act\ %9 

5.2-(l) If, with respect to a contract of sale, the court finds the contract or a 
part thereof to have been unconscionable at the time it was made, the court may 

(a) refuse to enforce the contract or rescind it on such terms as may be 
just; 

(b) enforce the remainder of the contract without the unconscionable part; 
or 

(c) so limit the application of any unconscionable part or revise or alter 
the contract as to avoid any unconscionable result. 

This provision would enable the courts to do justice as the circumstances 
require. 

We consider that the position taken in our Report on Sale of Goods in 
connection with contracts for the sale of goods applies with equal force to 
contracts of all types. Accordingly, we recommend that a provision similar to 
section 5.2(1) of our proposed Sale of Goods Act should be incorporated, with 
the necessary modifications, into the proposed legislation dealing with 
unconscionability. 



84 See supra, this ch., sec. 2(a). 

85 Supra, note 41, s. 7(l)(b). 

86 Supra, this ch., sec. 2(b). 

87 Supra, note 41, Schedule 1, s. 1(b). 

88 Sales Report, supra, note 2, at 159. 

89 Ibid., at 160-61. 



134 



(ii) Injunctions 

The New South Wales Contracts Review Act, 198CP provides for injunc- 
tive relief at the behest of a Minister of the Crown with respect to contracts of a 
specified class. Section 10 of the Act provides as follows: 

10. Where the Supreme Court is satisfied, on the application of the Minister 
or the Attorney General, or both, that a person has embarked, or is likely to 
embark, on a course of conduct leading to the formation of unjust contracts, it may, 
by order, prescribe or otherwise restrict, the terms upon which that person may 
enter into contracts of a specified class. 

This raises the question of whether a form of public law relief should be 
included in a general statute governing the law of contracts. We consider that 
injunctive power might well be useful in cases where a person or corporation 
has demonstrated a pattern of contractual unconscionability. Accordingly, we 
recommend that the courts should be empowered, at the behest of the Attorney 
General or other prescribed Minister, to issue injunctions against conduct 
leading to unconscionability, either in the formation or in the execution of 
contracts. We would note that the notion of standing for a public official in this 
sort of context is not novel in Ontario. 91 

We wish to emphasize that it is not our intention that the availability of this 
kind of injunctive power should, in any way, restrict the right of a party to 
injunctive relief with respect to a particular contract. 

(f) Exemption from Liability Clauses 



The doctrine of unconscionability developed as a brake on overreaching in 
the contractual process, and quite plainly sets limits on contractual freedom. As 
such, it would not make sense to permit a contracting party to exclude liability 
arising under a statutory provision dealing with unconscionability. Out of an 
abundance of caution, we made this explicit in section 5.2(5) of our proposed 
Sale of Goods Act? 1 which provides as follows: 

5.2-(5) The powers conferred by this section apply notwithstanding any 
agreement or waiver to the contrary. 

We recommend that a similar provision be included in the proposed legislation 
governing unconscionability. 



90 
91 

92 



Supra, note 41, s. 10. 

For example, section 247 of the Business Corporations Act, 1982, supra, note 29, vests 
standing in the Director or the Ontario Securities Commission, as appropriate, to apply 
to the court in cases of oppression or unfair prejudice. 

Sales Report, supra, note 2, at 162. 



135 



(g) Outright Prohibitions and Presumptions of 
Unconscionability 

The statutory formulation of the doctrine of unconscionability that we are 
recommending does not single out particular types of objectionable clauses that 
might appropriately be subject to outright prohibition. Nor are particular types 
of clauses made subject to a presumption of unconscionability, so as to shift the 
onus of proof to the party seeking to rely on such a clause to show that it is not 
unconscionable. There are precedents for such prohibitions 93 and presump- 
tions. 94 However, while it is true that some unconscionable clauses are readily 
identifiable, it would be impossible to list all clauses to which a presumption or 
prohibition should apply. Accordingly, we do not recommend that provisions 
be included either prohibiting, or shifting the onus of proof for, specific types 
of clauses. 

We would emphasize that we do not oppose prohibitions and presumptions 
of unconscionability. In our Report on Sale of Goods, for example, we 
recommended that an exclusion or limitation of damages for breach of warranty 
for injury to the person be considered prima facie unconscionable. 95 However, 
we believe that prohibitions and presumptions with respect to particular types of 
clauses are best dealt with in specific legislation. 

(h) Consumer Protection 

In concluding this chapter we wish to add an important observation. Our 
recommendations are addressed to all types of unconscionable contract provi- 
sions and we do not distinguish between consumer and non-consumer contracts. 
We wish, however, to make the point that the implementation of our recom- 
mendations would not by itself accord consumers the protection they need 
against unconscionable conduct. To effectuate this goal, additional legislation, 
together with appropriate administrative supports, is needed. 

Fortunately, in Ontario much of the machinery is already in place in the 
Business Practices Act 96 and in other consumer legislation. 97 It may be that 
these provisions are in need of review and updating. 98 We have treated this 
question as being outside our terms of reference. Nevertheless, it should be 
emphasized that nothing in this chapter should be interpreted as dispensing with 
the need for a business practices act or other legislation dealing with specific 
types of unconscionable practices and their policing in the consumer area. 



93 See, for example, Unfair Contract Terms Act 1977, supra, note 49, s. 2(1). 

94 See, for example, ibid., s. 2(2), and Uniform Commercial Code, supra, note 31, § 2- 
719(3). 

95 Sales Report, supra, note 2, at 232-33. 

96 Supra, note 27. 

97 See discussion of Ontario legislation on unconscionability, supra, this ch., sec. 1(b). 

98 See Belobaba, "Some Features of a Model Consumer Trade Practices Act", in Ziegel 
(ed.), Proceedings of the Seventh Annual Workshop on Commercial and Consumer Law 
(1979) 1. 



136 



Recommendations 

The Commission makes the following recommendations: 

1 . Legislation should be enacted expressly conferring on the courts power 
to grant relief from contracts and contractual provisions that are 
unconscionable. 

2. The proposed legislation should not distinguish between procedural and 
substantive unconscionability. 

3. The proposed legislation should include a non-exclusive list of deci- 
sional criteria to guide the courts in determining questions of 
unconscionability (See infra, Recommendation 4). 

4. In determining whether a contract or part thereof is unconscionable in 
the circumstances relating to the contract at the time it was made, the 
court may have regard, among other factors, to evidence of: 

(a) the degree to which one party has taken advantage of the 
inability of the other party reasonably to protect his or her 
interests because of his or her physical or mental infirmity, 
illiteracy, inability to understand the language of an agreement, 
lack of education, lack of business knowledge or experience, 
financial distress, or because of the existence of a relationship 
of trust or dependence or similar factors; 

(b) the existence of terms in the contract that are not reasonably 
necessary for the protection of the interests of any party to the 
contract; 

(c) the degree to which the contract requires a party to waive rights 
to which he or she would otherwise be entitled; 

(d) gross disparity between the considerations given by the parties 
to the contract and the considerations that would normally be 
given by parties to a similar contract in similar circumstances; 

(e) knowledge by one party, when entering into the contract, that 
the other party will be substantially deprived of the benefit or 
benefits reasonably anticipated by that other party under the 
contract; 

(f) the degree to which the natural effect of the transaction, or any 
party's conduct prior to, or at the time of, the transaction, is to 
cause or aid in causing another party to misunderstand the true 
nature of the transaction and his or her rights and duties 
thereunder; 



137 



(g) whether the complaining party had independent advice before 
or at the time of the transaction or should reasonably have acted 
to secure such advice for the protection of the party's interest; 

(h) the bargaining strength of the parties relative to each other, 
taking into account the availability of reasonable alternative 
sources of supply or demand; 

(i) whether the party seeking relief knew or ought reasonably to 
have known of the existence and extent of the term or terms 
alleged to be unconscionable; 

(j) in the case of a provision that purports to exclude or limit a 
liability that would otherwise attach to the party seeking to rely 
on it, which party is better able to guard against loss or 
damages; 

(k) the setting, purpose and effect of the contract, and the manner 
in which it was formed, including whether the contract is on 
written standard terms of business; and 

(1) the conduct of the parties in relation to similar contracts or 
courses of dealing to which any of them has been a party. 

5. The proposed legislation should expressly authorize the court to raise 
the issue of unconscionability of its own motion. 

6. The proposed provisions on unconscionability should apply to all types 
of contracts. 

7. The term "contract" in the proposed provisions on unconscionability 
should be defined to include any enforceable promise. 

8. The proposed legislation should incorporate a provision, similar to 
section 5.2(1) of the proposed Sale of Goods Act, with the necessary 
modifications. Accordingly, the court should be able, in the case of an 
unconscionable contract to 

(a) refuse to enforce the contract or rescind it on such terms as may 
be just; 

(b) enforce the remainder of the contract without the unconsciona- 
ble part; or 

(c) so limit the application of any unconscionable part or revise or 
alter the contract as to avoid any unconscionable result. 



138 



9. The courts should be empowered, at the behest of the Attorney General 
or other prescribed Minister, to issue injunctions against conduct leading 
to unconscionability, either in the formation of or in the execution of 
contracts. 

10. A provision, similar to section 5.2(5) of the proposed Sale of Goods Act, 
preventing a party from excluding liability or waiving rights under the 
provisions dealing with unconscionability, should be included in the 
proposed legislation. 



CHAPTER 7 



PENALTY CLAUSES AND 
RELIEF FROM FORFEITURE 
OF MONIES PAID 



1. INTRODUCTION 

This chapter examines the law governing two important types of contrac- 
tual clause whose validity the common law, including equity, refuses to 
recognize in whole or in part, notwithstanding the normal principle that freely 
consented to bargains are binding. The first type of clause to be examined is the 
penalty clause, which may be defined as a promise to pay a stipulated sum of 
money, 1 otherwise than by way of liquidated damages, if the promisor breaches 
a term of the contract. The second type of clause involves an express or implied 
agreement that monies paid by way of deposit or towards the purchase price of 
the thing bargained for will be forfeited in favour of the payee if the agreement 
is cancelled because of the payor's breach. Both types of clause, to a greater or 
lesser degree, have attracted the hostility of the courts because of the opportu- 
nity they are seen to provide for oppressive or unconscionable bargains and 
their repugnancy to basic principles governing the assessment of damages. 



2. CONTRACTS TO PAY A STIPULATED SUM ON BREACH 

(a) THE PRESENT LAW AND THE CASE FOR REFORM 

It is very common for parties to agree that on breach of a particular 
contractual obligation a certain sum of money will be paid by the defaulting 
party. Such agreements are not in themselves objectionable. On the contrary, 
they serve several purposes useful to both parties. They enable the promisee to 
put a value on performance and to avoid the risks of undercompensation 
inherent in litigation. They enable the promisor to offer an assurance of 
performance while limiting liability, thereby making the cost of breach predict- 
able. They reduce the cost to the parties and the costs to the state of resolving 
disputes. On the other hand, there are cases where the stipulated sum greatly 
exceeds the actual loss caused to the promisee by the breach. In such cases, 



In Anglo-Canadian law the discussion almost invariably focuses on clauses requiring the 
payment of a sum of money. There is no reason, however, why the doctrine should be 
confined to monetary payments and in civil law systems it is not so confined. See, for 
example, Ringuet v. Bergeron, [1960] S.C.R. 672, 24 D.L.R. (2d) 449, applying 
Quebec law to a penalty clause requiring the transfer of shares. 

[139] 



140 



strict enforcement of the agreement would lead to an extravagant and oppres- 
sive result. It is not surprising, then, that equity has found means to relieve 
against such results. 

In 1801 it was said that "[t]he jurisdiction of Courts of Equity in relieving 
on penalties is of very high antiquity". 2 Before the eighteenth century, penalties 
were usually cast in the form of penal bonds. These were theoretically 
enforceable at common law, but equity granted relief against enforcement. 3 The 
general power of the courts of equity to relieve against penal bonds, and against 
penalty clauses in contracts which, since the nineteenth century, have replaced 
penal bonds, is confirmed by section 111 of the Courts of Justice Act, 1984. 4 

The courts, while retaining the power to relieve against penalties, have 
nevertheless been anxious not to lose the advantages of enforcing fair and 
reasonable agreements stipulating in advance the sum to be paid on breach. In 
an era when the values represented by freedom of contract were highly prized, 
it seemed anomalous that freely made and clear agreements should be struck 
down. Lacking a general principle of unconscionability, the courts sought to 
limit intervention by drawing a distinction between "penalty clauses", which 
were unenforceable, and "liquidated damages clauses", which were 
enforceable. 

Unfortunately, however, no satisfactory test has evolved for distinguishing 
the two kinds of clause. The generally accepted test was summarized by the 
Supreme Court of Canada in 1915 as follows: 5 

A penalty is the payment of a stipulated sum on breach of the contract, irrespective 
of the damage sustained. The essence of liquidated damages is a genuine cove- 
nanted pre-estimate of damage. 

The difficulty of applying this test is illustrated by the leading English case, 
Dunlop Pneumatic Tyre Co. , Ltd. v. New Garage and Motor Co. , Ltd. 6 In that 
case, a retailer agreed to pay a manufacturer £5 for every breach of a resale 
price maintenance scheme. The House of Lords unanimously held that the 
agreement was enforceable. On the assumption that the scheme did not, at that 



2 Astley v. Weldon (1801), 2 Bos. & Pul. 346, at 354, 126 E.R. 1318, at 1323 (subsequent 
reference is to 126 E.R.) . 

3 See Re Dixon, [1900] 2 Ch. 561 (C.A.), at 576. 

4 S.O. 1984, c. 11. Section 111 provides as follows: 

A court may grant relief against penalties and forfeitures, on such terms as to 
compensation or otherwise as are considered just. 

For discussion of this provision see infra, this ch., sec. 3(a). 

5 Canadian General Electric Co. v. Canadian Rubber Co. (1915), 52 S.C.R. 349, at 351, 
27 D.L.R. 294, at 295, per Fitzpatrick C.J. 

6 Dunlop Pneumatic Tyre Co. , Ltd. v. New Garage and Motor Co. , Ltd. , [1915] A.C. 79, 
[1914-15] All E.R. Rep. 739 (H.L.) (subsequent references are to [1915] A.C). 



141 



time, offend public policy on competition, this result seems reasonable. It is, 
however, hard to imagine that the figure of £5 was in any sense a genuine 
attempt to pre-estimate actual damage caused by specific breaches. It seems 
plain that its intended effect was wholly deterrent. 



The reason for enforcing the clause appears to be, not that it represented a 
genuine pre-estimate of damage, but that it was thought to be fair and 
reasonable. One law lord said that the question was whether the sum stipulated 
was "extravagant"; 7 another said that the agreement contained nothing "unrea- 
sonable, unconscionable or extravagant"; 8 another, that the sum was not 
"extravagant or extortionate". 9 Similar phrases also appear in Canadian 



cases 



10 



A serious problem with the current law is that relief against penalty clauses 
only applies to clauses requiring payment of money on breach of contract. 
Clauses requiring payment in other circumstances are not penalty clauses, 
although they may have the same practical effect. Thus, where a hirer 
terminated a chattel lease contract in accordance with an option to terminate, 
the contract providing for a certain sum to be payable on such termination, it 
was held that the clause was not a penalty clause and that the court was 
powerless to relieve. 11 Said one judge, "Let no one mistake the injustice of this. 
It means that equity commits itself to this absurd paradox: it will grant relief to 
a man who breaks his contract but will penalise the man who keeps it." 12 



Another difficulty with the present approach to penalty clauses is that it is 
capable of leading to the striking down of agreements that are perfectly fair and 
reasonable. Indeed, the resale price maintenance scheme in Dunlop Pneumatic 
Tyre Co. , Ltd. v. New Garage and Motor Co. , Ltd. 13 might well have been 
struck down on a strict application of the test announced in the case itself. 



The Supreme Court of Canada suggested in H.F. Clarke Ltd. v. 
Thermidaire Corp. Ltd. that a liquidated damages clause would be struck down 
if it required the defendant to pay a larger sum than the Court would have 



7 Ibid., at 88, per Lord Dunedin. 

8 Ibid. , at 97, per Lord Atkinson. 

9 Ibid., at 101, per Lord Parmoor. 

10 Canadian General Electric Co. v. Canadian Rubber Co., supra, note 5. See, also, 
Henderson v. Nichols (1849), 5 U.C.Q.B. 398 (C.A.), at 400. 

11 Bridge v. Campbell Discount Co. Ltd., [1962] A.C. 600, (1962] 1 All E.R. 385 (H.L.) 
(subsequent reference is to [1962] A.C). See, also, Ellis v. Frughtman (1912), 8D.L.R. 
353, 3 W.W.R. 558 (Alta. S.C., App. Div.). 

12 Bridge v. Campbell Discount Co. Ltd., supra, note 1 1, at 629, per Denning L.J. 

13 Supra, note 6. 



142 



awarded as damages. 14 It may be, as certain passages suggest, 15 that the Court 
in the Thermidaire case in fact applied a test of unconscionability, but, in our 
view, the mere fact that the stipulated sum exceeds the amount that the Court 
would award should not be sufficient reason for striking down the clause. 
Indeed, in the case where the promisee has a special interest in the contractual 
performance that might not be reflected in a judicial award of damages, an 
agreement for the payment of a stipulated sum is most useful. 16 

Thus, where rules of law respecting certainty of proof or remoteness, or 
failure fully to protect intangible interests, would lead to undercompensation, 
there is strong reason for permitting the parties to set their own value on 
performance and for enforcing their agreement. 17 

(b) RESPONSES TO THE PROBLEM AND THE POSITION IN OTHER 
JURISDICTIONS 

(i) England 

With the exception of a Working Paper published by the English Law 
Commission in 1975, 18 the current law of penalty clauses has not received much 
critical attention in England. The Law Commission was of the view that there 
was nothing radically wrong with the current rules, and concentrated its 
attention on a number of subsidiary issues. However, while the Commission 
rejected the possibility of substituting a test of reasonableness for the existing 
rule, it did not subject to serious analysis the basis of the common law 
distinction between penalty clauses and liquidated damages clauses and the 
reasons for refusing to enforce penalty clauses. 

(ii) The United States 

American law with respect to penalties and liquidated damages clauses 
differs in important respects from Anglo-Canadian law. The particular rules, 
both legislative and common law, vary among the states, and the most that can 
be done is to give a broad approximation of current trends. 



14 [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385 (subsequent reference is to [1976] 1 S.C.R.). 

15 See ibid., at 331, where Laskin C.J. suggested that judicial interference with the 
enforcement of penalty clauses is "simply a manifestation of a concern for fairness and 
reasonableness". 

16 The statement of Dickson, J. , in Elsley v. J. G. Collins Insurance Agencies Ltd. , [1978] 2 
S.C.R. 916, at 937, 83 D.L.R. (3d) 1, at 15 (subsequent reference is to [1978] 2 
S.C.R.), that the court's jurisdiction is for the sole purpose of relieving against 
oppression suggests also that a reasonable agreement ought to be enforced. 

17 See Astley v. Weldon, supra, note 2, at 1323: "A man in possession of his own estate 
may set his own value upon the view, the timber, or other ornaments and conveniences 
of the estate ...". See, also, Goetz and Scott, "Liquidated Damages, Penalties and the 
Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of 
Efficient Breach" (1977), 77 Colum. L. Rev. 554. 

18 England, Law Commission, Working Paper No. 61, Penalty Clauses and Forfeiture of 
Monies Paid (1975) (hereinafter referred to as "Working Paper No. 61"). 



143 



The current position in most American jurisdictions with respect to 
contracts to pay a stipulated sum on breach is reflected in section 2-7 1 8 of the 
Uniform Commercial Code 19 and section 356 of the Second Restatement of the 
Law of Contracts . 20 Section 2-718(1) of the Uniform Commercial Code permits 
damages to be liquidated in an agreement but only in an amount that is 



19 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978) 
(hereinafter referred to as "Uniform Commercial Code"). Section 2-718 reads as 
follows: 

2-7 1 8. -(1) Damages for breach by either party may be liquidated in the 
agreement but only at an amount which is reasonable in the light of the anticipated 
or actual harm caused by the breach, the difficulties of proof of loss, and the 
inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term 
fixing unreasonably large liquidated damages is void as a penalty. 

(2) Where the seller justifiably withholds delivery of goods because of the 
buyer's breach, the buyer is entitled to restitution of any amount by which the sum 
of his payments exceeds 

(a) the amount to which the seller is entitled by virtue of terms 
liquidating the seller's damages in accordance with subsection (1), 
or 

(b) in the absence of such terms, twenty per cent of the value of the 
total performance for which the buyer is obligated under the 
contract or $500, whichever is smaller. 

(3) The buyer's right to restitution under subsection (2) is subject to offset to 
the extent that the seller establishes 

(a) a right to recover damages under the provisions of this Article other 
than subsection (1), and 

(b) the amount or value of any benefits received by the buyer directly 
or indirectly by reason of the contract. 

(4) Where a seller has received payment in goods their reasonable value or the 
proceeds of their resale shall be treated as payments for the purposes of subsection 
(2); but if the seller has notice of the buyer's breach before reselling goods received 
in part performance, his resale is subject to the conditions laid down in this Article 
on resale by an aggrieved seller (Section 2-706). 

20 American Law Institute, Restatement of the Law, Second — Contracts, 2d (1979) 
(hereinafter referred to as "Second Restatement"). Section 356 reads as follows: 

356. -(1) Damages for breach by either party may be liquidated in the 
agreement but only at an amount that is reasonable in the light of the anticipated or 
actual loss caused by the breach and the difficulties of proof of loss. A term fixing 
unreasonably large liquidated damages is unenforceable on grounds of public policy 
as a penalty. 

(2) A term in a bond providing for an amount of money as a penalty for non- 
occurrence of the condition of the bond is unenforceable on grounds of public policy 
to the extent that the amount exceeds the loss caused by such non-occurrence. 

The predecessor to section 356 (American Law Institute, Restatement of the Law, 
Contracts (1932), § 339) took a more restrictive approach and provided that an 
agreement made in advance of a breach fixing damages for a breach was not enforceable 
unless the amount fixed was a reasonable forecast of just compensation for harm caused 
by the breach and the harm caused by the breach was incapable of accurate estimation or 
very difficult to estimate accurately. 



144 



reasonable in light of the anticipated or actual harm caused by the breach, the 
difficulties of proof of loss, and the inconvenience or non-feasibility of 
otherwise obtaining an adequate remedy. It also makes void a term fixing 
unreasonably large liquidated damages. The provisions of section 356 of the 
Second Restatement are, generally speaking, similar. 21 

In California, in 1977, as a result of recommendations by the California 
Law Revision Commission, 22 the provisions of the California Civil Code 
relating to liquidated damages clauses were revised to provide 23 that, in non- 

The Restatements have, of course, only persuasive force, whereas section 2-718 of 
the Uniform Commercial Code has statutory force in all states that have adopted the 
Code. 

21 The Second Restatement, supra, note 20, determines reasonableness by referring, inter 
alia, to the "anticipated or actual loss caused by the breach", while the Uniform 
Commercial Code refers to the "anticipated or actual harm caused by the breach". 
Neither of the provisions refers specifically to damages suffered or recoverable in an 
action at law. There is, therefore, a question whether the reasonableness of the stipulated 
amount is restricted by the quantity of damages recoverable under the rule in Hadley v. 
Baxendale ((1854), 9 Ex. 341, 156 E.R. 145). The position that the reasonableness of the 
stipulated amount is not so restricted finds support in cases enforcing liquidated damages 
clauses allowing recovery of attorney's fees. (See Equitable Lumber Corp. v. IPA Land 
Development Corp., 38 N.Y. 2d 516 (1976)). In most American jurisdictions, an 
unsuccessful party is not normally responsible for the other party's costs. 

22 California Law Revision Commission, Recommendation Relating to Liquidated Damages 
(1976), 13 Cal. L. Revision Comm'n. Reports, at 1735. 

23 West's Annotated California Codes, The Civil Code of the State of California (1985) 
(hereinafter referred to as "California Civil Code"), § 1671. The former provisions, 
sections 1670 and 1671, were repealed by Stats. 1977, c. 198, p. 718, §5, operative July 
1, 1978. Section 1671 is as follows: 

1671. -(a) This section does not apply in any case where another statute 
expressly applicable to the contract prescribes the rules or standard for determining 
the validity of a provision in the contract liquidating the damages for the breach of 
the contract. 

(b) Except as provided in subdivision (c), a provision in a contract liquidating 
the damages for the breach of the contract is valid unless the party seeking to 
invalidate the provision establishes that the provision was unreasonable under the 
circumstances existing at the time the contract was made. 

(c) The validity of a liquidated damages provision shall be determined under 
subdivision (d) and not under subdivision (b) where the liquidated damages are 
sought to be recovered from either: 

(1) A party to a contract for the retail purchase, or rental, by such party 
of personal property or services, primarily for the party's personal, 
family, or household purposes; or 

(2) A party to a lease of real property for use as a dwelling by the party 
or those dependent upon the party for support. 

(d) In the cases described in subdivision (c), a provision in a contract 
liquidating damages for the breach of the contract is void except that the parties to 
such a contract may agree therein upon an amount which shall be presumed to be the 
amount of damage sustained by a breach thereof, when, from the nature of the case, 
it would be impracticable or extremely difficult to fix the actual damage. 



145 



consumer transactions and subject to the provisions of any other statute 
expressly applicable to the contract, a liquidated damages provision is valid 
unless the party seeking to invalidate it establishes that the provision was 
"unreasonable under the circumstances existing at the time the contract was 
made". 24 In the consumer transactions specified by section 1671(c), a liqui- 
dated damages provision is stated to be void pursuant to section 1671(d) except 
where it satisfies the requirements outlined under the pre- 1977 law. 25 

Essentially, the amendments favour the enforcement of liquidated damages 
provisions except against a consumer in a consumer transaction. Their overall 
effect, other than in consumer transactions not involving the purchase of real 
property, 26 is to substitute a test of reasonableness for the more exacting 
requirements under the old law. 

(c) CONCLUSIONS 

We have concluded that the law governing penalty clauses -is in need of 
rationalization and reform. Given our proposed recognition of a general 
principle of unconscionability, 27 however, we believe that there is no need for 
specific and detailed legislative provisions of the sort outlined in the preceding 
section. Rather, the law relating to agreements to pay a stipulated sum on 
breach can, and should, be subsumed under the general principle of 
unconscionability. 



24 The new provision does not itself provide any criteria of unreasonableness, but the 
concept is explained in the Report of the California Law Revision Commission (supra, 
note 22, at 1751-52) as including such factors as the relative bargaining powers of the 
parties, whether the contract was drafted by lawyers, and whether the provision was in a 
standard form contract. The California Law Revision Commission reasoned that the new 
section would reverse the bias against liquidated damages clauses and allow parties with 
relatively equal bargaining power to enter into a reasonable liquidated damages agree- 
ment with the assurance that it would be held valid (supra, note 22, at 1742). It is worthy 
of note that the circumstances which may be taken into account in the determination of 
reasonableness in non-consumer transactions are limited to those in existence "at the 
time the contract was made" and not as it appears in retrospect. Accordingly, the amount 
of damage actually suffered would have no bearing on the validity of the liquidated 
damages provisions. This contrasts with section 2-718 of the Uniform Commercial 
Code, supra, note 19, pursuant to which damages may be liquidated at an amount which 
is reasonable in light of "anticipated or actual harm". 

25 Prior to 1977, the California Civil Code provided that liquidated damages clauses were 
void except where the parties had agreed on an amount in circumstances where, from the 
nature of the case, it would be impracticable or extremely difficult to fix the actual 
damage. Judicial interpretation of these provisions had resulted in a requirement that the 
stipulated amount "must represent the result of a reasonable endeavour by the parties to 
estimate a fair average compensation for any loss that may be sustained". (Better Foods 
Markets Inc. v. American District Telegraph Co., 40 Cal. 2d 179, at 185, 253 P. 2d 10, 
at 15 (Cal. Sup. Ct. 1953)). 

26 The 1977 California amendments also contain provisions respecting the validity of 
liquidated damages clauses in contracts for the purchase of real property: see California 
Civil Code, supra, note 23, §§ 1675-79. 

27 See supra, ch. 6. 



146 



We do not anticipate that this change would affect the outcome of many 
cases, since principles of unconscionability have long been at work in the 
decided cases, even when not openly acknowledged. Indeed, the doctrine of 
penalty clauses represents one of the earliest examples of equity's willingness to 
intervene in cases of unconscionability: an express agreement was set aside 
because its enforcement would lead to results considered to be extravagant, 
extortionate, oppressive and unconscionable. 28 However, in an era in which 
unconscionability was not openly recognized as a ground for relief, the 
intervention of the courts in this field was explained as a special doctrine 
peculiar to penalty clauses. 

We believe that this failure to recognize unconscionability as the underly- 
ing basis of the court's intervention has led to complexities and anomalies. In 
our view, the open recognition of a test of unconscionability will provide a far 
more coherent and frank explanation of such results than the present distinction 
between penalties and liquidated damages. The assimilation of this area of law 
with unconscionability will ensure that agreements are not struck down by the 
application of a mechanical rule, but are assessed in accordance with consistent 
and rational criteria. 

A further advantage of subsuming this area of the law under the general 
rubric of unconscionability is that it would enable the courts to relieve against 
clauses requiring the payment of money in circumstances other than upon 
breach of a contractual obligation. 29 Under the unconscionability doctrine, the 
court would have the power to refuse to enforce a clause, if it was found to be 
unconscionable, whether the sum was payable on breach of contract or in any 
other circumstances. In effect, the court would be enabled to look at the 
substance and not only the form of the obligation. 

Having concluded that penalty clauses should be governed by our proposed 
general doctrine of unconscionability, we turn to consider whether special 
provisions should be recommended to deal with two particular aspects of 
stipulated sum clauses. One question concerns the time at which the test of 
unconscionability should be applied. At common law, the validity of penalty 
clauses is to be assessed at the date of contract. 30 In principle this seems to us to 
be correct. The natural time to test the validity of a contractual agreement is at 
the time a contract is formed. Since our proposed criteria of unconscionability 31 



28 In Protector Endowment Loan and Annuity Co. v. Grice (1880), 5 Q.B.D. 592 (C.A.), at 
596, Bramwell L.J. said: "equity in truth refused to allow to be enforced what was 
considered to be an unconscientious bargain." In Elsley v. J.G. Collins Insurance 
Agencies Ltd. , supra, note 16, at 937, Dickson J., as he then was, said the jurisdiction to 
interfere with penalties "is designed for the sole purpose of providing relief against 
oppression". 

29 See discussion supra, this ch., sec. 2(a), at text to notes 11 and 12. 

30 See Clydebank Engineering and Shipbuilding Co. Ltd. v. Castaneda, [1905] A.C. 6, 
[1904-7] All E.R. Rep. 251 (H.L. (Scot.)), and Commissioner of Public Works v. Hills, 
[1906] A.C. 368, [1904-7] All E.R. Rep. 919 (P.C. (Cape Good Hope)). 

31 Supra, ch. 6, Recommendation 4. 



147 



require the application of the test at the time of the contract, no special 
provision is needed on this point in respect of stipulated sum clauses. 

A second point requiring consideration is whether a stipulated sum clause 
should operate as a limit on the defendant's liability in a case where the actual 
loss exceeds the stipulated sum. In our opinion, there can be no rigid rule on 
this question. Often the parties will intend that the sum should represent a limit 
that will operate for the benefit of both parties, and that will usually be the 
proper conclusion where the sum is described as liquidated damages. 32 In some 
cases, however, it will be found that the parties did not intend a clause to limit 
the defendant's liability, and in that case the proper conclusion will be that the 
plaintiff can disregard the clause and recover the actual loss. 33 In our opinion, 
this is a question of the construction of the true meaning of the clause in all the 
circumstances of the particular contract, and we consider that no statutory 
provision is likely to be of assistance. 

Accordingly, we recommend that legislation should be enacted to provide 
that a contractual provision for payment of a stipulated sum in the event of 
breach shall not be struck down as penal unless it is unconscionable in 
accordance with our recommendations relating to unconscionability. 



3. RELIEF FROM FORFEITURE OF MONIES PAID 

(a) The Present Law 

It frequently happens in practice that a buyer of goods or services or of 
land is required to make a deposit at the time the contract is made or to pay part 
of the purchase price before the contract has been executed by the seller. If the 
buyer subsequently repudiates his obligations and the contract is cancelled, to 
what extent can the buyer recover the monies he has paid? The common law 
takes a different view of the position than does equity, and accordingly we 
distinguish between the two approaches in the account that follows of the 
existing law. 

The Anglo-Canadian position at common law has been well settled for a 
considerable time. Penalty doctrines do not apply to the retention of such 
payments. If the payment is in the form of a deposit the seller is entitled to 
retain it even though there is no forfeiture clause in the agreement. This has 
been the authoritative rule since the leading decision of the English Court of 
Appeal in Howe v. Smith 34 and is based on the history of the payment of 
deposits in Western European law and its security function. 35 It is equally well 
settled that forfeiture of a deposit does not deprive the seller of the right to sue 



32 Elsley v. J.G. Collins Insurance Agencies Ltd., supra, note 16. 

33 See Lozcal Holdings Ltd. v. Brassos Developments Ltd. (1980), 1 1 1 D.L.R. (3d) 598, 12 
Alta. L.R. (2d) 227 (C.A.). 

34 (1884), 27 Ch. D. 89 (C.A.). 

35 Ibid., at 101-02, per Fry L.J. 



148 



for damages. 36 If, however, the payment does not satisfy the elusive criterion of 
a deposit, 37 the seller will not be entitled to retain the payment unless the 
agreement contains a forfeiture clause. Of course, if there is no forfeiture clause 
the seller still has the right to sue for damages and to claim a set-off if the buyer 
seeks the return of his payments. These fairly straightforward propositions were 
stated by Denning L.J. with his usual clarity in Stockloser v. Johnson: : 38 

It seems to me that the cases show the law to be this: (1) When there is no forfeiture 
clause. If money is handed over in part payment of the purchase price, and then the 
buyer makes default as to the balance, then, so long as the seller keeps the contract 
open and available for performance, the buyer cannot recover the money; but once 
the seller rescinds the contract or treats it as at an end owing to the buyer's default, 
then the buyer is entitled to recover his money by action at law, subject to a cross- 
claim by the seller for damages ... (2) But when there is a forfeiture clause or the 
money is expressly paid as a deposit (which is equivalent to a forfeiture clause) , 
then the buyer who is in default cannot recover the money at law at all. 

In the same case, Denning L.J. attempted to justify the common law's 
disparate treatment of penalty clauses and forfeiture clauses on the ground that, 
in the former case, a seller is seeking to exact a penalty whereas in the latter the 
seller is merely seeking to retain what he or she already has. Many commenta- 
tors have not been persuaded by the validity of the distinction and we are not 
persuaded by it either. We return to this question below. For the moment, it is 
sufficient to draw attention to some of the practical difficulties engendered by 
the distinction. First, it raises nice questions of characterization where a seller, 
after rescission, seeks to enforce a promise to pay a deposit made before the 
contract was terminated, 39 or where an owner seeks to retain a security deposit 
made pursuant to a building contract. 40 Second, in Canada at any rate, the 
parties themselves frequently provide that a deposit or part payment may be 
retained by the seller as liquidated damages and "not as a penalty", 41 thus 
suggesting that the distinction is also not drawn in standard contractual 
documents. 

For over a century, equity has been willing to grant some form of relief to 
a buyer in default under an agreement for the sale of land, by giving the buyer 
an extension of time to meet his or her obligations under the contract. 42 



36 Ibid. 

37 Gallagher v. Shilcock, (1949] 2 K.B. 765, at 769, [1949] 1 All E.R. 921, at 922. 

38 [1954] 1 Q.B. 476, at 489, [1954] 1 All E.R. 630, at 637 (C.A.) (footnotes omitted, 
emphasis in original) (subsequent references are to [1954] 1 Q.B.). 

39 Hinton v. Sparkes (1868), L.R. 3 C.P. 161. 

40 Public Works Commissioner v. Hills, [1906] A.C. 368; Waugh v. Pioneer Logging Co., 
[1948] 1 W.W.R. 929 (B.C.C.A.), affd [1949] S.C.R. 299, [1949] 2 D.L.R. 577. 

41 As, for example, in Lozcal Holdings Ltd. v. Brassos Developments Ltd. , supra, note 33. 

42 See, for example, In re Dagenham (Thames) Dock Co. (1873), L.R. 8 Ch. 1022; Kilmer 
v. British Columbia Orchard Lands Ltd., [1913] A.C. 319, 110 D.L.R. 172 (P.C.); 
Steedman v. Drinkle, [1916] 1 A.C. 275, 9 W.W.R. 1146; Walsh v. Willaughan (1918), 
42 O.L.R. 455 (App. Div.); and Mussen v. Van Diemen's Land Co., [1938] 1 Ch. 253. 



149 



However, until Stockloser v. Johnson* 7 * it was not clear whether equity's 
intervention included the power to grant relief from forfeiture of payments 
made by the buyer by allowing the recovery of such payments. In Stockloser v. 
Johnson the majority of the English Court of Appeal affirmed that power, 
whether or not the buyer was willing to complete the contract and whether or 
not the vendor has rescinded. Denning L.J.'s judgment in this case also 
clarified the conditions under which equity would accede to a request for 
relief: 44 "first, the forfeiture clause must be of a penal nature, in this sense, that 
the sum forfeited must be out of all proportion to the damage, and, second, it 
must be unconscionable for the seller to retain the money." He used the term 
unconscionable in a broad, non-technical sense and unconscionability, it would 
seem, is to be determined as of the time of forfeiture and not as of the time 
when the contract was made. 

The wide jurisdiction enunciated in Stockloser v. Johnson has been greeted 
coolly by subsequent lower courts in England 45 and there is apparently no 
reported case where an English court has granted relief to a defaulting buyer 
from forfeiture of payments made. Canadian courts have been much more 
positive in their response. The buyer has sought relief from forfeiture in at least 
thirteen reported cases between 1954 and 1985, 46 and has succeeded in four. 
The buyer failed in the other nine cases not because the courts denied their 
jurisdiction to grant relief, but because they did not feel the buyer had made out 
a meritorious case. Stockloser v. Johnson was also referred to by the Supreme 
Court of Canada in Dimensional Investments Ltd. v. The Queen, , 47 but the Court 
reserved its opinion on the status of the equitable doctrine in Canada. 

In Canada, the common law and equitable positions are also affected by 
various statutory provisions, which are both general and particular in character. 
The general provision in Ontario is section 1 1 1 of the Courts of Justice Act, 



43 Supra, note 38. 

44 Ibid., at 490. 

45 See Galbraith v. Mitchenall Estates Ltd. , [1965] 2 Q.B. 473, [19641 2 All E.R. 653; and 
compare Treitel, The Law of Contract (6th ed., 1983), at 757. 

46 See Mitchell v. Agrai-Dairy Mart Ltd. (1984), 54 A. R. 368 (Q.B.) ; British Columbia 
Development Corp. v. NAB Holdings Ltd. (1984), 53 B.C.L.R. 240 (S.C.); Greyhound 
Lines of Canada Ltd. v. Highfield Corp. Ltd. (1984), 60 A. R. 304, 35 Alta. L.R. (2d) 15 
(Q.B.); Shelson Investments Ltd. v. Durkovich (1984), 34 Alta. L.R. (2d) 319, 56 A.R. 
367 (Q.B.); Bordo v. 403512 Ontario Inc. (1983), 41 O.R. (2d) 68 (H.C.J.); Dimen- 
sional Investments Ltd. v. The Queen, [1968] SCR. 93, (1967), 64 D. L.R. (2d) 632; Re 
Province & Central Properties Ltd. and City of Halifax (1969), 2 N.S.R. (1965-69) 221, 
5 D.L.R. (3d) 28 (S.C., App. Div.); Deber Investments Ltd. v. Roblea Estates Ltd. 
(1976), 21 N.S.R. (2d) 158 (S.C., T.D.); Hughes v. Lukuvka (1970), 14 D.L.R. (3d) 
110, 75 W.W.R. 464 (B.C. C.A.); Craig v. Mohawk Metal Ltd. (1975), 9 O.R. (2d) 
716, 61 D.L.R. (3d) 588 (H.C.J.); Can. Union College v. Cansteel Industries Ltd. 
(1979), 9 Alta. L.R. (2d) 167 (Dist. Ct.); Popyk v. Western Savings & Loan Assn. 
(1969), 67 W.W.R. 684, 3 D.L.R. (3d) 511 (Alta. C.A.); and Buck v. Cooper (1955), 1 
D.L.R. (2d) 282 (B.C.S.C). 

47 Supra, note 46. 



150 



]984 4 * affirming the courts' jurisdiction to grant relief from penalties and 
forfeitures. 49 The significance of the provision is not clear. In Snider v. 
Harper, 50 Stuart J. A. of the Appellate Division of the Supreme Court of Alberta 
expressed the view that the parallel section in the Alberta Act created a new 
source of judicial power, whereas in Emerald Christmas Tree Co. v. Boel & 
Sons Enterprises Ltd. 51 the British Columbia Court of Appeal held that the 
parallel British Columbia provision was only declaratory of the existing law and 
did not confer a new type of discretion. In any event it seems unlikely that 
section 111 of the Courts of Justice Act, 1984 and its predecesors were meant to 
freeze the courts' discretionary powers to the types of relief available at the 
time the section was first adopted. 

The particular statutory provisions in Canada protecting a buyer's pay- 
ments differ widely in character. Some, like the provisions in conditional sales 
legislation, 52 now superseded in Ontario by the Personal Property Security 
Act, 53 seek to protect the buyer's payments by giving him a statutory right to 
redeem the goods even after they have been repossessed by the seller. The 
personal property security Acts, 54 on the other hand, contain comprehensive 
statutory regimes regulating the parties' rights after the debtor's default and in 
effect making it difficult for a seller to retain the goods and any payments made 
by the buyer without the buyer's consent. Still another example is provided by 
the Saskatchewan Agreements of Sale Cancellation Act 55 which does not permit 
cancellation of instalment agreements for the sale of land without a court order. 
These provisions apply only to particular types of transaction. While they may 
be helpful in indicating what types of relief may be afforded in cases where the 
normal equitable approach is inadequate or inappropriate, they provide little 
guidance about the proper scope of the courts' power to grant relief from 
forfeiture as a matter of general principle. This problem is addressed in the next 
section. 

(b) ISSUES AND CONCLUSIONS 

The first issue to be considered is whether the law should retain the 
distinction currently drawn between penalty clauses and forfeiture clauses. 
There is a superficial attraction to the argument that a contracting party who 
seeks to recover money under a stipulated damages clause is in a different 



48 Supra, note 4. 

49 Ibid. 

50 (1922), 18 Alta. L.R. 82, at 84, 66 D.L.R. 149, at 151 (C.A.). 

51 (1979), 13 B.C.L.R. 122, 8 R.P.R. 143 (C.A.). See, also, Liscumb v. Provanzo (1986), 
55 O.R. (2d) 404 (C.A.), aff g (1985), 51 O.R. (2d) 129 (H.C.J.). 

52 The earliest Ontario provisions appeared in 1888: see An Act respecting Conditional 
Sales of Chattels, S.O. 1888, c. 19, ss. 4-5. Similar provisions were subsequently 
adopted in many of the other provincial conditional sales Acts. 

53 R.S.O. 1980, c. 375. 

54 See, for example, the Ontario Personal Property Security Act, ibid., Part V. 

55 R.S.S. 1978, c. A-7. 



151 



position from a party who merely seeks to retain what he or she already has. As 
we have already indicated, however, 56 the distinction breaks down in practice. 
It is further undermined by the fact that in the very case in which he justified the 
distinction, Stockloser v. Johnson, 51 Denning L.J. was prepared to give the 
courts broad powers to relieve against forfeiture of monies paid. In our view, 
once this concession is made, the distinction becomes wholly untenable. In 
reaching this conclusion we have the support of an impressive list of prece- 
dents, including section 2-718(2) and (3) of the American Uniform Commercial 
Code, 58 section 2-5 16(c) of the American Uniform Land Transactions Act, 59 
and section 374 of the Second Restatement of the Law of Contracts. ^ These 
provisions all afford relief to a party in breach from the effects of a forfeiture 
clause on the same basis as relief from the terms of a liquidated damages clause. 
We note as well that the English Law Commission has argued in favour of 



56 Supra, this ch., sec. 3(a). 

57 Supra, note 38. 

58 Supra, note 19. 

59 National Conference of Commissioners on Uniform State Laws, Uniform Laws Anno- 
tated: Civil Procedural and Remedial Laws (1975). Section 2-516 provides as follows: 

2-5 16. -(a) Damages for breach by either party may be liquidated in the 
agreement, but only in an amount that is not unreasonable in the light of the 
anticipated or actual harm caused by the breach, the time the real estate is withheld 
from the market, the difficulties of proof of loss, and the inconvenience or 
nonfeasibility of otherwise obtaining an adequate remedy. A provision for unrea- 
sonably large liquidated damages is void. 

(b) A party entitled to recover under a valid liquidated-damages clause has no 
other remedy for any breach to which the liquidated-damages clause applies unless 
other remedies are expressly reserved in the contract. 

(c) Except as provided in subsection (d), if a seller justifiably withholds 
conveyance of real estate because of the buyer's breach, the buyer is entitled to 
restitution of any amount by which the sum of his payments exceeds the amount to 
which the seller is entitled under provisions liquidating the seller's damages in 
accordance with subsection (a). 

(d) The buyer's right of restitution under subsection (c) is subject to offset to 
the extent of: 

(1) the seller's right to recover damages under the provisions of this 
Article other than subsection (a); and 

(2) the amount or value of any benefits received by the buyer under the 
contract. 

(e) If a seller has received payment in property other than money, its value 
determined by the provisions of the contract or, if not so determinable, the fair 
market value on the date of the agreement shall be treated as payments for the 
purposes of subsection (c). 

60 Supra, note 20. Section 374 provides as follows: 

374. -(1) Subject to the rule stated in Subsection (2), if a party justifiably 
refuses to perform on the ground that his remaining duties of performance have 
been discharged by the other party's breach, the party in breach is entitled to 
restitution for any benefit that he has conferred by way of part performance or 
reliance in excess of the loss that he has caused by his own breach. 



152 



assimilating the law of forfeiture of deposits to that of liquidated damages and 
penalties, subject to an exception for deposits on contracts for the purchase of 
land. 61 

The second issue is what should be the common basis of relief. Since we 
have recommended a test of unconscionability for relief from penalty clauses, 
the same test should logically be applied to forfeiture clauses, and we so 
recommend. We do not support the double test for relief from forfeiture clauses 
favoured by Denning L.J. in Stockloser v. Johnson because it seems to us 
unnecessarily complicated. In any event we believe that, in determining the 
reasonableness of a forfeiture provision, the courts will take into consideration 
the damages likely to be suffered by the party not in breach if the other party 
fails to honour his or her obligations. 

We note that the English Law Commission considered, but rejected, the 
possibility of giving the courts a general power to relieve against forfeiture if it 
is reasonable to do so, on the ground that this approach would lead to too much 
uncertainty. 62 The same charge could be levelled against our proposal. How- 
ever, we have already indicated why, in our view, the existing law is 
considerably less certain and more intrusive on freely bargained agreements 
than the criteria we have proposed to determine unconscionability. 63 

A more persuasive case can perhaps be made in favour of allowing the 
party not in breach to retain payments received by him or her up to a maximum 
amount or an amount that does not exceed a prescribed percentage of the sale 
price. Precedents along these lines can be found in the Uniform Commercial 
Code 64 and in the California Civil Code. 65 The adoption of similar provisions 
was also considered by the English Law Comission. 66 Their justification is that 
they avoid unnecessary litigation and promote greater certainty. While we are 
obviously sympathetic to both these goals, we have reached the conclusion after 
careful consideration that any fixed dollar amount or percentage of the price 
allowed to be retained by the party not in breach is bound to be arbitrary and 
that using such criteria even as presumptive guidelines in general legislation 
may do more harm than good. We have not investigated the desirability of 
adopting this approach for particular types of contract and express no views on 
the question one way or the other. 

(2) To the extent that, under the manifested assent of the parties, a party's 
performance is to be retained in the case of breach, that party is not entitled to 
restitution if the value of the performance as liquidated damages is reasonable in the 
light of the anticipated or actual loss caused by the breach and the difficulties of 
proof of loss. 

61 Working Paper No. 61, supra, note 18, paras. 59 and 60, at 44-45. 

62 Ibid., para. 65, at 48. 

63 Supra, this ch., sec. 2(c). 

64 Supra, note 19, § 2-718(2). 

65 Supra, note 23, § 1675. 

66 Working Paper No. 61, supra, note 18, para. 66, at 49. 



153 



A third, and more particular, issue is whether special legislation is 
desirable with respect to land instalment contracts. Such contracts are in 
substance realty mortgages, since the buyer is already in possession of the land 
and the vendor is only retaining title by way of security until the buyer has 
completed paying the price. Accordingly, there is much to be said for 
collapsing the distinction between mortgage transactions and instalment sales of 
land, as has been done in Article 3 of the Uniform Land Transactions Act. 67 
However, we have not found it necessary to reach a firm conclusion on the 
point in the context of this Project, in view of our current Project on the Law of 
Mortgages, now near completion. That Project deals with all transactions that 
are in substance realty mortgages, and the Report on the Law of Mortgages will 
contain the Commission's recommendations concerning what statutory changes, 
if any, are desirable with respect to the common law treatment of land 
instalment contracts. 

A final issue to which we wish to direct attention concerns the disposition 
of section 1 1 1 of the Courts of Justice Act, 1984. As we have noted, 68 there is 
some doubt about the scope of the powers conferred on Ontario courts under 
this section. We would expect the courts to follow the reasoning of the British 
Columbia Court of Appeal in Emerald Christmas Tree Co. v. Boel & Sons 
Enterprises Ltd. 69 but, whether or not this assumption is correct, the section 
does no harm and we would leave it alone. 

Recommendations 

The Commission makes the following recommendations: 

1. The existing penalty doctrine to determine the validity of stipulated 
damages clauses should be replaced by a test of unconscionability, the 
criteria for which should be the same as those recommended in this 
Report for other types of contractual provisions alleged to be 
unconscionable. 

2. Relief from forfeiture of payments made under a contract should be 
based on the same test of unconscionability, and the existing distinction 
between the basis of relief for penalty clauses and relief from forfeiture 
clauses should be abolished. 

3. Section 111 of the Courts of Justice Act, 1984 should be retained. 



67 Supra, note 59. 

68 Supra, this ch., sec. 3(a). 
69 



Supra, note 51 



CHAPTER 8 



PAROL EVIDENCE RULE 



1. THE PRESENT LAW AND THE CASE FOR REFORM 

The traditional statement of the parol evidence rule is, "if there be a 
contract which has been reduced into writing, verbal evidence is not allowed to 
be given of what passed between the parties, either before the written instru- 
ment was made, or during the time that it was in a state of preparation, so as to 
add to or subtract from, or in any manner to vary or qualify the written 
contract". 1 Theoretically, the rule should not preclude the parties from estab- 
lishing that their real agreement does not consist in the document before the 
court, but rather in: (1) some other document; (2) a mixture of documents; (3) a 
mixture of documentary material and an oral agreement; or (4) simply an oral 
agreement. That is, evidence going to whether or not an agreement has been 
reduced to writing should be relevant to a decision whether the parol evidence 
rule applies. 

Nevertheless, a great deal of ambiguity surrounds the rule with the result 
that, as applied by the courts, the rule does have the effect, in many situations, 
of excluding extrinsic evidence of arrangements allegedly agreed to by the 
parties, but not included in and conflicting with the written document presented 
by one party as representing the whole agreement. 2 This is particularly true 



Gossv. Nugent (IS33), 5 B. & Ad. 58, at 64-65, 110E.R. 713, at 716, per Denman C.J. 
The rule is not limited to parol (oral) evidence, it also applies to other forms of extrinsic 
evidence including written evidence. See Treitel, The Law of Contract (6th ed., 1983), at 
151. 

For a general discussion of the rule and exceptions to it, see: Sopinka & Lederman, 
The Law of Evidence in Civil Cases (1974), at 269-78; Treitel, supra, this note, at 151- 
58; Fridman, The Law of Contract in Canada (1976), at 245-48; Waddams, The Law of 
Contracts (2d ed., 1984), at 233-56; Cross, Evidence (5th ed., 1979), at 611-15; and 
Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. I, at 110-17. 

See, for example, Hawrish v. Bank of Montreal, [1969] S.C.R. 515,2D.L.R. (3d) 600; 
Bauer v. Bank of Montreal, [19801 2 S.C.R. 102, 110 D.L.R. (3d) 424 (subsequent 
references are to [1980] 2 S.C.R.); Carman Construction Ltd. v. Canadian Pacific 
Railway Co., [1982] 1 S.C.R. 958, 136 D.L.R. (3d) 193; Hayward v. Mellick (1984), 45 
O.R. (2d) 110, 5 D.L.R. (4th) 740 (C.A.); and Chant v. Infinitum Growth Fund (1986), 
55 O.R. (2d) 366, 28 D.L.R. (4th) 577 (C.A.); but compare Gallen v. Allstate Grain Co. 
(1984), 9 D.L.R. (4th) 496, 53 B.C.L.R. 38 (C.A.), leave to appeal to the Supreme 
Court of Canada denied (1984), 56 N.R. 233 (subsequent references are to (1984), 9 
D.L.R. (4th)). 

[155] 



156 



where a written version of an agreement contains an integration clause. 3 To the 
extent that the rule is applied to exclude extrinsic evidence of additional or 
inconsistent terms, it reflects a judicial preference for written over oral 
evidence. Regardless of whether such a preference is justified in some or even 
most circumstances, courts often have not made it clear that the rule operates 
only where it is possible to conclude that the parties have intended the writing to 
constitute their whole agreement. 4 

In addition, the methods by which a court may arrive at the conclusion that 
a document represents the parties' whole agreement are not clear. It is obvious 
that a written memorandum that records only a part of an agreement between 
the parties should not be enforced by the courts as though it represented the 
entire agreement. At the same time, when parties have agreed to reduce their 
contract to writing, and have intended that prior representations be superseded 
by that writing, those intentions should be respected by the courts. The 
confusion associated with the parol evidence rule arises from the difficulty of 
differentiating between evidence going to whether the writing represents the 
parties' agreement, and evidence that adds to, varies, or contradicts the writing. 
At times, courts have resolved this difficulty by considering all the evidence, so 
that the parol evidence rule would seem redundant to the principle that the 
parties' real agreement should be enforced. 5 At other times, courts have given 
emphasis to the rule as an exclusionary device, reasoning that where the writing 
"appears" to be the whole contract further evidence of the parties' intentions 
and negotiations should not be considered. 6 It has been suggested that a 
document in writing raises a strong presumption that it contains the whole 
agreement between the parties. 7 

Uncertainty associated with the parol evidence rule also arises from the 
many exceptions to it developed by the courts. 8 For example, it is generally 



3 See, for example, Hawrish v. Bank of Montreal, supra, note 2. An integration clause 
states that the writing contains the whole agreement between the parties. 

4 Corbin, Corbin on Contracts (1960), Vol. 3, § 573, and Dawson, "Parol Evidence, 
Misrepresentation and Collateral Contracts" (1982), 27 McGill L.J. 403, at 405. 

5 J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd., [1976] 1 W.L.R. 1078, 
[1976] 2 All E.R. 930 (C.A.) (subsequent references are to [1976] 1 W.L.R.); 
Mendelssohn v. Normand Ltd., [1970] 1 Q.B. 177, [1969] 2 All E.R. 1215 (C.A.) 
(subsequent reference is to [1970] 1 Q.B.); Canadian Acceptance Corp. v. Mid-Town 
Motors Ltd. (1970), 72 W.W.R. 365 (Sask. Dist. Ct.); and see, also, Dawson, supra, 
note 4, at 403. 

6 See Inglis v. Buttery & Co. (1878), 3 App. Cas. 552 (H.L.), at 558, 572, and 577; 
Henderson v. Arthur, [1907] 1 K.B. 10 (C.A.); and Kaplan v. Andrews, [1955] 4 D.L.R. 
553 (Ont. C.A.). 



7 



Wedderburn, "Collateral Contracts", [1959] Camb. L.J. 58, at 60-62. See, also, 
England, The Law Commission, Report No. 154, Law of Contract: The Parol Evidence 
Rule (Cmnd. 9700, 1986) (hereinafter referred to as "Law Com. No. 154"), para. 2.13, 
at 11-12. 

For a more detailed discussion of the exceptions to the rule see: England, The Law 
Commission, Working Paper No. 70, Law of Contract: The Parol Evidence Rule (1976) 



157 



accepted that if assent to a document is obtained by fraud or as a result of 
innocent misrepresentation as to the effect of the document or any of its terms, 
at the very least the document may not bind totally. 9 As well, the courts have 
always been willing to listen to and to give effect to evidence that a document is 
conditional 10 or that a consideration stated in a deed was not paid. 11 Rectifica- 
tion may be allowed where an agreed term of a contract is incorrectly recorded 
in or omitted from the signed document, 12 and may be available in cases where 
one party knowingly takes advantage of another party's mistake. 13 Indeed, the 
fictions of independent representations and separate collateral contracts have 
been called in aid to allow the courts to look beyond apparently complete 
written contracts. 14 

The English Court of Appeal took a very open approach to the admissibil- 
ity of extrinsic evidence in J. Evans & Son (Portsmouth) Ltd. v. Andrea 
Merzario Ltd. 15 In that case, it was held that breach of an oral assurance that 
goods would be carried below deck gave rise to a cause of action in damages 
and overrode exemption clauses in the written contract, including a clause 
giving the defendants complete freedom as to the mode of carriage. Lord 

(hereinafter referred to as "Working Paper No. 70"), paras. 10-21, at 6-13; Law Com. 
No. 154, supra, note 7, paras. 2.30-2.31, at 18-19; and Law Reform Commission of 
British Columbia, Report on Parol Evidence Rule (1979) (hereinafter referred to as 
"British Columbia Report"), at 8-10. 

9 See, for example, Curtis v. Chemical Cleaning and Dyeing Co., [1951] 1 K.B. 805, 
[1951] 1 All E.R. 631 (C.A.); Mendelssohn v. Normand Ltd. , supra, note 5; Royal Bank 
v. Hale (1961), 30 D.L.R. (2d) 138 (B.C.S.C); and Ballard v. Gaskill, [1955] 2 D.L.R. 
219, 14 W.W.R. 519 (B.C.C.A.). See, also, Bauer v. Bank of Montreal, supra, note 2, 
at 111, and Bank of Nova Scotia v. Zackheim (1983), 44 O.R. (2d) 244, 3 D.L.R. (4th) 
760 (C.A.). 

10 See, for example, Pym v. Campbell (1856), 6 El. & Bl. 370, 119 E.R. 903. There, the 
defendants agreed to pay a price for a share in an invention. The court allowed evidence 
to show that the agreement was dependent on the approval of the invention by the 
defendants' engineers. 

11 See, for example, In Re Lang Estate, [1919] 1 W.W.R. 651 (Sask. K.B.). There, the 
defendant bought land and gave her husband a quit claim deed to enable him to vote in 
the area where the land was situated. Although the deed stated a consideration, evidence 
was permitted to show that it was not paid and that therefore the defendant was the 
rightful owner of the property. 

12 See, for example, Bercovici v. Palmer (1966), 59 D.L.R. (2d) 513, 58 W.W.R. Ill 
(Sask. C.A.). 

13 See, for example, Coderre (Wright) v. Coderre, [1975] 2 W.W.R. 193 (Alta. S.C.). 

14 See, for example, Gallen v. Allstate Grain Co. , supra, note 2; Sperry Rand Canada Ltd. 
v. Thomas Equipment Ltd. (1982), 135 D.L.R. (3d) 197, 40 N.B.R. (2d) 271 (C.A.); 
Canadian Acceptance Corp. v. Mid-Town Motors Ltd., supra, note 5; DeLassalle v. 
Guildford, [1901] 2 K.B. 215, [1900-3] All E.R. Rep. 495 (C.A.); Brikom Investments 
Ltd. v. Carr, [1979] Q.B. 467, [1979] 2 All E.R. 753 (C.A.); and Ferland v. Keith 
(1958), 15 D.L.R. (2d) 472 (Ont. C.A.). 

15 J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd., supra, note 5. 



158 



Denning M.R. was not prepared to attribute much presumptive weight to such 
clauses in standard form contracts, and quoted 16 from his own earlier judgment 
in Mendelssohn v. Normand 11 to the effect that such contracts may be rejected 
when repugnant to an express oral promise or misrepresentation. In Evans, 
Lord Denning held that the oral assurance constituted a collateral contract. 
Roskill and Lane L.J.J. , on the other hand, were of the opinion that it was 
simply a case of looking at all the evidence to ascertain the real bargain between 
the parties. 18 That evidence revealed a promise to carry the cargo below deck, 
notwithstanding appearances to the contrary in the writing. The parol evidence 
rule was said to have "little or no application where one is not concerned with a 
contract in writing ... but with a contract which ... was partly oral, partly in 
writing, and partly by conduct". 19 

The decision of the Court of Appeal evinces judicial confidence in the 
ability of the courts to work out the real terms of a bargain by reference to all of 
the circumstances, including, but not limited to, the existence of a written 
contract that appears to embody the whole agreement. This assertion of 
competence accords with the courts' willingness in the past to look at the 
surrounding circumstances where the applicable legal doctrine so demands. 

So far in Ontario, legislative modification of the parol evidence rule has 
been quite limited. However, it is important to note that section 4(7) of the 
Ontario Business Practices Act 20 provides that extrinsic evidence is admissible 
in civil actions to prove false, misleading, deceptive or unconscionable con- 
sumer representations, notwithstanding the existence of a written agreement or 
"that the evidence pertains to a representation of a term, condition or undertak- 
ing that is or is not provided for in the agreement". 



2. THE POSITION AND PROPOSALS FOR REFORM IN OTHER 
JURISDICTIONS 

(a) UNITED STATES 

Section 2-202 of the Uniform Commercial Code 21 provides: 

2-202. Terms with respect to which the confirmatory memoranda of the 
parties agree or which are otherwise set forth in a writing intended by the parties as 
a final expression of their agreement with respect to such terms as are included 



16 Ibid., at 1082. 

17 Mendelssohn v. Normand Ltd. , supra, note 5, at 184. 

18 J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd., supra, note 5, at 1083, per 
Roskill, L.J. 

19 Ibid. 

20 R.S.O. 1980, c. 55. 

21 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978). 



159 



therein may not be contradicted by evidence of any prior agreement or of a 
contemporaneous oral agreement but may be explained or supplemented 

(a) by course of dealing or usage of trade (Section 1-205) or by course of 
performance (Section 2-208); and 

(b) by evidence of consistent additional terms unless the court finds the 
writing to have been intended also as a complete and exclusive statement 
of the terms of the agreement. 

All of the states except Louisiana, as well as the District of Columbia, the 
Virgin Islands and Guam have adopted section 2-202 of the Uniform 
Commercial Code as part of Article 2 of the Code. 22 The section reflects the 
view that what constitutes the parties' contract depends on what the parties 
intended. Force is attributed to a seeming contractual document only to the 
extent that the parties so intended and such documents are to be regarded as 
complete and exhaustive only if the parties so intended. While this suggests a 
very liberal view of the admissibility of extrinsic evidence, in practice 
American courts have often shown themselves quite conservative. This is due to 
a variety of factors, including the widespread use of merger clauses in 
agreements, frequent resort to jury trials in civil suits, and a deeply seated 
judicial conservatism. 

(b) England 

The English Law Commission, in a Working Paper published in 1976, 23 
provisionally recommended that the parol evidence rule be abolished. 24 In the 
opinion of the Law Commission, as expressed in the Working Paper, the rule 
"at best, adds to the complications of litigation without affecting the outcome 
and, at worst, prevents the courts from getting at the truth". 25 In reaching its 
conclusion, the Law Commission emphasized the extensive exceptions to the 
rule, and wondered whether the rule itself had not been "largely destroyed". 26 
In its view, judicial efforts at adapting the parol evidence rule to take account of 
"the habits of mankind" had substantially undermined the certainty and finality 
that were supposed to be the advantages of the rule. 27 

The Law Commission expected that, even with the abolition of the rule, 
most cases would be resolved exactly as before, with the difference that judicial 
reasons would refer openly to the parties' intentions rather than to a technical 
rule of uncertain ambit or one of the exceptions to it. 28 



22 Ibid., Cumulative Annual Pocket Part 1985, at 1-2. 

23 Working Paper No. 70, supra, note 8. 

24 Ibid., para. 43, at 25. 

25 Ibid. 

26 Ibid., para. 21, at 13. 

27 Ibid., para. 25, at 16. 

28 Ibid., para. 41, at 24. 



160 



The Commission's final Report on the Parol Evidence Rule 19 was issued in 
1986. In that Report, the Commission reversed its earlier position concerning 
abolition of the rule. Based upon its analysis of the law, the Commission 
concluded as follows: 30 

[T]he parol evidence rule, in so far as any such rule of law can be said to have an 
independent existence, does not have the effect of excluding evidence which ought 
to be admitted if justice is to be done between the parties. Those authorities which, 
it may be argued, support the existence of a rule which would have that effect 
would, in our view, be distinguished by a court today and not followed. Evidence 
will only be excluded when its reception would be inconsistent with the intention of 
the parties. While a wider parol evidence rule seems to have existed at one time, no 
such wider rule could, in our view, properly be said to exist in English law today. 

The Commission accordingly recommended against legislation that would effect 
any change in the law. Acknowledging that the conclusions contained in the 
final Report differed from those expressed in the Working Paper, the Law 
Commission stated: 31 

[T]he fact that different conclusions are expressed in the working paper and this 
report as to the nature of the parol evidence rule is, in our opinion, almost entirely 
irrelevant to the practical working of the law and to the way in which cases are 
decided or settled. Acceptance of the conclusions reached in this report will, for all 
practical purposes, lead to the same end result as that intended by those who wrote 
the working paper. When the working paper was published there was then no 
evidence of courts being compelled by the working of any parol evidence rule to 
decide cases in a way which appeared to be unjust. The working paper stated that 
so effective and extensive were the exceptions to the rule that 'the scope of the rule, 
if not its existence, is doubtful'. This report, in short, is concerned with a question 
of legal analysis which is of importance in legal theory but does not, in our view, 
affect the way in which cases are required by law to be decided in courts or 
tribunals. 

The Commission also recommended against legislation to clarify or 
declare the effect of the law. In the view of the Commission, such legislation 
would be "difficult to draft, uncertain of effect and ... unnecessary". 32 

(c) BRITISH COLUMBIA 

The Law Reform Commission of British Columbia has recommended 
abolition of the parol evidence rule. In its 1979 Report on Parol Evidence 
Rule, 32, the Commission reviewed the arguments in favour of retaining the rule, 
including certainty, finality and the economic benefits of narrowing the issues 



29 Law Com. No. 154, supra, note 7. 

30 Ibid., para. 2.45, at 27. 

31 Ibid., para. 1.8, at 4 (footnote reference deleted). 

32 Ibid., para. 1.7, at 4 (footnote reference deleted). 

33 British Columbia Report, supra, note 8. 



161 



by excluding extrinsic evidence. 34 With respect to certainty, the Commission 
commented that the rule merely "promotes a sense of security that may not 
always be warranted regarding the potency of the written document vis-d-vis the 
parol agreement". 35 Moreover, the Commission observed, there is no clear 
evidence that the rule in fact contributes to finality, or to a narrowing of the 
issues in litigation. 36 In favour of abrogation of the rule, the Commission 
considered that, in the context of contract law, "fairness and justice means 
meeting the legitimate expectations of the parties by giving effect to the whole 
of their agreement". 37 This end would not be furthered, in the opinion of the 
British Columbia Commission, by a technical rule the effect of which has been 
to exclude evidence relevant to that agreement. 

The Commission recognized that abrogation of the rule might in some 
cases be unfair to a party who, in the interests of certainty, has attempted to 
reduce an agreement to writing. However, the Commission concluded that, on 
balance, justice would best be served by permitting the courts "to examine all 
the evidence and give it whatever weight is appropriate ... ", 38 



3. PROPOSALS FOR REFORM 

In our Sales Report we considered whether the parol evidence rule should 
be abolished or relaxed in connection with the law of sale of goods. 39 We 
concluded in that context that the rule caused greater harm than it was designed 
to avoid and should be abolished, and that merger or integration clauses should 
have no conclusive effect. Section 4.6 of the draft Bill accompanying that 
Report provides as follows: 40 

4.6 The parol evidence rule does not apply to contracts for the sale of goods 
and a provision in a writing purporting to state that the writing represents the 
exclusive expression of the parties' agreement has no conclusive effect. 

The Uniform Law Conference of Canada adopted this section in principle, 
but opted for less compressed language, as follows: 41 



34 Ibid., at 14. 

35 Ibid. 

36 Ibid. 

37 Ibid., at 15. 

38 Ibid., at 16. 

39 Supra, note 1, at 110-17. 

40 Ibid., Vol. 3, at 20. 

41 Uniform Law Conference of Canada, Proceedings of the Sixty-third Annual Meeting 
(1981), at 34 and 189-90. And see Uniform Law Conference of Canada, Proceedings of 
the Sixty-fourth Annual Meeting (1982), Appendix HH, s. 17. 



162 



17. No rule of law or equity respecting parol or extrinsic evidence and no 
provision in a writing prevents or limits the admissibility of evidence to prove the 
true terms of the agreement, including evidence of any collateral agreement or 
representation or evidence as to the true identity of the parties. 

The question for us now is whether we should extend our recommenda- 
tions on the parol evidence rule in the Sales Report beyond the sales context. It 
seems to us that the reasons we gave in 1979 favouring abolition of the rule are 
as cogent today as they were then, and apply as forcefully to the law of 
contracts generally as to the law of sale of goods. It is clear from recent Ontario 
decisions that the parol evidence rule continues to have force in Ontario, 42 so 
that we cannot conclude, as could the English Law Commission, that the 
common law has arrived at a satisfactory state. 

We recognize that it may be argued that the parol evidence rule, insofar as 
it serves to increase the weight attaching to written documents, contributes to 
certainty. Seaton J. A. has commented to this effect, although with the caveat 
that he is "not attracted to deciding a point by refusing to hear evidence on an 
aspect of it": 43 

I would favour retention of a respect for the written contract that makes it difficult 
to persuade the court that a term not recorded was intended to be part of the 
bargain. 

I do not see how people can safely act through an agent or take an assignment 
of a contract if written documents are not treated with some respect. Lawyers 
cannot give useful advice to people considering whether to contract if the written 
part is of little importance. Certainty, though no longer the only aim, remains an 
important aim in contract law. 

We agree that written documents should not be set aside lightly in favour 
of evidence of oral representations. At the same time, we do not believe that the 
parol evidence rule is necessary to ensure continued judicial respect for written 
documents. Rather, we would endorse the approach taken by the English Court 
of Appeal in Evans, 44 which held that the court is best able to gauge the real 
agreement between the parties by reviewing all the relevant evidence. We 
believe that the rule is at odds with the principle that contracts should be 
enforceable. To exclude evidence of the terms of a contract is to contradict that 
principle. 

Particularly in light of the prevalence of standard form contracts, we worry 
about a rule that reinforces the position of the party in a stronger position and 
enables that party, if the rule is rigorously applied, to walk away from prior or 
contemporaneous statements with impunity. Moreover, given the lack of clarity 
in the case law as to the proper interpretation and application of the rule, and 
the many exceptions to the rule, we are not convinced that it conduces to 



42 See text accompanying notes 2 and 3, supra, this ch., sec. 1. 

43 Gallen v. Allstate Grain Co., supra, note 2, at 501 (in dissent). 

44 J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd., supra, note 5. 



163 



certainty in the law. On the contrary, we believe that the rule often has the 
effect of obscuring the real reasons for decisions. The rule invites judicial 
recourse to technical exceptions to it, and fictitious devices to avoid it. 

Accordingly, we conclude that our recommendations with respect to the 
parol evidence rule and merger and integration clauses in the Sales Report 
should be extended to the law of contracts generally. We consider the language 
of section 17 of the Uniform Sale of Goods Act effective, and recommend that a 
similar provision be enacted in Ontario, which would be applicable to all types 
of contract. 



Recommendations 

The Commission makes the following recommendations: 

1. (a) Evidence of oral agreement to terms not included in, or inconsistent 

with, a written document should be admissible to prove the real 
bargain between the parties. 

(b) Conclusive effect should not be attached to merger and integration 
clauses. 

2. In order to give effect to the abovementioned recommendations, a 
provision similar to section 17 of the Uniform Sale of Goods Act, but 
applicable to all types of contracts, should be enacted. 



CHAPTER 9 



GOOD FAITH 



1. THE PRESENT LAW 

(a) INTRODUCTION 

While the conceptual roots of a good faith requirement in contract law can 
be traced back to Roman times, 1 the status of such a requirement in Canadian 
contract law remains uncertain. Strictly speaking, the common law of contracts 
has yet to acknowledge good faith as a generalized and independent doctrine. In 
an important lecture delivered in 1956 on the nature and extent of good faith in 
English contract law, Professor Powell concluded that "in English law there is 
no overriding general positive duty of good faith imposed on the parties to a 
contract". 2 A more recent study by an American scholar has prompted an even 
more radical assessment: "[T]he English courts appear to be moving away 
from the Roman concept of 'good faith' in contractual dealings". 3 

Although this latter assessment is probably overstated, the basic point 
remains beyond dispute. None of the leading English textbooks list "good 
faith" in either the table of contents or in the index. 4 Amongst the Canadian 
texts only Waddams, in The Law of Contracts, 5 has attempted to unravel and 
identify the various strands of good faith analysis that seem to permeate many 
of the more traditional judicial techniques and legal doctrines in Canadian 
contract law. Other Canadian textbooks appear to follow the lead of their 
English counterparts and make no mention of good faith, either in the table of 
contents or in the index. 6 Thus, thirty years later, Professor Powell's assess- 
ment of the status of good faith as a doctrinally independent contractual concept 
remains correct. 



1 See Powell, "Good Faith in Contracts" (1956), 9 Current Legal Prob. 16, at 20. 

2 Ibid., at 25. 

3 Thigpen, "Good Faith Performance Under Percentage Leases" (1980-81), 51 Miss. L.J. 
315, at 321 (emphasis added). 

4 The sample surveyed included: Atiyah, An Introduction to the Law of Contract (3d ed., 
1981); Guest, Anson's Law of Contract (25th ed., 1984); Furmston (ed.), Cheshire and 
Fifoot's Law of Contract (10th ed., 1981); Guest et. al. (eds.), Chitty on Contracts (25th 
ed., 1983); and Treitel, The Law of Contract (6th ed., 1983). 

5 Waddams, The Law of Contracts (2d ed., 1984), at 365-76 and 400-05. 

6 The sample surveyed included Fridman, The Law of Contract in Canada (1976), and 
Mueller, Contracts (1981). 

[165] 



166 



This is not to suggest, however, that good faith plays no role in contract 
law in Canada. The language of good faith appears in literally hundreds of 
Canadian federal and provincial statutes. A recent computer search of federal 
legislation, for example, revealed no less than forty-seven statutes with 153 
statutory provisions using the language of good faith, and doing so virtually 
without further definition. 7 A further computer search of provincial legislation 
employing good faith language resulted in equally impressive findings: in 
British Columbia, some ninety-six statutes with 168 statutory provisions requir- 
ing good faith were found; in New Brunswick, the search revealed fifty-five 
such statutes, with 101 statutory good faith provisions; and, in Ontario, some 
285 statutory provisions, in 156 statutes, were found to have a good faith 
requirement. 8 The statutory good faith provisions related to a variety of 
substantive areas, including banking, trade marks, assignment of book debts 
and warehouse receipts; 9 and seemed to perform a variety of functions, 
including procedural, prescriptive and proprietary functions. 10 

It is also significant that, while good faith is not yet an openly recognized 
contract law doctrine, it is very much a factor in everyday contractual 
transactions. 11 To the extent that the common law of contracts, as interpreted 
and developed by our courts, reflects this reality, it is accurate to state that good 
faith is a part of our law of contracts. 

In this vein, a great many well-established concepts in contract law reflect 
a concern for good faith, fair dealing and the protection of reasonable 
expectations, creating a legal behavioural baseline. We propose now to consider 



7 Belobaba, "Good Faith in the Law of Contract" (1982), Appendix A. Unpublished 
paper undertaken for the Ontario Law Reform Commission's Law of Contract Amend- 
ment Project. A copy of this paper is available at the Legislative Library, Legislative 
Building, Queen's Park, Toronto. 

8 Ibid., Appendix B. Of the provincial legislation found to require good faith, definitions 
of good faith were found only in sale of goods legislation. See Belobaba, ibid., at 6, n. 
27. 



10 



n 



Ibid., Appendices A and B. 

Ibid., at 6, n. 29. Procedural good faith provisions include, for example, the wide range 
of good faith defences for technical irregularities in statutory procedures, or for non- 
compliance with certain orders or requirements. Prescriptive good faith provisions 
include various good faith obligations imposed on bodies or persons charged with 
statutory responsibilities. Proprietary good faith provisions include the many statutory 
protections of purchasers for value in good faith without notice. 

See, generally, Beale and Dugdale, "Contracts Between Businessmen: Planning and the 
Use of Contractual Remedies" (1975), 2 Brit. J. L. & Soc. 45; Macaulay, "Non- 
Contractual Relations in Business: A Preliminary Study" (1963), 28 Am. Soc. Rev. 55; 
Macaulay, "The Use and Non-Use of Contracts in the Manufacturing Industry" (1963), 
9(7) Prac. Law. 13; Macaulay, "Elegant Models, Empirical Pictures, and the Complexi- 
ties of Contract" (1977), 11 Law & Soc. Rev. 507; Macneil, "Contracts: Adjustment of 
Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract 
Law" (1978), 72 Nw. U. L. Rev. 854; and Macneil, The New Social Contract: An 
Inquiry into Modern Contractual Relations (1980). 



167 



judicial recourse to notions of good faith in our law of contracts. 12 For 
convenience, the discussion may be divided into two parts: good faith in 
contract negotiation and formation, and good faith in the performance and 
enforcement of contracts. 

(b) Good Faith in Contract Negotiation and Formation 

In contrast to the well-developed range of remedies available at common 
law for breach of contract, there is no comprehensive set of remedies for 
wrongdoing in contract formation and negotiation. Nonetheless, our courts have 
provided remedies in situations where pre-contractual negotiations were con- 
ducted in what might commonly be perceived as bad faith. Some of these 
remedies — for example, in negligence and by way of promissory estoppel — 
were discussed in chapter 2 of this Report, in the context of the doctrine of 
consideration. We there expressed the view that the existing law is inadequate 
in its protection of reasonable reliance on pre-contractual representations, and 
recommended legislative intervention in this connection. 13 

As we stated in our Report on Sale of Goods, 14 if reforms of the sort that 
we have now proposed in respect of the doctrine of consideration were 
implemented, the need for a general legislated requirement of good faith in 
bargaining would be much diminished, although not totally eliminated. The 
question whether such a requirement should be enacted to supplement our 
proposed increased protection of reliance interests is addressed in a later section 
of this chapter. 15 

(c) Good Faith in Contract Performance and 
Enforcement 

Although good faith is not explicitly recognized as an independent doctrine 
in Anglo-Canadian contract law, there are many instances where good faith and 
fair dealing can be said to be required in the performance and enforcement of 
contracts. While it would be almost impossible to list all such instances, it may 
be useful to review some of the more common ways in which concepts of good 
faith and fair dealing shape our law of contracts. 

It is not unusual for a court to imply a term in a contract that is suggestive 
of good faith and fair dealing. In some cases, a court may imply terms that give 
effect to the presumed intentions of the parties to produce results that are not 



12 See, also, Bridge, "Does Anglo-Canadian Contract Law Need a Doctrine of Good 
Faith?" (1984), 9 Can. Bus. L.J. 385, at 409-12. 

13 Supra, ch. 2, sec. 4(d). 

14 Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. 1, at 169. 

15 Infra, this ch., sec. 4. 



168 



absurd or unfair. 16 For example, courts have required that a party give 
reasonable notice of termination of employment, 17 and that a party give 
reasonable notice before cancelling a licensing agreement. 18 

In situations where parties have agreed to a bargain and are less than 
diligent in performing or wilfully refuse to perform their contractual obliga- 
tions, the courts have employed interpretive techniques, including the 
implication of a "best efforts" or "due diligence" obligation to ensure some 
level of good faith behaviour. 19 Where a party interferes or fails to cooperate 
with the other party's performance of the contract, judicial remedies are 
likewise available. 20 

Canadian courts have also required that contracting parties not abuse their 
discretionary powers to specify contractual terms in open term contracts 21 or to 
terminate contracts unilaterally. 22 Furthermore, in instances where the right to 
determine contractual compliance rests with a party to the contract or with a 
third party, that determination must be made in good faith. 23 



16 See, for example, Town of Fort Frances v. Boise Cascade Canada Ltd. , [1983] 1 S.C.R. 
171, 143 D.L.R. (3d) 193, and Mercantile Bank v. Sigurdson (1978), 86 D.L.R. (3d) 
680, [1978] 3 W.W.R. 523 (B.C.S.C.); and compare Liverpool City Council v. Irwin, 
[1977] A.C. 239, [1976] 2 W.L.R. 562 (H.L.). 

17 Pilonv. Peugeot Canada Ltd. (1980), 29 O.R. (2d) 711, 114 D.L.R. (3d) 378 (H.C.J. ). 

18 Philip F. Levine Marketing Ltd. v. 3SM Tours Ltd., [1983] 4 W.W.R. 149, amended 
[1983] 6 W.W.R. 436 (Alta. Q.B.). 

19 Mason v. Freedman, [1958] S.C.R. 483, 14 D.L.R. (2d) 529; Aldercrest Developments 
Ltd. v. Hunter, [1970] 2 O.R. 562, 11 D.L.R. (3d) 439 (C.A.); and Metropolitan Trust 
Co. of Canada v. Pressure Concrete Services Ltd., [1973] 3 O.R. 629, 37 D.L.R. (3d) 
649 (H.C.J.), aff d (1975), 9 O.R. (2d) 375 (C.A.). 

20 Stirling v. Maitland (1864), 5 B. & S. 840, 122 E.R. 1043; Schrider v. Lang Bay 
Lumber Co. (1961), 34 W.W.R. 319 (B.C.C.A.); Barque Quilpue Ltd. v. Brown, [1904] 

2 K.B. 264 (C.A.); and Shoot v. Shoot (1956), 6 D.L.R. (2d) 366, [1957] O.W.N. 22 
(C.A.). 

21 Auto-Body Rustproofing (Canada) Ltd. v. Canadian National Sportsmen's Show, [1971] 

3 O.R. 39, 19 D.L.R. (3d) 276 (H.C.J.), and Winsco Manufacturing Ltd. v. Raymond 
Distributing Co., [1957] O.R. 565, 10 D.L.R. (2d) 699 (H.C.J. ). 

22 Hurley v. Roy (1921), 50 O.L.R. 281, 64 D.L.R. 375 (App. Div.), and Moir v. J. P. 
Porter Co. (1979), 33 N.S.R. (2d) 674, 57 A.P.R. 674 (C.A.), aff g 33 N.S.R. (2d) 685 
(S.C., T.D.). 

23 See, for example, Brennan Paving Co. v. City of Oshawa, [1955] S.C.R. 76, [1955] 1 
D.L.R. (2d) 321; Gordon Leaseholds Ltd. v. Metzger, [1967] 1 O.R. 580, 61 D.L.R. 
(2d) 562 (H.C.J.); Wallace v. Temiskaming and Northern Ontario Railway Commission 
(1906), 12 O.L.R. 126 (C.A.), aff d (1906), 37 S.C.R. 696; and Canada Egg Products 
Ltd. v. Canadian Doughnut Co., [1955] S.C.R. 398, [1955] 3 D.L.R. (2d) 1. It is 
questionable whether the requirement to decide compliance in good faith extends beyond 
cases where operational fitness or mechanical utility is in question. Where matters of 
fancy, taste and sensibility are involved, a party may not, at present, be required to act in 
good faith when rejecting contractual performance. See Truman v. Ford Motor Co. of 
Canada, [1926] 1 D.L.R. 960 (Ont. App. Div.). 



169 



2. WEAKNESSES IN THE PRESENT LAW AND THE CASE FOR 
LEGISLATIVE REFORM 

From our review in the preceding section, it appears that elements of good 
faith analysis are already an important part of the Anglo-Canadian law of 
contracts. However, these have not been synthesized into a settled and indepen- 
dent doctrine. Judicial efforts to incorporate good faith standards into contract 
law remain piecemeal and difficult to analyze. 

In our view, an unsettled and incoherent body of law, particularly in an 
area as pervasively important as good faith in contracting, is unsatisfactory. 
Predictability in contract planning, as well as in contract dispute resolution, is 
an important value that may be compromised when a relevant doctrine is 
unclear. A question arises, then, whether change should come about through the 
common law or through legislative intervention. 

Continued doctrinal uncertainty could prompt judicial efforts at clarifica- 
tion and rationalization. However, judges necessarily proceed on a case by case 
basis, and there are many available conceptions of good faith, ranging from 
"fair conduct" 24 to "solidarity" 25 and "community standards", 26 that could be 
applied in any given case. The array of definitions that might result could make 
the law even more uncertain than it is at present. If, on the other hand, the 
courts do not have recourse to generalized concepts of good faith, the desire to 
do justice in the individual case will perpetuate the doctrinal manipulation that 
now serves to maintain minimum behavioural standards, however unevenly. In 
this vein, Powell has described the current law as being riddled with "contor- 
tions and subterfuge". 27 

In contrast to the slow and unpredictable pace of common law develop- 
ments, it is a relatively easy matter to frame legislation clarifying and 
rationalizing a contractual doctrine of good faith. We believe that a legislated 
obligation of good faith, to apply in specified circumstances, would be 
conducive to greater certainty and to more straightforward judicial reasoning. 

3. A SURVEY OF SUGGESTED APPROACHES 
(a) THE EUROPEAN CIVIL CODES 

Section 242 of the German Civil Code provides as follows: 28 



24 Holmes, "A Contextual Study of Commercial Good Faith: Good Faith Disclosure in 
Contract Formation" (1978), 39 U. Pitt. L. Rev. 381, at 442. 

25 Unger, Law in Modern Society (1976), at 210. 

26 Thigpen, supra, note 3, at 320. 

27 Powell, supra, note 1, at 26. 

28 For discussion, see Trebilcock, "Good Faith in Sales Transactions" (1974), at 6-11. 
Unpublished paper undertaken for the Ontario Law Reform Commission's Sale of Goods 
Project. A copy of this paper is available at the Legislative Library, Legislative Building, 
Queen's Park, Toronto. 



170 



The debtor is bound to effect performance according to the requirements of good 
faith, common habits being duly taken into consideration. 

The French, Italian and Swiss Civil Codes contain similar provisions. 29 

It should be noted that each of the four European Code provisions limits 
the scope of good faith scrutiny to contractual performance. In Germany, pre- 
contractual injurious reliance is protected by a judicially developed culpa in 
contrahendo doctrine, the purpose of which is similar to that of section 90 of the 
American Second Restatement of the Law of Contracts . 30 It is also noteworthy 
that good faith is not defined in any of the Codes. 

The critical literature discussing the good faith provisions of the European 
Codes is mixed. Powell's assessment is positive. In his view, the success of 
section 242 of the German Civil Code is assured because it rests on the Roman 
foundation of common sense. 31 Gordley, on the other hand, is critical of the 
European approach: 32 

The German 'general clauses' are examples of cloudy rules. No one really knows 
what 'immorality' and 'good faith' might mean. As one German joke has it, the 
only principles yet discovered to explain 'good faith' are das geht zu weit and die 
arme Frau — 'that's going too far' and 'the poor woman'. 

(b) Uniform Commercial Code 

Good faith is mentioned in no less than fifty of the 400 or so provisions of 
the American Uniform Commercial Code. 33 The most general good faith 
provision is section 1-203, to the effect that "every contract or duty within this 
Act imposes an obligation of good faith in its performance or enforcement." 
"Good faith" is defined as "honesty in fact in the conduct or transaction 
concerned." 34 This generally prescribed definition requiring merely subjective 
honesty is bolstered, however, in the sales context: "Good faith in the case of a 



29 Ibid., at 11-14. See, also, Dawson, Oracles of the Law (1968), at 461-79, and Powell, 
supra, note 1, at 29-37. 

30 American Law Institute, Restatement of the Law, Second — Contracts, 2d (1979) 
(hereinafter referred to as "Second Restatement"). Section 90 of the Restatement is 
discussed supra, ch. 2, sec. 4(d). For further discussion of this doctrine, see, also, 
Trebilcock, supra, note 28, at 8-11; and Kessler and Fine, "Culpa in Contrahendo, 
Bargaining in Good Faith, and Freedom of Contract: A Comparative Study" (1964), 77 
Harv. L. Rev. 401. 

31 Powell, supra, note 1, at 37. 

32 Gordley, "European Codes and American Restatements: Some Difficulties" (1981), 81 
Colum. L. Rev. 140, at 147. 

33 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978), 
(hereinafter referred to as "Uniform Commercial Code"). See, generally, Farns worth, 
"Good Faith Performance and Commercial Reasonableness Under the Uniform Com- 
mercial Code" (1963), 30 U. Chi. L. Rev. 666, at 667. 



34 



Uniform Commercial Code, supra, note 33, § 1-201(19). 



171 



merchant", states section 2-103(l)(b), "means honesty in fact and the obser- 
vance of reasonable standards of fair dealing in the trade". 

Contracting out of the duty of good faith is not permitted under the 
Uniform Commercial Code, but contracting parties are given some opportunity 
for self regulation. Section 1-102(3) provides that: 

The obligations of good faith, diligence, reasonableness and care prescribed by this 
Act may not be disclaimed by agreement but the parties may by agreement 
determine the standards by which the performance of such obligations is to be 
measured if such standards are not manifestly unreasonable. 

The approach of the Uniform Commercial Code to good faith has been 
extensively reviewed in the literature. 35 One issue that has received a great deal 
of attention is the scope of scrutiny, and suggestions have been made that the 
obligation of good faith should not be limited to contractual performance and 
enforcement but should extend to precontractual negotiation. 36 A second 
concern has to do with the definition of good faith in Article l. 37 Most 
commentators agree with Farnsworth that the definition of good faith, requiring 
only "honesty in fact", has so enfeebled the requirement of good faith that "it 
could scarcely qualify ... as an over-riding or supereminent principle." 38 

Thirdly, even the more rigorous "good faith in the case of a merchant" 
definition 39 is vulnerable to serious criticism. Its application is restricted to 
situations where Article 2 imposes a duty of good faith and this occurs in only 
thirteen of the 104 provisions in the Article. 40 As well, the definition is 
applicable only to the dealings of "merchants" as defined in the Code, 41 so that 



35 See, generally, Burton, "Breach of Contract and the Common Law Duty to Perform in 
Good Faith" (1980), 94 Harv. L. Rev. 369; Dugan, "Standardized Forms: Unconscio- 
nability and Good Faith" (1979), 14 New England L. Rev. 711; Dugan, "Good Faith 
and the Enforceability of Standardized Terms" (1980), 22 Wm. & Mary L. Rev. 1; 
Eisenberg, "Good Faith Under the Uniform Commercial Code — A New Look at an Old 
Problem" (1971), 54 Marq. L. Rev. 1; Farnsworth, supra, note 33; Hillman, "Policing 
Contract Modifications under the UCC: Good Faith and the Doctrine of Economic 
Duress" (1979), 64 la. L. Rev. 849; Holmes, supra, note 24; Holmes, "Is There Life 
After Gilmore's Death of Contract? — Inductions From a Study of Commercial Good 
Faith in First-Party Insurance Contracts" (1980), 65 Cornell L. Rev. 330; Note, "Good 
Faith Under the Uniform Commercial Code" (1962), 23 U. Pitt. L. Rev. 754; Sales 
Report, supra, note 14, at 164 et seq.\ Peters, "Remedies for Breach of Contracts 
Relating to the Sale of Goods Under the Uniform Commercial Code: A Roadmap for 
Article Two" (1963), 73 Yale L. J. 199; Summers, "'Good Faith' in General Contract 
Law and the Sales Provisions of the Uniform Commercial Code" (1968), 54 Va. L. Rev. 
195; Thigpen, supra, note 3; and Trebilcock, supra, note 28. 

36 See discussion infra, this ch., sec. 4. 

37 Supra, note 34. 

38 Farnsworth, supra, note 33, at 674. 

39 Uniform Commercial Code, supra, note 33, § 2-103(l)(b). 

40 See Sales Report, supra, note 14, at 165. 

41 Uniform Commercial Code, supra, note 33, § 2-104(1). 



172 



many buyers and sellers, and other kinds of contracting parties such as 
franchisors and lessees, are not covered. It should also be noted that the Article 
2 definition of good faith presupposes "reasonable standards of fair dealing in 
the trade". Such standards may not exist for all trades. 

Finally, it has been suggested that the Code does not provide adequate 
guidance to contracting parties, lawyers and judges. 42 

(c) Second Restatement of the Law of Contracts 

Section 205 of the Second Restatement provides as follows: 43 

205. Every contract imposes upon each party a duty of good faith and fair 
dealing in its performance and its enforcement. 

The prescribed good faith requirement applies to all types of contracts and 
to all types of contracting parties. The core of the definition is simply "good 
faith and fair dealing", without further amplification. The Comment to section 
205 explains that "good faith performance or enforcement ... emphasizes 
faithfulness to an agreed common purpose and consistency with the justified 
expectations of the other party; it excludes a variety of types of conduct 
characterized as involving 'bad faith' because they violate community standards 
of decency, fairness or reasonableness". 44 

While broader in scope and arguably broader in definition than the 
Uniform Commercial Code, the Restatement requirement nonetheless limits the 
scope of scrutiny to contractual performance and enforcement. According to the 
Comment, 45 problems of bad faith in bargaining are often problems of contrac- 
tual capacity, mutual assent and consideration, or pre-contractual injurious 
reliance, all of which can be handled under other heads of the Restatement, such 
as, for example, the protection of reliance under section 90. 46 

According to Farns worth, section 205 "reflects a substantial body of pre- 
Code case law". 47 A recent survey of American good faith jurisprudence 
revealed that at least thirty-two state jurisdictions have openly adopted a 
generalized and independent good faith obligation. 48 



42 See Burton, "Good Faith Performance of a Contract within Article 2 of the Uniform 
Commercial Code" (1981), 67 la. L. Rev. 1, at 1-2. 

43 Second Restatement, supra, note 30. 

44 Ibid., Comment a. 

45 Ibid. 

46 For a discussion of § 90 of the Restatement, see supra, ch. 2, sec. 4(d). 

47 Farnsworth, "Ingredients in the Redaction of the Restatement (Second) of Contracts" 
(1981), 81 Colum. L. Rev. 1, at 10. 

48 Burton, supra, note 35, at 404. 



173 



(d) Ontario Law Reform Commission, Report on Sale of 
Goods 

Before turning to our recommendations for legislative reform of the 
doctrine of good faith in contract law generally, it would be useful to 
summarize the recommendations that we made with respect to good faith in our 
Report on Sale of Goods. 49 In that Report, we proposed that good faith "be 
enshrined in the revised [Sale of Goods Act] as a minimal behavioural baseline 
in the exercise of contractual statutory rights and obligations". 50 The relevant 
provision of the proposed revised Act provides as follows: 51 

(1) Every right and duty that is created by a contract of sale or by this Act imposes 
an obligation of good faith in its enforcement or performance whether or not it 
is expressly so stated. 

(2) 'Good Faith' means honesty in fact and the observance of reasonable standards 
of fair dealing. 

This provision reflected our concerns, first, that the proposed good faith 
obligation not be confined to merchants; secondly, that the basic behavioural 
guideline be higher than the "pure heart and empty head" criterion of honesty 
in fact; and thirdly, that the legislatively prescribed requirement encompass 
notions of reasonableness and fair dealing. 52 We did not recommend that the 
proposed good faith requirement apply to contract negotiation and formation, 
preferring to defer consideration of that issue until the law of consideration and 
injurious reliance had been reviewed. 53 

4. PROPOSALS FOR REFORM 

We have already expressed our view that a legislated requirement of good 
faith would conduce to greater certainty in the law and would encourage more 
straightforward judicial reasoning. 54 We recognize the concern of some critics 



49 Sales Report, supra, note 14. 

50 Ibid., at 166. 

51 Ibid., at 167, and Draft Bill, ss. 3.2 and 1.1(1)15. 

The Committee on a Uniform Sale of Goods Act of the Uniform Law Conference of 
Canada adopted the following modified version of the Ontario Law Reform Commis- 
sion's proposed provision on good faith in the sale of goods: 

14. Every duty that is created by a contract of sale or by this Act requires good 
faith in its performance, whether or not it is expressly so stated. 

The effect of this provision would be to limit the doctrine of good faith to the 
performance of duties, and to exclude it from the exercise of rights. See Uniform Law 
Conference of Canada, Proceedings of the Sixty-third Annual Meeting (1981), at 217-18, 
and Uniform Law Conference of Canada, Proceedings of the Sixty-fourth Annual 
Meeting (1982), Appendix HH, Uniform Sale of Goods Act, s. 14. 

52 Sales Report, supra, note 14, at 167. 

53 Ibid., at 169. 

54 Supra, this ch., sec. 2. 



174 



that the adoption of an explicit doctrine of good faith might lead judges "to 
abandon the duty of legally reasoned decisions and to produce an unanalytical 
incantation of personal values". 55 However, the considerable American experi- 
ence with the doctrine does not support these fears. 

It is our view that a legislated requirement would not conflict with existing 
contract law principles. Rather, statutory recognition of the doctrine of good 
faith would serve to synthesize the various strands of good faith analysis in the 
case law. Moreover, the literature reveals that a generalized doctrine of good 
faith would conform to commercial realities. 56 Accordingly, we recommend 
that legislation give recognition to the doctrine of good faith. 

There appears to be agreement among commentators that an obligation of 
good faith should apply to all contracts and contracting parties. 57 In the words 
of Lord Kenyon, in Mellish v. Motteux: 5 * 

In contracts of all kinds, it is of the highest importance that courts of law should 
compel the observance of honesty and good faith. 

We agree with this view, and accordingly recommend that the proposed 
statutory obligation of good faith should explicitly and generally apply to all 
contracts and contracting parties. 

A question arises whether the proposed obligation of good faith should 
apply to contract negotiation and formation. It is evident that good faith in pre- 
contractual dealings can play an important role, and we acknowledged this to be 
the case in our Report on Sale of Goods. 59 However, in the context of reform of 
the law of consideration, we have recommended legislative protection for pre- 
contractual injurious reliance. 60 As we stated in our Report on Sale of Goods, 
this sort of protection would greatly reduce recourse to a pre-contractual good 
faith obligation. 61 Remedies in tort, for fraud and negligent misrepresentation, 
for example, would also be available in cases of wrongdoing at the pre- 
contractual stage (as would the general doctrine of unconscionability and the 
doctrine of mistake). 62 Without suggesting that a general obligation of good 
faith in contract negotiation and formation would be redundant, we are not 
convinced of the need to legislate such an obligation specifically. We observe 
that the relevant provisions in the European Civil Codes and the Uniform 



55 Bridge, supra, note 12, at 413. 

56 See authorities cited, supra, note 11. 

57 See Summers, supra, note 35, at 215-16; Holmes (1980), supra, note 35, at 375; and 
Williston (ed. Jaeger), Williston on Contracts (3d ed., 1961), Vol. 5, § 670, at 159. 

58 (1792), Peake 156, at 157, 170 E.R. 113, at 113-14 (emphasis added). 

59 Sales Report, supra, note 14, at 169. 

60 Supra, ch. 2, sec. 4(d). 

61 Sales Report, supra, note 14, at 169. 

62 See, respectively, supra, ch. 6, and infra, ch. 14. 



175 



Commercial Code, as well as section 205 of the Restatement, similarly limit the 
scope of good faith scrutiny to exclude contract negotiation and formation. 63 

As discussed above, in our Report on Sale of Goods we favoured a 
definition of good faith that encompassed reasonableness and fair dealing, in 
addition to subjective honesty in fact. The proposed good faith obligation, we 
recommended, should apply to contract performance and enforcement. In light 
of the foregoing review of the current law, 64 we have concluded that this 
approach is as appropriate to the general law of contracts as it is to sale of goods 
law. 

We note that section 205 of the Restatement is the same, in principle, as 
our recommendations in the sale of goods context. 65 Adopting the wording of 
section 205 would provide our courts with an Official Comment as to the scope 
and meaning of the provision, and with a substantial number of American 
precedents. 

Accordingly, we recommend that the proposed statutory good faith provi- 
sion should take the form of section 205 of the American Second Restatement of 
the Law of Contracts. 

The final question is whether contracting parties should be permitted to 
vary or exclude the statutorily prescribed good faith requirement. As noted 
above, 66 section 1-102(3) of the Uniform Commercial Code provides that the 
prescribed good faith obligations may not be disclaimed, but that the parties 
"may by agreement determine the standards by which the performance of such 
obligations is to be measured if such standards are not manifestly unreasona- 
ble". In our Report on Sale of Goods, we recommended the adoption of a 
provision similar to section 1- 102(3). 67 We reasoned that good faith should be 
viewed as a "minimum rule of decent behaviour", which it would be unreason- 
able to disclaim by agreement. At the same time, we saw no disadvantage to 
permitting parties to determine by agreement the standards by which perform- 
ance of good faith obligations would be judged. Again, we consider this 
approach to be as appropriate to the general law of contracts as it is to sale of 
goods law. 

Accordingly, we recommend that legislation should provide that con- 
tracting parties may not vary or disclaim the statutorily imposed good faith 
obligations, but that parties should be able, by agreement, to determine the 
standards by which the performance of such good faith obligations is to be 
measured if such standards are not manifestly unreasonable. 



63 Supra, this ch., sec. 3. 

64 Supra, this ch., sec. 1. 

65 Supra, this ch., sec. 3(c). 

66 Supra, this ch., sec. 3(b). 

67 Sales Report, supra, note 14, at 168. 



176 



Recommendations 

The Commission makes the following recommendations: 

Legislation should give recognition to the doctrine of good faith in the 
performance and enforcement of contracts. 

The proposed statutory obligation of good faith should apply explicitly 
and generally to all contracts and contracting parties. 

The proposed statutory good faith provision should take the form of 
section 205 of the American Second Restatement of the Law of 
Contracts. 

Legislation should provide that contracting parties may not vary or 
disclaim the statutorily imposed good faith obligations, but that parties 
should be able, by agreement, to determine the standards by which the 
performance of such good faith obligations is to be measured if such 
standards are not manifestly unreasonable. 



CHAPTER 10 



MINORS' CONTRACTS 



1. THE PRESENT LAW 



(a) INTRODUCTION 



The object of the law respecting minors' contracts has been to protect 
minors from the consequences of their bargains. 1 However, the goals of 
protecting minors, avoiding unjust enrichment by persons under age, and not 
excessively discouraging the commercial community from dealing with minors 
can be difficult to reconcile. Perhaps in part because of this, the law of minors' 
contracts is complex, confused, and highly technical. 



The principal difficulties may be briefly summarized at the outset. The 
common law recognizes at least four different types of minors' contracts, 
although it is not clear that underlying values are well served by such 
classification. Determining the scope of each category is, moreover, problem- 
atic. Further uncertainties arise in determining rights and liabilities associated 
with unenforceable minors' contracts. In addition, it is not clear when a minor 
can be successfully sued for tortious conduct arising out of an unenforceable; 
contract. Finally, there are problems in the current law relating to enforceabil- 
ity of guarantees of minors' obligations, and whether minors can appoint or act 
as agents. 



Before turning to a more detailed examination of existing law, it should be 
noted that, in Ontario, legislation has lowered the age of majority from twenty- 
one to eighteen. 2 While it is likely that this change has resulted in fewer legal 
problems related to minors' contracts, it has not directly altered the law 
governing such contracts. 



1 See Zouch v. Parsons (1765), 3 Burr. 1794, 97 E.R. 1103. 

2 Age of Majority and Accountability Act, R.S.O. 1980, c. 7, s. 1 

[177] 



178 

(b) Classification of minors' Contracts 

(i) Preface 

In order to analyze the effect of a contract made by an minor, it is 
necessary to differentiate the following categories of contract developed at 
common law: 3 

1. void contracts; 

2. contracts invalid unless ratified after attaining majority; 

3. contracts valid unless repudiated during minority, or within a reasonable time 
after attaining majority; and 

4. valid contracts. 

Contracts falling into the second and third categories are referred to as 
voidable, although it may be that, properly speaking, only contracts in the third 
category should be termed voidable. 4 

(ii) Void Contracts 

In Ontario, the common law determines whether a contract made by a 
minor will be treated as void ab initio. 5 Unfortunately, there does not seem to 
be any settled definition of the kind of contract that attracts this consequence. 
Judges have expressed themselves in different language at different times. To 
Ferguson J., in Butterfield v. Sibbitt, 6 "[a]ll contracts entered into by an infant 
must be for his benefit, otherwise they are void". A narrower view of the 
category of void minors' contracts was expressed by Laidlaw J. A. in McBride 
v. Appleton: 1 for a minor's contract to be void, not merely voidable, it must be 
"as a whole ... so much to the detriment of ... the infant, as to render it unfair 
that he should be bound by it". 8 In Re Staruch, 9 prejudice to the infant was 
advanced as the criterion of voidness. 

In determining when a contract is so unfair, prejudicial, or not beneficial, 
that it goes beyond being voidable and becomes void, the language of the 



3 R. v. Rash (1923), 53 O.L.R. 245, 41 C.C.C. 215 (App. Div.) (subsequent references 
are to 53 O.L.R.), and Toronto Marlboro Major Junior "A" Hockey Club v. Tonelli 
(1977), 18 O.R. (2d) 21, 81 D.L.R. (3d) 403 (H.C.J. ), aff d (1979), 23 O.R. (2d) 193 
(C.A.). 

4 See Percy, "The Present Law of Infants' Contracts" (1975), 53 Can. B. Rev. 1, at 12- 
13. 

5 But see the Infants Relief Act, 1874, 37 & 38 Vict., c. 62 (U.K.), s. 1. 

6 [1950] O.R. 504, at 509, [1950] 4 D.L.R. 302, at 307 (H.C.J.) (subsequent references 
are to [1950] O.R.); and R. v. Leduc, [1972] 1 O.R. 458, at 459, 5 C.C.C. (2d) 422, at 
423 (Dist. Ct.) (subsequent reference is to [1972] 1 O.R.). 

7 [1946] O.R. 17, [1946] 2 D.L.R. 16 (C.A.) (subsequent references are to [1946] O.R.). 

8 Ibid., at 30. 

9 [1955] 5 D.L.R. 807 (Ont. H.C.J.), at 809. 



179 



judges, while intended to be helpful, leaves much to be desired. 

(iii) Contracts Not Binding on the Minor Unless Ratified After 
Attaining Majority 

This category appears to comprise all minors' contracts that do not fit into 
any of the other categories. 10 Contracts that fall into this category do not bind 
the minor during minority, or after attaining majority unless ratified by the 
minor after majority. 11 

However, Canadian judges have not been consistent in distinguishing 
between contracts that are binding on a minor unless repudiated, and those in 
the category now under discussion. It has sometimes been implied, for 
example, that all contracts that are neither void nor valid without qualification 
are subject to repudiation by the minor. 12 On other occasions, judges have 
asked whether the contract has been ratified, even though the contract could 
properly have been characterized as one that was valid unless repudiated. 13 In 
other words, Canadian judges have sometimes tended to confuse both classes of 
so-called voidable contracts. 

Further complexity arises from the requirement of ratification. At common 
law there seem to have been no special rules governing ratification, provided 
the minor, on attaining majority, demonstrated an intention to adopt and 
approve the contract made during minority. This has been changed by legisla- 
tion in Ontario. Section 7 of the Statute of Frauds provides as follows: 14 

7. No action shall be maintained whereby to charge a person upon a promise 
made after full age to pay a debt contracted during minority or upon a ratification 
after full age of a promise or simple contract made during minority, unless the 
promise or ratification is made by a writing signed by the party to be charged 
therewith or by his agent duly authorized to make the promise or ratification. 

The requirement that ratification be by writing does not seem to have been 
rigorously applied, perhaps because it is viewed as overly rigid. In Re Hutton, 15 



10 R. v. Rash, supra, note 3, at 263, and Butterfield v. Sibbitt, supra, note 6, at 509. 

11 See discussion in R. v. Rash, supra, note 3, at 264-65. 

12 Blackwell v. Farrow, [1948] O.W.N. 7 (H.C.J.); Noble's Ltd. v. Bellefleur (1963), 37 
D.L.R. (2d) 519, 49 M.P.R. 279 (N.B.C.A.); LaFayette v. W.W. Distributors and Co. 
Ltd. (1965), 51 W.W.R. 685 (Sask. Dist. Ct.); Coull v. Kolbuc (1969), 68 W.W.R. 76 
(Alta. Dist. Ct.); and Henderson v. Minneapolis Steel & Mach. Co., 11931] 1 D.L.R. 
570, [1930] 3 W.W.R. 613 (Alta. S.C., T.D.). 

13 Re Paterson, [1918] 1 W.W.R. 105 (Man. Q.B.), and Re Sovereign Bank of Canada; 
Clark's Case (1916), 35 O.L.R. 448 (App. Div.). 

14 Statute of Frauds, R.S.O. 1980, c. 481, s. 7. 

15 Re Hutton, [1926] 4 D.L.R. 1080, [1926] 3 W.W.R. 609 (Alta. S.C., T.D.) (subsequent 
reference is to [1926] 4 D.L.R.). Lord Tenterden's Act (1828), 9 Geo. 4, c. 14 (U.K.), 
s. 5, which required written evidence of a minor's ratification of a contract, was 
incorporated as part of the law of Alberta in 1870. However, the provision has never 
been part of the published statutes of that Province. 



180 



a minor had not ratified by writing a contract entered into by him during his 
minority. However, he had done nothing to avoid the contract during the course 
of the three years following his majority. The Court considered that he had 
acquiesced in the contract and that, the contract being completed, ratification 
did not have to be in writing. More recently, in Blackwell v. Farrow, xt it was 
held that certain conduct by a minor amounted to ratification by implication; no 
mention was made of the writing requirement of the Statute of Frauds. 11 

(iv) Contracts Binding on the Minor Unless Repudiated 

Contracts in this category bind the minor unless he or she takes appropriate 
steps to repudiate during minority or within a reasonable time after attaining 
majority. 18 Commentators appear to agree that this category comprehends the 
following: 19 contracts concerning land; share contracts; partnership agree- 
ments; and marriage settlements. 

As noted earlier, Canadian courts have not always been clear and consis- 
tent in distinguishing this type of contract from a contract that will not bind a 
minor in the absence of an act of ratification. 20 

(v) Valid Contracts 

There are two types of contracts that may be legally binding on the minor 
as soon as they are made and that cannot be repudiated by the minor, whether 
before or after majority. These are, first, contracts for necessaries and, 
secondly, contracts of employment or service. 

a. Contracts for Necessaries 

According to the case law, "necessaries" consist of those things "without 
which an individual cannot reasonably exist". 21 The concept presupposes that 
the minor is in short supply of such things and that they are "essential to the 



16 Supra, note 12. 

17 Supra, note 14. 

18 Billiard v. Dillon, [1955] O.W.N. 621 (H.C.J.), and Murray v. Dean (1926), 30 
O.W.N. 271 (H.C. Div.). 

19 Percy, supra, note 4, at 13; Treitel, The Law of Contract (6th ed., 1983), at 416-17; 
Furmston (ed.), Cheshire and Fifoot's Law of Contract (10th ed., 1981), at 385-86; and 
Payne, "The Contractual Liability of Infants" (1966), 5 Western L. Rev. 136, at 143. 

20 Supra, note 13. 

21 Chappie v. Cooper (1844), 13 M. & W. 252, at 258, 153 E.R. 105, at 107 (subsequent 
reference is to 153 E.R.). See, also, Equality Rights Statute Law Amendment Act, 1986, 
Bill 7, 1986 (33d Leg. 2d Sess.), s. 18(4), dealing with contracts for accommodation 
entered into by a sixteen or seventeen year old person who has withdrawn from parental 
control. 



181 



existence and reasonable advantage and comfort of the infant ..." 22 . Neces- 
saries include things needed to maintain the minor in his or her accustomed 
social position, and accordingly vary with the individual. 23 With respect to 
contracts governed by the Sale of Goods Act, 24 necessaries means "goods 
suitable to the conditions in life of the minor . . . and to his actual requirements 
at the time of the sale and delivery". 25 

It should be noted that both at common law and under the Sale of Goods 
Act, the minor's condition in life is a material factor. It follows that the 
determination of what is necessary must be made on a case by case basis, with 
the result that, often, neither party to a given contract can be certain of its 
validity. 26 Moreover, it has been suggested that a contract for necessaries will 
not be considered valid if it is penal in nature, 27 or, according to other 
authority, if the contract as a whole does not benefit the minor. 28 

Assuming a contract does fall within the category of valid minors' 
contracts for necessaries, the nature of the minor's liability is unclear. With 
respect to contracts for necessary goods, the governing principles are expressed 
in section 3(1) of the Sale of Goods Act: 29 the capacity to buy and sell is 
regulated by the general law of contractual capacity, "but where necessaries are 
sold and delivered to a minor ... he shall pay a reasonable price therefor". 

One view of the provision suggests that the minor's liability under a 
contract for necessary goods is restitutionary rather than contractual. 30 Since the 
minor need only pay a reasonable price for goods actually delivered, the minor 
should not be liable on an executory contract for the sale of goods. 31 The 
contrary view is that the statutory imposition of a reasonable price does not alter 
the contractual nature of the minor's liability, and that the provision does not 
purport to cover the situation in which goods sold or agreed to be sold are not 
yet delivered. 32 



22 Ibid., at 107. 

23 Peters v. Fleming (1840), 6 M. & W. 43, 151 E.R. 314. 

24 R.S.O. 1980, c. 462. 

25 Ibid., s. 3(2). 

26 For a discussion of cases illustrating this point, see Percy, supra, note 4, at 2-6. 

27 R. v. Leduc, supra, note 6, at 459; Pyett v. Lampman (1922), 53 O.L.R. 149, [1923] 1 
D.L.R. 249 (App. Div.); and Coull v. Kolbuc, supra, note 12. 

28 Roberts v. Gray, [1913] 1 K.B. 520, [1911-13] All E.R. Rep. 870 (C.A.), and Fawcett 
v. Smethurst (1915), 84 L.J.K.B. (N.S.) 473. 

29 Supra, note 24. 

30 Nash v. Inman, [1908] 2 K.B. 1 (C.A.), at 8; R. v. Rash, supra, note 3, at 256; Cheshire 
and Fifoot's Law of Contract, supra, note 19, at 382; and Payne, supra, note 19, at 139. 

31 Miles, "The Infant's Liability for Necessaries" (1927), 43 L.Q.R. 389, and Cheshire 
and Fifoot's Law of Contract, supra, note 19, at 382. 

32 Percy, supra, note 4, at 7-9. 



182 



The nature of a minor's liability to pay for necessary services is also 
unclear. Roberts v. Gray 33 provides some authority for the proposition that 
contracts for necessary services in the nature of tuition and education may be 
binding even though executory. However, it is a matter of debate whether the 
principle in this case would apply generally to contracts for necessary ser- 
vices. 34 From a policy viewpoint, it is difficult to see why different principles 
should apply depending on whether goods or services are the subject of the 
contract. 

b. Contracts of Service 

Minors may also be bound by contracts of service, that is, contracts that 
provide them with employment or permit them to earn a livelihood or to be 
trained for some trade or profession. 35 There is a question, however, whether 
contracts of this kind form a separate category of enforceable minors' contracts, 
or are a subcategory of contracts for necessaries. 36 

There seems to be agreement that minors' contracts of service, like 
contracts for necessaries, will only be binding if they are considered by the 
court to be beneficial to the minor. While the weight of authority appears to 
favour a strictly pecuniary test, 37 there have been suggestions that a broader test 
should be applied. 38 It appears that contracts of service are distinguishable from 
contracts for necessaries in that executory beneficial contracts of service bind 
the minor to the same extent as do executed contracts of service. 39 It is difficult 
to appreciate why executory contracts of service should be enforceable if 
executory contracts for necessaries are not. 

The category of contracts of service does not seem to include trading 
contracts, that is, contracts for goods or services required by the minor to 
further his or her business activities, even where the contract enables the minor 



33 Supra, note 28. 

34 See, for example, Payne, supra, note 19, at 141-42; Percy, supra, note 4, at 8-9; and 
Cheshire and Fifoot's Law of Contract, supra, note 19, at 383. 

35 De Francesco v. Barnum (1890), 45 Ch. D. 430, at 439, [1886-90] All E.R. Rep. 414, 
at 419 (C.A.) (subsequent reference is to 45 Ch. D.); Millar v. Smith & Co., [1925] 3 
D.L.R. 251, at 267, [1925] 2 W.W.R. 360, at 367 (Sask. C.A.); and Percy, supra, note 
4, at 9. 

36 See Payne, supra, note 19, at 141-42, and Percy, supra, note 4, at 9. 

37 Clements v. London and North Western Railway Co., [1894] 2 Q.B. 482 (C.A.), and 
Chaplin v. Leslie Frewin (Publishers) Ltd., [1966] Ch. 71, [1965] 3 All E.R. 764 (C.A.) 
(subsequent references are to [1966] Ch.). 

38 See the judgment of Lord Denning M.R., in dissent, in Chaplin v. Leslie Frewin 
(Publishers) Ltd., ibid., at 88, and the judgment of Zuber J. A., in dissent on this issue, 
in Toronto Marlboro Major Junior "A" Hockey Club v. Tonelli, supra, note 3, at 200, 
relying on De Francesco v. Barnum, supra, note 35, at 439. 

39 Clements v. London and North Western Railway Co., supra, note 37. See, also, Percy, 
supra, note 4, at 9, and Cheshire and Fifoot's Law of Contract, supra, note 19, at 383. 



183 



to carry on a livelihood. For example, in Pyett v. Lampman m a contract to 
purchase a car was not binding even though the minor required the car to carry 
on his business. However, it can be difficult to distinguish trading contracts 
from contracts of service. This is illustrated by Chaplin v. Leslie Frewin 
(Publishers) Ltd. 41 There, a minor's contract to publish a book he had written 
was held enforceable because it enabled him to make a start as an author and 
thus earn money to keep himself and his wife. 42 

(c) RIGHTS AND LIABILITIES ASSOCIATED WITH UNENFORCEABLE 
MINORS' CONTRACTS 

(i) Minors' Rights 

To some extent, the rights and liabilities associated with minors' contracts 
flow from the categorization of those contracts, discussed above. If a minor's 
contract is valid, subject to uncertainties surrounding executory contracts for 
necessaries, it is enforceable by both parties. If it is void, neither party can 
enforce it. And if the contract falls into either of the so-called voidable 
categories, the minor can choose to avoid it or to enforce it. However, a minor 
who has induced a contract by fraudulent misrepresentation will not, appar- 
ently, be permitted to enforce the contract. 43 There is also authority that a minor 
cannot obtain a decree of specific performance in respect of a contract that does 
not bind the minor. 44 If the minor fails to repudiate, or chooses to ratify, a 
voidable contract the other party may enforce it. 

Should a minor choose to avoid a voidable contract, questions arise as to 
the recovery of money or property transferred under the contract. What rights 
of recovery does the minor have? Again, the law of minors' contracts is 
uncertain. In particular, it is unclear whether the minor's right to recover is 
based on failure of consideration from the other party or on the minor's ability 
to effect restitution. It may be that the basis of recovery varies according to 
whether the contract is subject to ratification or repudiation and whether the 
minor is seeking recovery of money or property. 45 



40 Supra, note 27. See, also, R. v. Rash, supra, note 3. Contrast, however, McGee v. 
Cusack, [1936] 1 D.L.R. 157 (P.E.I. Co. Ct.). 

41 Supra, note 37. 

42 Ibid., at 95. 

43 Gregson v. Law (1914), 15 D.L.R. 514, 5 W.W.R. 1017 (B.C.S.C), and Lempriere v. 
Lange (1879), 12 Ch. D. 675. 

44 Flight v. Bolland (1828), 4 Russ. 298, 38 E.R. 817, and Farnham v. Atkins (1670), 1 
Sid. 445, 82 E.R. 1208. 

45 The cases and commentators present various versions of the law on this issue. See, for 
example, Percy, supra, note 4, at 20-30; Payne, supra, note 19, at 144-48; and 
McCamus, "Restitution of Benefits Conferred Under Minors' Contracts" (1979), 28 
U.N.B. L.J. 89, at 99- 103. 



184 



If the basis of recovery is failure of consideration, a minor who has 
received a benefit under a voidable contract cannot recover. If the basis is 
restitutionary, the minor can recover so long as the other party can be restored 
to the pre-contractual position. While the restitutionary basis would seem to be 
the wider of the two, both can, in some instances, result in the minor being 
unable to recover money or property transferred under a voidable contract. 46 

It appears that a minor can recover money or property transferred under a 
void contract, regardless of whether there has been a failure of consideration 
from the other party or whether the minor can effect restitution. 47 It has been 
suggested by some commentators that the minor's extensive right of recovery 
under a void contract can work an unfairness, at least in those cases where the 
other party's conduct was not exploitative. 48 

(ii) Minors' Liabilities 

The law concerning the liability of a minor to restore benefits received 
under an avoided contract is also unsettled. Again, liability may vary depending 
on how the contract is categorized. As has been discussed, the minor may be 
required to effect restitution as a condition of recovering money or property. In 
addition, avoidance of a contract by a minor may serve to revest title to 
property transferred under the contract in the original owner, so that an action 
in detinue may be brought. 49 As well, there have been suggestions that a court 
might, in some circumstances, require the minor to restore benefits received as 
a condition of avoiding a contract. 50 There have also been suggestions that a 
minor must restore the goods retained in specie after disaffirming a contract 51 
and that a minor may be required to make restitution of benefits retained upon 
reaching majority, whether or not the benefits exist at the time of an action for 
their recovery. 52 The liability of a minor to restore money received under an 
avoided contract is even more uncertain because of the difficulties involved in 
tracing money. 53 



46 McCamus, ibid., at 99- 103. 

47 Re Staruch, supra, note 9, and Upper v. Lightning Fastener Employees' Credit Union 
(St. Catherines) Ltd. (1967), 9 C.B.R. (N.S.) 211 (Ont. Co. Ct.). 

48 See, for example, Percy, supra, note 4, at 35-36; and McCamus, supra, note 45, at 104. 

49 See McCamus, supra, note 45, at 106-07; Percy, supra, note 4, at 28-29; and Louden 
Mfg. Co. v. Milmine (1907), 14 O.L.R. 532 (H.C.J.), affd (1908), 15 O.L.R. 53 
(Div.Ct.). 

50 See Re Hutton, supra, note 15, at 1082, and Blackwell v. Farrow, supra, note 12, at 10. 
But see Butterfield v. Sibbitt, supra, note 6, at 510, where Ferguson J. noted that such a 
suggestion was far too wide as stated, and unsupported by any authority. 

51 Louden Mfg. Co. v. Milmine, supra, note 49; Noble's Ltd. v. Bellefleur, supra, note 12. 

52 Louden Mfg. Co. v. Milmine, supra, note 49; Molyneux v. Traill (1915), 32 W.L.R. 
292, 9 W.W.R. 137 (Sask. Dist. Ct.); and McCamus, supra, note 45, at 107. 

53 See McCamus, ibid., at 108. 



185 



Turning to rights of recovery from a minor under a void contract, there 
seems to be no general duty of full restitution by the minor. 54 This is true even 
though, as noted above, 55 the minor has extensive rights of recovery of benefits 
conferred under a void contract, and even though the other party cannot be 
restored to the pre-contractual position. However, the other party may be able 
to recover money or goods retained by the minor at the time of suit, or at the 
age of majority. 56 If property obtained by a minor pursuant to a void contract 
has been sold to a third party, it has been suggested that the original owner 
would be able to recover it under the doctrine of nemo dat quod non habet, 51 
unless the third party can establish that the original owner is estopped from 
claiming the property in the circumstances. 58 It has been suggested that the 
transfer of the risk of loss from the original owner to a good faith purchaser is 
unfair. 59 This result may be contrasted with the position with respect to voidable 
contracts under section 24 of the Sale of Goods Act, 60 allowing good title to a 
good faith purchaser of goods from a seller with a voidable title to them. 

(d) MINORS' LIABILITY FOR TORTIOUS CONDUCT ASSOCIATED 
WITH UNENFORCEABLE MINORS' CONTRACTS 

Minors are generally liable for their torts, subject to minors of tender years 
being incapable of forming certain mental attitudes involved in specific torts. 61 
Nevertheless, courts will not hold a minor liable in tort if the effect of so doing 
is, indirectly, to enforce an unenforceable contract. 62 Generally, if the minor's 
conduct is directly connected to the contract, so that it can be seen as a breach 
of contract, the minor will not be held liable. 63 If, on the other hand, the 
conduct complained of can be considered to be independent of the contract, 
even though the opportunity to commit it might not have arisen but for the 



54 Re Staruch, supra, note 9, and Upper v. Lightning Fastener Employees' Credit Union 
(St. Catherines) Ltd., supra, note 47. 

55 Supra, note 45. 

56 McCamus, supra, note 45, at 109. 

57 Percy, supra, note 4, at 36. 

58 For a discussion of estoppel in these circumstances, see the dissenting judgment of Roach 
J. A. in McBride v. Appleton, supra, note 7. 

59 Percy, supra, note 4, at 36. 

60 Supra, note 24. 

61 See, for example, Tillander v. Gosselin, 11967] 1 O.R. 203 (H.C.J.), and Continental 
Guaranty Corp. of Can. v. Mark, [1926] 4 D.L.R. 707, [1926] 3 W.W.R. 428 
(B.C.C.A.). 

62 See, for example, Noble's Ltd. v. Bellefleur, supra, note 12. 

63 See, for example, Jennings v. Rundall (1799), 8 Term Rep. 335, 101 E.R. 1419; Noble's 
Ltd. v. Bellefleur, supra, note 12; and Dickson Bros. Garage & U- Drive Ltd. v. Woo 
Wai Jing (1957), 11 D.L.R. (2d) 477, 23 W.W.R. 485 (B.C.C.A.), affg (1957), 10 
D.L.R. (2d) 652, 22 W.W.R. 143. 



186 



contract, the minor will be held liable. 64 Not surprisingly, this has given rise to 
fine and often artificial distinctions among similar fact situations, with results 
being difficult to predict and to justify. 65 

Existing law also protects minors from liability for fraudulent misrepresen- 
tation in obtaining a contract. Such fraud apparently creates no right of action in 
tort against the minor 66 and does not estop the minor from relying on his or her 
minority. 67 However, fraudulent misrepresentation as to age may deprive the 
minor of the right to resort to equitable remedies 68 and may impose an equitable 
obligation on the minor in respect of property or money transferred under the 
fraudulently induced contract. 69 The law is uncertain as to what amounts to 
fraud in this context. 70 

(e) ENFORCEABILITY OF GUARANTEES OF MINORS' OBLIGATIONS 

The case law is unsettled whether adults can be sued successfully on 
guarantees of minors' unenforceable obligations. 71 The argument in favour of 
enforceability can be put on the basis that the minor's immunity is a personal 
privilege, so that third parties should not be able to rely on it. It would defeat 
the obvious purpose of a guarantee and constitute a trap for unwary creditors if 
adult guarantors were automatically relieved. On the other hand, it may be 
argued that guarantees, by their very nature, depend on the existence of some 
primary obligation, so that the guarantor should not be liable if the primary 
obligation is void or has been avoided. In any event, it appears to be well settled 
that an independent indemnity, rather than a guarantee, given by an adult in 
respect of a minor's obligation is enforceable. 72 Accordingly, the characteriza- 
tion of an adult's promise — as guarantee or indemnity — may well determine 
enforceability. The distinction between these two kinds of promises can be 
difficult to draw, and it is hard to see why, on policy grounds, the distinction 
should be determinative. 



64 See, for example, Burnard v. Haggis (1863), 14 C.B. (N.S.) 45, 143 E.R. 360, and 
Victoria U Drive Yourself Auto Livery Ltd. v. Wood, [1930] 2 D.L.R. 811, [1930] 1 
W.W.R. 522, 634 (B.C.C.A.). 

65 For a discussion of unpredictability and artificiality in the case law in this area, see 
Percy, supra, note 4, at 37-40. 

66 Re Darnley (1908), 14 B.C.R. 15, 9 W.L.R. 20 (B.C.S.C). 

67 Jewell v. Broad (1909), 19 O.L.R. 1, affd (1910), 20 O.L.R. 176 (Div. Ct.). 

68 Gregson v. Law, supra, note 43. 

69 Jewell v. Broad, supra, note 67. There is some question whether this obligation extends 
to proceeds of property transferred to the minor under the contract. See Stocks v. Wilson, 
[1913] 2 K.B. 235, and R. Leslie, Ltd. v. Shiell, [1914] 3 K.B. 607, [1914- 15] All E.R. 
Rep. 511 (C.A.). 

70 See Atiyah, "Liability of Infants in Fraud and Restitution" (1959), 22 Mod. L. Rev. 
273, and Percy, supra, note 4, at 41-42. 

71 For a discussion of the case law, see Percy, supra, note 4, at 50-53. 

72 Yeomen Credit v. Latter, [1961] 1 W.L.R. 828, [1961] 2 All E.R. 294 (C.A.). 



187 



(f) Minors' Contracts and Agents 

It appears to be settled in Canada that a minor has the same capacity to 
appoint an agent to execute a contract as to enter into that contract personally. 73 
That is, contracts entered into by agents on behalf of minors are characterized 
as void, voidable, or valid, with rights and liabilities depending on the 
characterization. In the event that the contract entered into by the agent is 
unenforceable, the agent may be liable for breach of implied warranty of 
authority. 74 The capacity of a minor to give a power of attorney, on the other 
hand, seems to be more restricted, 75 although it is difficult to appreciate the 
reason for this. 

It appears that a minor may act as an agent and that a principal cannot rely 
on an agent's minority to avoid a contract. 76 However, a third party's recourse 
against a minor agent, whether for breach of warranty of authority or where the 
agent acted for an undisclosed principal, is likely to be quite circumscribed. 77 



2. LEGISLATIVE INTERVENTION IN OTHER JURISDICTIONS 

(a) PREFACE 

This section reviews the law of minors' contracts in New Zealand, New 
South Wales and British Columbia, where the common law of minors' contracts 
has been substantially altered by statute. As will be seen, legislation has 
attempted to respond both to the uncertainty of the common law and to its 
potential unfairness to parties contracting with minors. 

(b) NEW ZEALAND 

In effect, the New Zealand Minors ' Contracts Act 1969 1% codifies the law 
of minors' contracts. 79 The legislation distinguishes between minors over the 
age of eighteen, and minors under eighteen, with greater protection being 
afforded to the latter. Contracts entered into by minors over eighteen, 80 and 
contracts of service as well as certain life insurance contracts entered into by 
any minor, have the same effect, in the first instance, as if entered into by a 



73 Johannsson v. Gudmundson (1909), 19 Man. R. 83, 11 W.L.R. 176 (C.A.), rev'g 10 
W.L.R. 254 (subsequent reference is to 19 Man. R.). 

74 Fridman, The Law of Agency (5th ed., 1983), at 212. 

75 Zouch v. Parsons, supra, note 1, and Johannsson v. Gudmundson, supra, note 73, at 90 
and 94. 

76 Powell, The Law of Agency (2d ed., 1961), at 173. 

77 O'Hare, "Agency, Infancy and Incapacity" (1970), 3 U. Tas. L.J. 312, at 322-23. 

78 Minors' Contracts Act 1969, Repr. Stat. N.Z. 1979, Vol. 3, at 639. 

79 Ibid., s. 15. 

80 Pursuant to section 4 of the Age of Majority Act 1970, Stat. N.Z. 1970, Vol. 1, No. 137, 
the age of majority in New Zealand is twenty. 



188 



person of full age. 81 However, if a court determines that the consideration given 
to the minor under such a contract was so inadequate as to be unconscionable, 
or that a provision in such a contract imposed a harsh or oppressive obligation 
on the minor, the court may cancel the contract, decline to enforce it against the 
minor, or declare it unenforceable, in whole or in part, against the minor. 82 

Contracts entered into by minors under eighteen, other than contracts of 
service and certain life insurance contracts are, in the first instance, unenforce- 
able against the minor, but otherwise have effect as if the minor were of full 
age. 83 If a court determines that such a contract was fair and reasonable at the 
time it was entered into, the court may enforce the contract against the minor, 
declare the contract binding on the minor, in whole or in part, or make an order 
entitling the other party to the contract to cancel it, on such conditions as the 
court thinks just. 84 

When a court exercises its discretion to disaffirm or approve a minor's 
contract, it may order such compensation or restitution of property as it thinks 
just. 85 Such awards may be made to a party to the contract, a guarantor or 
indemnifier of the contract, or to any person claiming through, under, or on 
behalf of a party, guarantor or indemnifier. 86 The New Zealand Act also 
provides that any contract entered into by a minor has effect as if the minor 
were of full age, if court approval of the contract is obtained in advance. 87 An 
application for such approval may be made by the minor, the minor's guardian, 
or any other person who would be a party to the contract. 88 

The uncertainty in the common law with respect to guarantees of minors' 
unenforceable contracts is resolved by the legislation. Guarantees, like indemni- 
ties, are enforceable against the guarantor as if the minor had been of full age. 89 
The common law limits on a minor's liability in tort for fraudulent representa- 
tions in procuring a contract are confirmed by statute, 90 but the court is 
empowered to take any such representation into account in deciding whether to 



81 Minors' Contracts Act 1969, supra, note 78, s. 5(1). 

82 Ibid., s. 5(2). 

83 Ibid., s. 6(1). 

84 Ibid., s. 6(2)(a). 

85 Ibid., ss. 5(2), 6(2), and 7. Section 6(3) sets out the circumstances to which the court 
must have regard in exercising its jurisdiction to affirm contracts of minors under 
eighteen years of age. 

86 Ibid., s. 7(1). 

87 Ibid., s. 9(1). 

88 Ibid., s. 9(2). 

89 Ibid., s. 10. 

90 Ibid., s. 15(4). 



189 



disaffirm or approve a contract and in making an order for compensation or 
restitution of property. 91 

While the New Zealand legislation has gone some distance towards 
responding to uncertainty and potential unfairness in the common law, we 
would question whether the division of minors into two classes is warranted. As 
well, the legislation, in effect, requires that contracts of minors under eighteen 
be treated differently depending on how they are categorized. Certain insurance 
contracts and contracts of service are enforceable against a minor under 
eighteen in the first instance, and all other contracts are unenforceable against 
such a minor in the first instance. In view of the difficulties that have arisen 
under common law categorizations, the wisdom of this approach may be 
questioned. 

(c) New South Wales 

New South Wales undertook a major revision of the law relating to minors 
in 1970. The Minors (Property and Contracts) Act, 197CP 2 provides that persons 
eighteen years and over have full capacity to participate in civil acts, 93 defined 
to include, in part, contracts and dispositions of property. 94 Minors, defined as 
persons under eighteen, 95 are not bound by their civil acts except as provided by 
the legislation. 96 The legislation provides that certain categories of civil acts are 
presumptively binding on minors. 97 A civil act participated in by a minor that is 
presumptively binding has effect as if the minor had not been under the 
disability of minority at the time of participation. 98 

A civil act that was for the benefit of the minor at the time the minor 
participated in the act is presumptively binding. 99 Dispositions of property by a 
minor are presumptively binding if the consideration is not manifestly inade- 
quate at the time of disposition, and the whole or any part of the consideration is 
received by the minor. 100 Dispositions of property to a minor are presumptively 
binding if the consideration given or to be given by the minor is not manifestly 
excessive at the time of disposition. 101 Certain other civil acts are also 
presumptively binding, such as a disposition made wholly or partly as a gift, 



91 Ibid. 

92 Minors (Property and Contracts) Act, 1970, Stat. N.S.W. 1970, Vol. 2., No. 60. 

93 Ibid., s. 8. 

94 Ibid., s. 6(1). 

95 Ibid. 

96 Ibid., s. 17. 

97 Ibid., ss. 19-25. 

98 Ibid., s. 6(3). 

99 Ibid., s. 19. 

100 Ibid., s. 20(1). 

101 Ibid., s. 20(2). 



190 



where the disposition was reasonable at the time it was made. 102 A civil act is 
presumptively binding in favour of a third party if that party has, for value and 
without notice of the minority, acquired property affected by the civil act or 
altered his or her position in reliance on that act. 103 

A very significant limit on these presumptions is that they do not apply to a 
civil act participated in by a minor who, by reason of youth, lacked the 
understanding necessary for the participation. 104 Accordingly, the legislation 
requires that minors, as well as the type of civil act, be categorized. The Act 
also distinguishes between married and unmarried minors for limited purposes: 
"a receipt by a married minor for rents, profits or other income or for 
accumulations of income is presumptively binding". 105 

Capacity to participate in civil acts may be granted by a court, where it 
appears to the court that the grant is for the benefit of the minor. 106 A civil act 
by a minor authorized by court order is presumptively binding. 107 As well, 
dispositions of property by or to a minor may be certified by an independent 
solicitor or by the Public Trustee, to the effect that the minor understands the 
disposition and makes it voluntarily and for consideration that is not manifestly 
inadequate. 108 Dispositions certified in this way are presumptively binding. 109 
Again, the presumptions relating to court-approved civil acts and certified 
dispositions appear not to apply to a civil act participated in by a minor who, by 
reason of youth, lacked the understanding necessary for the participation. 110 

A civil act participated in by a minor may be affirmed by the minor after 
reaching the age of eighteen or, after the death of the minor, by the personal 
representative. 111 A civil act by a minor may be affirmed by a court on 
application of the minor or other interested person if it appears to the court that 
such affirmation is for the benefit of the minor. 112 Civil acts affirmed in any of 



102 Ibid., s. 21. Sections 22 and 23 set out other circumstances under which a civil act by a 
minor will be presumptively binding. 

103 Ibid., s. 24. 

104 Ibid., s. 18. 

105 Ibid., s. 25. Again, the presumption would only apply where the minor did not, by 
reason of youth, lack the understanding necessary to the receipt. 

106 Ibid., ss. 26 and 27. 

107 Ibid. 

108 Ibid., s. 28(2). 

109 Ibid., s. 28(1). 

110 Ibid., s. 18. 

111 Ibid., s. 30. 

112 Ibid. 



191 



these ways are presumptively binding 113 except where the minor lacked, by 
reason of youth, the understanding necessary for participation in the civil act. 114 

A minor may repudiate a civil act during minority or until the age of 
nineteen, unless the act was for his or her benefit. 115 Such repudiation may also 
be effected by a deceased minor's personal representative, 116 or by a court. 117 
However, repudiation is not effective as against a party or any other person 
where the civil act is presumptively binding on the minor in favour of such 
person. 118 If a civil act is not repudiated within the appropriate time, it becomes 
presumptively binding. 119 Again, this would not apply to a minor who lacked, 
by reason of youth, the understanding necessary for participation in the civil 
act. 120 

Where a civil act is repudiated in accordance with the legislation, a court 
may confirm the civil act, wholly or in part, or may adjust rights associated 
with it. 121 Where a civil act is presumptively binding in favour of any person, 
the court may not make orders adversely affecting that person's rights without 
his or her consent. 122 Subject to this limitation, where a civil act is repudiated 
the court may make orders to secure, "so far as practicable", just compensa- 
tion and restitution. 123 

It should be noted that a civil act participated in by a minor cannot be 
enforced by the minor against any other person unless the act is presumptively 
binding in favour of that person. 124 A minor cannot obtain compensation for or 
restoration of property under a civil act that is not presumptively binding unless 
the act is repudiated: the court's jurisdiction to adjust the rights of the parties 
arises only once the civil act has been repudiated. 125 Accordingly, some 
pressure is brought to bear on the minor to repudiate or affirm. 126 As well, a 
person interested in a civil act may apply to a court to have the status of the civil 
act determined, and where it appears to the court on such an application that the 



113 Ibid. 

114 Ibid., s. 18. 

115 Ibid., s. 31. 

116 Ibid., s. 32. 

117 Ibid., ss. 34 and 36. 

118 Ibid., s. 35(1). 

119 Ibid., s. 38. 

120 Ibid., s. 18. 

121 Ibid., s. 37(1). 

122 Ibid., s. 37(3). 

123 Ibid., s. 37(4). 

124 Ibid., s. 39. 

125 Ibid., s. 37. 

126 Ibid., s. 38. 



192 



civil act is not presumptively binding, the court must either affirm or repudiate 
it on behalf of the minor. 127 

The New South Wales legislation also addresses specific problems that 
have arisen in connection with minors' contracts. Guarantors of minors' 
contracts are liable as they would be if the principal debtor were not a minor. 128 
Persons under the age of twenty-one are answerable for their torts, whether or 
not the tort is connected with the contract, and whether or not the cause of 
action for the tort is in substance a cause of action in contract. 129 Persons under 
twenty-one may appoint an agent by power of attorney or otherwise, and a civil 
act in which a minor participates by agent has the same effect as if carried out 
by the minor without an agent. 130 

The legislation does provide clear answers where the common law was 
confused in connection with guarantees, tort liability and agency. However, the 
basic scheme of minors' contractual capacity set out in the legislation seems 
unduly complex, and establishes categories of contract and classes of minority 
that may be difficult to apply. On a policy level, the legislation expands the 
potential contractual liability of minors considerably, presumably to encourage 
commercial dealings with minors. Apart from the issue of whether this policy 
should be tempered to a greater degree by the desire to protect minors, it is 
questionable whether the legislation provides the kind of certainty required to 
increase significantly confidence in contracting with minors. 

(d) British Columbia 

The Law Reform Amendment Act, 79&5, 131 amends the Infants Act 132 and 
implements many of the recommendations made by the Law Reform Commis- 
sion of British Columbia in its 1976 Report on Minors' Contracts. 133 The 
legislation attempts to balance the protection of minors from contractual 
liability against the rights of those who contract with minors. 

The Act, which applies to both executed and executory contracts, 134 makes 
contracts unenforceable against minors and enforceable against other parties. 135 
This rule is qualified by making a contract enforceable against the minor if it is 



127 Ibid., s. 36. 

128 Ibid., s. 47(1). 

129 Ibid., s. 48. 

130 Ibid., s. 46. 

131 Law Reform Amendment Act, 1985, S.B.C. 1985, c. 10, ss. 1 and 2. 

132 R.S.B.C 1979, c. 196. 

133 Law Reform Commission of British Columbia, Report on Minors' Contracts (1976) 
(hereinafter referred to as "British Columbia Report"). 

134 Law Reform Amendment Act, 1985, supra, note 131, s. 1, adding to the Infants Act 
s. 16.1. 

135 Ibid., s. 16.2. 



193 



enforceable under any other legislative provision; affirmed by the minor after 
attaining majority; performed or partially performed by the minor within one 
year of attaining majority; or not repudiated within one year after the minor 
attains majority. 136 In addition, the court is given broad powers to order 
compensation or restitution to a party to a repudiated or breached minor's 
contract. 137 

The legislation also entitles a minor to apply to the court for an order 
granting full capacity to contract or the capacity to enter into a particular 
contract or class of contracts. 138 A minor may also apply to the Public Trustee 
for an order granting contractual capacity or for an order ratifying a specific 
contract. 139 

A party who contracts with a minor may, within one year from the date of 
the minor's majority, request that the minor either affirm or repudiate the 
contract. 140 If the contract is not affirmed within sixty days of receipt of the 
notice, the contract is deemed to be repudiated. 141 In the absence of a request 
for affirmation or repudiation, a minor would have one year, after reaching 
majority, to repudiate a contract made during minority. 142 

Under the British Columbia Act, the common law limits on minors' tort 
liability where the tort is connected with a contract remain unchanged. 143 
However, a minor would not be able to make fraudulent age representations 
with impunity. The court could take such representations into account, where 
they induced a person to enter into a contract, when determining the measure of 
relief available to a party to the contract. 144 Dispositions of property under an 
unenforceable minor's contract would be effective to transfer title unless and 
until otherwise ordered by the court. 145 Dispositions to bona fide transferees for 
value would not be invalid. 146 



136 Ibid., s. 16.2(1). 

137 Ibid., s. 16.3(l)(b). 

138 Ibid., s. 16.4(1). 

139 Ibid., s. 16.5(1). 

140 Ibid., s. 16.9(1). 

141 Ibid., s. 16.9(2). The Law Reform Commission of British Columbia proposed that a 
minor who had attained the age of majority should have to repudiate a contract within 
sixty days of receiving a written notice. If repudiation did not take place within that time 
then the contract would be enforceable. See British Columbia Report, supra, note 133, at 

47. 

142 Law Reform Amendment Act, 1985, supra, note 131, s. 1, adding to the Infants Act 
s. 16.11. 

143 Ibid., s. 16.8. 

144 Ibid., s. 16.3(3)(b) and 16.3(4). 

145 Ibid., s. 16.3(6). 

146 Ibid., s. 16.3(5). 



194 



With respect to the liability of guarantors, the Act provides 147 that both 
guarantors and indemnifiers are bound, even though the contract may be 
unenforceable against the minor. 



3. REFORM PROPOSALS IN OTHER JURISDICTIONS 

(a) ALBERTA 

In 1975, the Alberta Institute of Law Research and Reform reviewed the 
law of minors' contracts and concluded that it was uncertain, sometimes harsh, 
and in need of change. 148 It recommended that, in general, contracts made by 
minors should not be enforceable against them but should be enforceable 
against other parties. 149 However, the courts should have a broad discretionary 
power to grant relief to any party by way of compensation or restitution. 150 The 
majority of the Institute's members also favoured the creation of a category of 
contract that would be enforceable against minors: an adult would be able to 
enforce a contract against a minor party if a court was satisfied that the adult 
reasonably believed, at the time the contract was made, that it was "fair and 
reasonable in itself and in the circumstances of the minor". 151 The court could, 
nonetheless, refuse to enforce the contract if it was satisfied that the contract 
was improvident from the minor's point of view and that restitution or 
compensation would put the adult in as good a position as if the contract had not 
been made. 152 A minority of the Institute's members opposed the creation of 
this special category of contract, considering that it would lead to uncertainty 
and complexity and was not necessary in view of the court's broad powers to 
order relief under an unenforceable contract. 153 

The Institute's recommendations would apply to executory as well as 
executed contracts. 154 Subject to a dissent, the provisions of the proposed Act 
would also apply where the minor had misrepresented his or her age. 155 
However, a minor's misrepresentations as to age would not result in tort 
liability. 156 Except for such misrepresentations, a minor would be liable for 
tortious conduct, regardless of whether the tort was connected with a contract 



147 Ibid., s. 16.6. 

148 Alberta Institute of Law Research and Reform, Report No. 14, Minor's Contracts (1975) 
(hereinafter referred to as "Alberta Report"), at 27. 

149 Ibid., at 28. 

150 Ibid., at 29. 

151 Ibid., at 32. 

152 Ibid., at 33. 

153 Ibid. 

154 Ibid., at 34. 

155 Ibid., at 36. 

156 Ibid., at 37. 



195 



or whether the cause of action in tort was, in substance, a cause of action in 
contract. 157 

Under the recommendations of the Institute, a minor's contract would 
become enforceable if affirmed by the minor after attaining majority or if not 
repudiated by the minor within one year of attaining majority. 158 Subject to a 
dissent, 159 the Institute would also allow an adult party to a contract to give 
notice to a minor party who had attained majority requiring that the contract be 
affirmed or repudiated within 30 days, failing which it would become enforcea- 
ble against the minor. 160 

A minor's contract would be enforceable if approved by the court. 161 
Approval could be obtained by the minor or an adult party, before or after the 
contract was made, if the court was satisfied that the approval was for the 
benefit of the minor. 162 As well, the court would be empowered to grant 
capacity to enter contracts, or any description of contracts, to a minor if 
satisfied that the grant would be for the minor's benefit. 163 Contracts made by a 
minor under such a grant would be enforceable against the minor. 164 

The Institute also addressed the position of a bona fide third party 
transferee of property for value, and recommended that the title of such a 
person should not be invalid by reason only that the transferor acquired the 
property under a contract unenforceable against a minor. 165 On the issue of 
guarantees, the Institute proposed that a guarantor of a minor's obligation 
should be liable to the same extent as if the minor had been an adult. 166 The 
guarantor's recourse against the minor for indemnity would turn on whether the 
primary obligation was enforceable against the minor, although the court would 
have power to grant just relief to the guarantor in any event. 167 The final 
collateral issue dealt with by the Institute was a minor's power to appoint an 
agent. It was recommended that such an appointment, by power of attorney or 
otherwise, should be valid. 168 

157 Ibid. 

158 Ibid., at 35. 

159 Ibid., at 34. 

160 Ibid., at 35. 

161 Ibid., at 39. 

162 Ibid. 

163 Ibid., at 40. 

164 Ibid. 

165 Ibid., at 41. 

166 Ibid., at 42. 

167 Ibid. 

168 Ibid., at 43. 



196 



The recommendations of the Alberta Institute would correct certain 
problems in the common law concerning tort liability, agency, guarantees, and 
the position with respect to executory contracts. The Institute also focused 
clearly on the central issue of the law of minors' contracts, namely, the extent 
to which minors ought to be protected at the expense of other parties. It 
concluded that contracts should, in general, be unenforceable against minors 
subject to a broad discretion in the court to relieve against unfairness by 
ordering compensation or restitution. This basic approach would be modified 
by the majority of the Institute, which would create a category of contract to be 
enforceable against minors. 

(b) ENGLAND 

The Law Commission produced its final Report on the law of minors' 
contracts in 1984. 169 Prior to the release of that Report, the Commission had 
prepared and circulated for discussion an extensive Working Paper, 170 which 
explored the issues of minors' contracts and suggested certain reforms. 

In the Working Paper, two alternative sets of proposals were advanced. 
The more radical set of proposals would have conferred full contractual 
capacity on minors aged sixteen and over and would have rendered contracts of 
minors under the age of sixteen unenforceable. 171 Some limited protection 
would have been given to persons contracting with minors under the age of 
sixteen with respect to the recovery of benefits retained by the minor in 
specie. 112 After receiving public comment on these proposals, the Law Com- 
mission concluded that this approach should not be pursued. 173 

The second set of proposals in the Working Paper advocated changes to, 
and the codification of, the law of minors' contracts. Public consultation 
following the release of the Working Paper persuaded the Law Commission that 
codification of the law of minors' contracts was not required. 174 The Law 
Commission concluded that any legislation relating to the law of minors' 
contracts should be confined to those areas of the current law that were likely to 
cause difficulty or lead to injustice. 175 



169 England, The Law Commission, Report No. 134, Law of Contract: Minors' Contracts 
(1984) (hereinafter referred to as "English Law Commission Report"). 

170 England, The Law Commission, Working Paper No. 81, Law of Contract: Minors' 
Contracts (1982) (hereinafter referred to as "Working Paper No. 81"). 

171 Ibid., paras. 13.5 and 13.6. 

172 Ibid., para. 13.8. 

173 English Law Commission Report, supra, note 169, para. 2.3. 

174 Ibid., paras. 3.2-3.4. 

175 Ibid., para. 3.5. 



197 



In its final Report, the Law Commission recommended that the law 
governing minors' contracts should continue to be based on the principle of 
"qualified unenforceability", 176 a term coined in the Working Paper for the 
general rule that minors' contracts are unenforceable against them subject to a 
number of specific exceptions covering contracts of a class likely to benefit 
minors. 177 In particular, it was recommended that, with the exception of 
contracts for necessaries, contracts of employment, and contracts involving 
certain lasting property rights or obligations, minors' contracts should be 
enforceable by a minor but unenforceable against a minor. 178 

In its Working Paper, the Law Commission had tentatively recommended 
that a minor, on reaching majority, should not be able to ratify a contract made 
during minority. 179 It had further suggested that, in an action on a "new 
contract" that reproduced the effect of the earlier unenforceable contract, it 
should be a defence to the action that the terms of the contract were unfair to the 
minor. 180 This proposal was not well received. In light of the criticism, the Law 
Commission took the view in its final Report that ratification of a contract upon 
reaching majority should be permitted and that there should be no limits placed 
on the effectiveness of "new contracts". 181 

The Working Paper had provisionally recommended that guarantees of 
unenforceable minors' contracts should be enforceable. 182 This proposal was 
endorsed by those consulted and is included in the Law Commission's final 
Report. 183 

With respect to property acquired by a minor under an unenforceable 
contract the Law Commission concluded that, when it would be equitable to do 
so, a minor should return such property or any property representing it to the 
other contracting party. 184 This requirement would not extend to situations 
where the property had been sold and the proceeds dissipated. The Law 



176 Ibid., paras. 1.5 and 1.12. 

177 Working Paper No. 81, supra, note 170, para. 13.10. 

178 English Law Commission Report, supra, note 169, para. 1.5. Contracts in the latter 
class would include: contracts for the sale, acquisition or lease of an interest in land; 
marriage settlements; agreements to pay calls on shares; and contracts of partnership. 

179 Working Paper No. 81, supra, note 170, para. 13.30. 

180 Ibid. 

181 English Law Commission Report, supra, note 169, paras. 4.4-4.8. 

182 Working Paper No. 81, supra, note 170, para. 13.37. 

183 English Law Commission Report, supra, note 169, paras. 4.12-4.14. 

184 Ibid., para. 4.22. In its Working Paper the Law Commission provisionally recommended 
that a minor should only have to return property in specie. If the minor was unable to 
return the property he or she should pay for it unless it could be shown that the property 
was not disposed of in order to defeat a claim for its return. See Working Paper No. 81, 
supra, note 170, para. 13.14. 



198 



Commission reasoned that to require full payment of the value of the property 
would be to enforce an otherwise unenforceable contract against the minor. 185 

The Working Paper had tentatively suggested that a minor should be liable 
for the tort of deceit, even if associated with a contract that was unenforceable 
against the minor, 186 and that no other changes should be made to the common 
law protection of minors from liability for torts connected with unenforceable 
minors' contracts. In its final Report, the Law Commission stated that it was not 
persuaded that there were difficulties in practice relating to the protection of 
minors from liability for deceit. Accordingly, it concluded that legislation on 
this issue was unnecessary. 187 

The proposals of the Law Commission would not, if enacted, constitute a 
major departure from existing law. It would still be necessary to categorize 
minors' contracts. The courts would have some discretion to order compensa- 
tion and restitution, but persons who chose to deal with minors would still do so 
at their own risk. 

(c) SCOTLAND 

In 1985, the Scottish Law Commission produced a Consultative Memoran- 
dum relating to legal capacity and responsibility of minors and pupils. 188 This 
memorandum explored the issues of legal capacity and responsibility for those 
under eighteen years of age and sought comments on proposals for reform. The 
memorandum dealt not only with contractual capacity and responsibility, but 
also with capacity in respect of other legal acts. Since these other legal acts are 
beyond the scope of this Report, we shall refer to the work of the Scottish Law 
Commission only insofar as it relates to contracts. 

Scots law divides persons under the age of eighteen into pupils (boys under 
fourteen years of age and girls under twelve years of age) and minors (boys 
between fourteen and eighteen and girls between twelve and eighteen). 189 
Tutors and curators are the two categories of guardians for pupils and minors 
respectively. 190 A child's tutors and curators are usually his or her parents. 191 



185 English Law Commission Report, supra, note 169, para. 4.23. In its Working Paper the 
Law Commission also recommended that an adult should not be entitled to recover the 
proceeds of a sale of the property. See Working Paper No. 81, supra, note 170, para. 
13.14. 

186 Ibid., paras. 13.34 and 13.35. 

187 English Law Commission Report, supra, note 169, para. 5.3. 

188 Scottish Law Commission, Consultative Memorandum No. 65, Legal Capacity and 
Responsibility of Minors and Pupils (1985) (hereinafter referred to as "Scottish 
Memorandum"). 

189 Ibid., para. 2.1. 

190 Ibid. 

191 Ibid. 



199 



The basis of Scots law in this area is the incapacity of pupils whose tutors 
must, generally, act on their behalf in all legal transactions, and the limited 
capacity of minors who, if they have a curator, must generally act with their 
curator's consent, 192 and who, if they do not have a curator 193 or are married or 
forisfamiliated, 194 have full capacity to perform all legal acts. 195 

Where a pupil purports to contract on his or her own behalf, or where a 
minor who has a curator purports to contract without the curator's consent, the 
law is unsettled whether the contract is completely void or merely unenforce- 
able against the pupil or minor. 196 

Valid transactions entered into by or on behalf of pupils and minors are 
subject to the qualification that, in general, they may be set aside or "reduced" 
at the instance of the pupil or minor within four years of majority on the 
grounds of minority and lesion. 197 The standard of lesion is "enorm lesion", or 
considerable prejudice to the pupil or minor. The existence of lesion is 
determined as at the time of the transaction, rather than the time of suit, and in 



192 Ibid. 

193 Ibid., para. 2.7. 

194 Ibid., paras. 2.24 and 2.25. A minor who has, with parental consent, set out on an 
independent course of life is forisfamiliated. 

195 There are two exceptions to this rule. First a minor cannot dispose of heritable property 
by a gratuitous inter vivos deed (Scottish Memorandum, supra, note 188, para. 2.8). 
Secondly, while a minor without curators can give a valid receipt or discharge for 
payment of capital or income, he or she cannot compel a debtor to make a capital 
payment, as opposed to a payment of interest or income, unless security is first given that 
the money will be properly invested or otherwise used for the minor's benefit (Scottish 
Memorandum, supra, note 188, para. 2.8). A minor acting with the consent of a curator 
is under the same disability as a minor without curators in relation to gratuitous 
disposition of heritable property and the power to compel payment of a capital debt 
(Scottish Memorandum, supra, note 188, para. 2.9). 

196 Scottish Memorandum, supra, note 188, paras. 2.2 and 2.10. See ibid, for references to 
literature that suggests that such contracts may be valid and enforceable by the minor or 
the pupil if beneficial. 

The general rule of incapacity for pupils is subject to two qualifications. The first is 
that if money is lent to a pupil and expended on the pupil's estate or otherwise spent for 
his or her benefit the pupil will be liable to the extent of any enrichment (Scottish 
Memorandum, supra, note 188, para. 2.4). The second is that, by analogy to cases 
relating to minors, a pupil may be obliged at common law to pay for necessaries supplied 
to him. It is also thought that the statutory obligation to pay a reasonable price for 
necessaries in section 3 of the Sale of Goods Act, 1979, c. 54 (U.K.) applies to pupils 
(Scottish Memorandum, supra, note 188, para. 2.4). 

As well, there are certain contracts that a minor with a curator is entitled to enter 
into alone. These include contracts for the supply of necessaries (Scottish Memorandum, 
supra, note 188, para. 2.14), contracts of apprenticeship and employment (Scottish 
Memorandum, supra, note 188, para. 2.23) and contracts in the course of the minor's 
profession, trade or business (Scottish Memorandum, supra, note 188, para. 2.20). 

197 Ibid., para. 2.7. 



200 



making the determination the court must consider not only the financial 
circumstances, but all of the circumstances of the transaction. 198 

The right of challenge on the ground of minority and lesion is not available 
in respect of contracts beneficial to minors or pupils, contracts entered into in 
the course of a minor's profession, trade or business, and contracts fraudulently 
induced by the minor. 199 The right of challenge will also be lost if the minor 
ratifies the transaction after attaining eighteen years of age. 200 Ratification may 
be express or by any free and deliberate act implying approval of the contract. 
What amounts to ratification depends on the circumstances of the case. In order 
for ratification to be effective, the ratifying party must be aware at the time of 
ratification of the right to reduce the contract, and the ratification must not have 
been induced by fraud. 201 

Finally, if a transaction is either void or reduced the party contracting with 
the pupil or the minor is bound to return anything received under the contract, 
whether or not the pupil or minor is in a position to do the same. 202 Restitution 
is mutual, however, and a minor must repay or restore anything obtained under 
the contract if it is still part of his or her estate. 203 The general obligation to 
return anything received under the contract is relaxed in favour of a minor if he 
or she has destroyed or squandered the property received under the contract. 204 

If a contract is void no rights of any kind can be passed to a third party. 205 
If a contract is merely voidable, the rights of a third party depend on the 
classification of the third party's right to the property and whether the third 
party took the property in good faith, for value, and without notice of the 
defect. 206 

The Scottish Law Commission put forward two options for reform. Its 
preferred option was a single tier of incapacity (with some minor exceptions) 
extending to sixteen years of age and mil legal capacity thereafter. 207 The 
Scottish Commission viewed this as a realistic dividing line between those who 
need special protection on account of immaturity and those who do not. 



198 Ibid., para. 2.34. 

199 Ibid., para. 2.36. Note that a mere assertion of age in a deed by which a contract is 
constituted may not be enough if the minor was induced by the other party to make that 
declaration. 

200 Ibid., para. 2.37. 

201 Ibid. 

202 Ibid., paras. 2.39 and 2.42. 

203 Ibid., para. 2.39. 

204 Ibid. 

205 Ibid., para. 2.43. 

206 Ibid. 

207 Ibid., paras. 5.12-5.15. 



201 



Under this option, the Scottish Commission suggested that all legal acts of 
persons under sixteen years of age should be performed on their behalf by their 
guardian, and any transactions that they purported to enter into on their own 
behalf would be invalid. 208 It proposed that this general rule should be subject to 
an exception for "everyday" transactions of a kind commonly entered into by 
persons of the age of the contracting party. 209 This exception was felt to cover 
the range of transactions commonly entered into by young persons of various 
ages. 

With respect to the consequences of invalidity, the Scottish Commission 
suggested that the adult party should be obliged to return anything received 
under the transaction in accordance with common law principles, but that the 
court should be empowered to modify the young person's obligation to make 
restitution or recompense in any way it considered equitable in the 
circumstances. 210 

The second option put forward by the Scottish Commission was a 
modification of its preferred option, which incorporated an intermediate stage 
of qualified legal capacity for persons between sixteen and eighteen years of 
age. 211 Persons up to sixteen years of age were to be fully protected from the 
legal consequences of entering into transactions but were to be entitled to enter 
into "everyday transactions". 212 Persons between sixteen and eighteen years of 
age were to have capacity to enter into any transaction with the proviso that the 
court would have the power to set aside prejudicial transactions. 213 The right to 
take action to have such a transaction set aside would be exercisable until the 
young person reached the age of twenty-one years. 214 If a transaction was set 
aside, the court would have the power to modify the young person's obligation 
to return anything received under it. 215 

The Scottish Law Commission suggested that under its second option it 
might be appropriate to exclude the right of challenge in the following 
circumstances: where the transaction was one ordinarily entered into by a 
person of equal age; 216 where a sixteen or seventeen year old fraudulently 
misrepresented his or her age, thereby inducing the other party to enter into the 
contract; 217 where a bona fide third party had acquired rights for value that 



208 Ibid., paras. 5.24 and 5.25. 

209 Ibid., paras. 5.28-5.35. 

210 Ibid., para. 5.99. 

211 Ibid., para. 5.22. 

212 Ibid., para. 5.63. 

213 Ibid., para. 5.22. 

214 Ibid., para. 5.122. 

215 Ibid., para. 5.123. 

216 Ibid., para. 5.110. 

217 Ibid., para. 5.112. 



202 



depended on the validity of the transaction; 218 where there were any "actings or 
events" after the young person in question attained the age of eighteen that 
amounted to ratification or any other personal bar to reduction; 219 and, possibly, 
where parental consent had been given 220 or where the transaction had been 
ratified by the courts. 221 

4. PROPOSALS FOR REFORM 

(a) INTRODUCTION 

The difficulties with the existing law of minors' contracts were reviewed in 
the first section of this chapter. The current law is complex, replete with 
anomalies, and difficult to apply. Results are uncertain, and the interests of 
fairness are not adequately served, particularly as regards compensation and 
restitution under an unenforceable contract. For these reasons, we believe that 
legislative reform would be appropriate. 

The law of minors' contracts should, in our view, respond to three policy 
goals. First, protection should be provided to minors who, by reason of 
inexperience and lack of knowledge, enter into imprudent contracts. Secondly, 
innocent parties who contract with minors should be treated fairly. Thirdly, the 
law, in the interests of both minors and commerce, should not unnecessarily 
discourage commercial dealings with minors. While it is apparent that these 
goals conflict one with the other to some extent, we believe that it is possible to 
strike a reasonable balance among them that would be significantly simpler and 
more certain than the status quo. We favour a scheme under which some 
minors' contracts would be enforceable, and under which questions of fairness 
to the parties would be explicitly addressed in the case of an unenforceable 
minor's contract. To this end, we shall now consider specific reform issues. 

(b) The General Rule 

The reason for special legal rules to govern minors' contracts is the need to 
protect minors. Consistent with this, we recommend that, as a general rule, 
minors' contracts should not be enforceable against them. However, it does not 
follow that these contracts should not be enforceable against adult parties. None 
of the policy goals require such reciprocity, and it would be strange if a minor, 
the person whom we are trying to protect, could not exercise such contractual 
rights as would be available to an adult. 

Accordingly, we recommend that while minors' contracts should not be 
enforceable against them, minors should have the right to enforce their 
contracts, subject to the provisions recommended below and to the provisions of 
other legislation. 



218 Ibid., para. 5.117. 

219 Ibid., paras. 5.114 and 5.116. 

220 Ibid., paras. 5.118 and 5.119. 

221 Ibid., para. 5.120. 



203 



(c) AFFIRMATION 

Originally, the English Law Commission objected to providing for binding 
affirmation, after majority, of an obligation undertaken during minority. 222 In 
the view of the Law Commission, such a provision would have resulted in 
untoward pressure being brought to bear on persons who had recently attained 
majority. However, following consultation, the Law Commission was con- 
vinced that ratification after attaining the age of majority should be permitted. 223 

We are not aware of significant problems with ratification under the 
common law of Ontario of the kind projected by the Law Commission in its 
Working Paper. We would agree with the Law Commission's final proposal 
and with the position taken by the Law Reform Commission of British 
Columbia 224 that, while minors require the protection of special rules in relation 
to contracts, adults do not need protection against affirmation of obligations 
undertaken during minority. 

Accordingly, we recommend that legislation should provide that a contract 
may be affirmed by a minor who has attained the age of majority, and that after 
such affirmation the contract may be enforced against the minor. However, to 
prevent affirmation from becoming a broad concept, we believe that an act of 
affirmation should be a conscious, positive one. Accordingly, we recommend 
that legislation should indicate that the mere receipt or retention of a benefit, 
after the age of majority, pursuant to a minor's contract, is not conclusive 
evidence of affirmation of the contract. 

We have discussed the requirement, under section 7 of the Statute of 
Frauds, that ratification of minors' contracts be in writing. 225 In our view, this 
requirement is unduly rigid. In support of this view, we note that judicial 
interpretation of the requirement has tended to be very liberal, presumably in 
response to the injustice that would be caused by its strict application. 

Accordingly, we recommend that section 7 of the Statute of Frauds should 
be repealed. 226 

(d) REPUDIATION 

We have proposed, as a general rule, that minors' contracts should be 
unenforceable against minors but enforceable against other parties. However, 
the policy of protecting minors does not require that other parties be exposed 
indefinitely to one-sided liability. It would seem reasonable to place some time 
limit on the period after majority during which a minor may hold another party 



222 Working Paper No. 81, supra, note 170, paras. 9.8-9.9. 

223 English Law Commission Report, supra, note 169, paras. 4.4-4.8. 

224 British Columbia Report, supra, note 133, at 34-35. 

225 Supra, this ch., sec. l(b)(iii). 

226 Further recommendations relating to contractual aspects of the Statute of Frauds are 
discussed supra, ch. 5. 



204 



to a contract, while not affirming the contract. As well, the other party should 
be permitted to require a decision, within a fairly short period after the minor 
reaches the age of majority, as to whether the contract is to be affirmed or 
repudiated. 

Accordingly, we recommend that legislation should provide that a party 
who contracts with a minor may, by notice in writing after the minor has 
attained the age of majority, require the minor to affirm or repudiate the 
contract within thirty days from receipt of the notice. Unless the minor 
repudiates the contract within the thirty day period, or within one year after 
attaining the age of majority, whichever period expires first, the contract may 
be enforced against the minor. Because of the important consequences that 
follow a notice to affirm or repudiate a contract, we further recommend that the 
notice should refer to the consequences of a failure to respond to the notice. 

We also believe it to be important to indicate the kinds of conduct that 
would amount to repudiation. Accordingly, we recommend that legislation 
should provide that repudiation of a contract by a minor includes: 

(1) a refusal to perform the contract or a material term thereof; 

(2) the making of a claim for relief under a contract unenforceable against 
a minor; and 

(3) the giving of an oral or written notice of repudiation to the other 
party. 

(e) RELIEF UNDER AN UNENFORCEABLE CONTRACT 

One of the most difficult issues in the current law of minors' contracts is 
that of relief to parties to a contract that is unenforceable against a minor. It is 
far from clear what the governing principles are at the present time, and 
whether there are different principles to govern different categories of con- 
tract. 227 In our view, relief should not hinge on technical rules; nor should it 
depend on how a contract is categorized. 

Accordingly, we recommend that legislation should provide that, where a 
contract is unenforceable against a minor because of minority, an action for 
relief may be brought by the minor, before or after attaining majority, or by the 
other party to the contract after the minor has repudiated the contract. In any 
such action, the court should be empowered to grant to any party such relief — 
for example, by way of restitution or compensation — as may be just. 

(f) Contracts in the best interests of the minor 

We have discussed the problems caused by the fine distinctions drawn in 
the current law between necessaries and non-necessaries, beneficial contracts, 
trading contracts and contracts of service, contracts valid until repudiated, 
contracts not binding unless ratified, and so on. The current law has attempted 



227 Supra, this ch., sec. 1(c). 



205 



to achieve the policy goal of treating innocent parties who contract with minors 
fairly through the use of these various exceptions to the basic rule of unenforce- 
ability. However, as legislation and reform proposals from other jurisdictions 
reveal, there are other ways of achieving just results for innocent parties who 
contract with minors that are less technical and rigid. 

While we do not believe that the protection of minors requires that they be 
relieved of contractual liability in every case, we would not enlarge the class of 
contracts now enforceable against minors. Rather, we prefer to replace the 
current technical exceptions with a single exception to the general rule of 
unenforceability. We believe that contracts should be enforceable against 
minors where the other party to the contract can satisfy the court that the 
contract was in the best interests of the minor. We would note that the 
enforcement of contracts that benefit minors is consistent with the three policy 
goals outlined above. 228 

Accordingly, we recommend that legislation should provide that a contract 
may be enforced against a minor if the other party to the contract satisfies the 
court that the contract was in the best interests of the minor. 

(g) EXECUTED AND EXECUTORY CONTRACTS 

As we have discussed in an earlier section of this chapter, there is some 
uncertainty under the present law as to the enforceability of executory contracts 
for necessaries. 

The status of executed contracts was considered by the English Law 
Commission in its Working Paper. 229 The Commission suggested that, where a 
contract had been performed by both sides, the law should not interfere merely 
because the minor had acted improvidently or suffered hardship. The Law 
Commission provisionally recommended 230 that an executed contract should 
only be re-opened where the adult party had taken advantage of the minor's 
youth and thereby induced a contract that caused hardship to the minor. 

The Law Reform Commission of British Columbia also addressed this 
issue and reached a different conclusion. 231 It stressed that an improvident 
contract does not lose its character as such by virtue of being executed. While 
acknowledging the advantages of finality and certainty that would accompany a 
rule against reopening executed contracts, it considered that the protection of 
minors should not be limited to cases where the minor had not performed the 



228 Supra, this ch., sec. 4(a). 

229 Working Paper No. 81, supra, note 170, para. 13.29. In its final Report, the Law 
Commission made no recommendation on this issue. See English Law Commission 
Report, supra, note 169, para. 5.2. 

230 Working Paper No. 81, supra, note 170, para. 13.29. 

231 British Columbia Report, supra, note 133, at 33-34. 



206 



contract. 232 Under our proposed scheme, a distinction between executed and 
executory contracts would be anomalous. Minors' contracts would be enforcea- 
ble only in limited circumstances, under which there would be no need to 
protect minors from liability. Accordingly, we agree with the conclusions of the 
Law Reform Commission of British Columbia. 

We therefore recommend that the proposed legislation should apply to 
executed as well as executory contracts. 

(h) Judicial Approval of Contracts and Grants of 
Capacity 

In some circumstances, the basic rule of unenforceability of minors' 
contractual obligations would prove very inconvenient. For example, a minor 
might wish to enter into a contract that would be beneficial, but be unable to do 
so because the other party is unwilling to take the risk. A provision for court 
approval of a minor's contract would meet this problem, at least where the 
contract is of sufficient importance to the parties to warrant an application to 
court. In other cases, a minor might wish to have capacity to enter into a class 
of contracts or to enter into contracts generally, in order to carry on a business. 
It is true that judicial conferral of capacity to enter into contracts not specifically 
reviewed by the court might result in a minor entering into a particular contract 
that is improvident. However, there might well be circumstances in which, on 
balance, it would be in the minor's interests, to confer contractual capacity, and 
the risk of improvident contracts being made by the minor could be met by 
attaching terms and conditions to the court's approval. 

Accordingly, we recommend that legislation should provide that a contract 
entered into by a minor is enforceable against the minor if it is approved by the 
court. A party to the contract should be able to apply for the approval of the 
court either before or after the contract is entered into. Approval should not be 
given unless the court is satisfied that the contract would be for the benefit of 
the minor. 

We further recommend that legislation should provide that, on application 
by a minor, the court may grant to the minor capacity to enter into contracts 
generally, or into any description of contract, subject to such terms and 
conditions as the court thinks fit. The court should not make such an order 
unless satisfied that it would be for the benefit of the minor. 

(i) Dispositions of Property 

Like the Alberta Institute of Law Research and Reform, 233 we believe that 
questions of title to property transferred pursuant to a contract that is unenforce- 
able against a minor should not be left unresolved until the contract becomes 
binding or the court makes an order regarding title. As between the parties to 



232 Ibid. See, also, Law Reform Amendment Act, 1985, supra, note 131, s. 1, adding to the 
Infants Act s. 16.1. 

233 Alberta Report, supra, note 148, at 40. 



207 



such a contract, a transfer should be valid unless and until the contract is 
repudiated and restitution is ordered by the court. As regards bona fide third 
party transferees for value, we believe that the third party's title should not be 
invalid only because the transferor acquired the property under a contract that is 
unenforceable against a minor. As noted earlier, an analogous position is taken 
under section 24 of the Sale of Goods Act, which allows good title to a good 
faith purchaser of goods from a seller with a voidable title to them. 234 

We do not, however, recommend altering existing statute law regarding 
conveyances of real property by a minor. 235 The focus of our current project is 
the law of contracts, and it would be inadvisable, in our view, to attempt reform 
of the law of conveyancing in this context. 

Accordingly, we recommend that legislation should provide that, subject 
to the provisions of any other legislation, a disposition of property or a grant of 
a security or other interest therein made pursuant to a contract that is 
unenforceable against a minor is effective to transfer the property or interest 
unless and until the court orders otherwise. The legislation should further 
provide that, subject to the provisions of any other legislation, a subsequent 
disposition of property or a grant of a security or other interest therein to a bona 
fide transferee or grantee for value is not invalid only because the transferor or 
grantor acquired the property under a contract that was unenforceable against a 
minor. 

(j) AGENCY 

We have commented on the anomalous restriction in the common law on 
the granting of a power of attorney by a minor. 236 We see no reason why a 
minor should not be able to do through an agent what he or she can do in 
person. At the same time, it should be emphasized that the fact that a minor acts 
through an agent should not in itself give rise to liability on the minor's part. 
That is, the minor should be liable on a contract entered into by an agent only to, 
the extent he or she would have been liable had the contract been made by the 
minor personally. Again, we are mindful of restrictions in the existing law on 
conveyancing of real property by minors, and would make our recommenda- 
tions subject to these restrictions. 

Accordingly, we recommend that legislation should provide that, subject 
to the provisions of any other legislation, a minor may appoint an agent by 
power of attorney or otherwise to enter into any contract or make any 
disposition of property or grant any security or other interest. However, any 
contract, disposition, or grant by such agent should have no greater validity or 
effect as against the minor than it would have had if participated in or effected 
by the minor without an agent. The legislation should further provide that a 
person may, by an agent under the age of majority, make any contract, dispose 



234 Supra, note 24. See, also, this ch., sec. l(c)(ii). 

235 See, for example, Children's Law Reform Act, 1982, S.O. 1982, c. 20, s. 60. 

236 Supra, this ch., sec. 1(0- 



208 



of any property or grant any security or other interest that a person may make, 
dispose of, or grant by an agent who has attained the age of majority. 

(k) Guarantees 

We have discussed the uncertainty in the common law as to whether adults 
can be sued successfully on guarantees of minors' unenforceable obligations. 237 
In our view, there is no policy justification why an adult should not be liable on 
such a guarantee. We also cannot justify the existing distinction between 
guarantees and indemnities. 

Accordingly, we recommend that legislation should provide that a guaran- 
tor of an obligation of a minor is bound by the guarantee as if the minor were an 
adult. If the obligation is enforceable against the minor, the guarantor should be 
entitled to be indemnified by the minor to the same extent as if the minor were 
an adult. If the obligation is not enforceable against the minor, the court should 
be empowered to grant the guarantor such relief against the minor as is just. For 
the purposes of the proposed legislation, "guarantor" should include a person 
who enters into a guarantee or indemnity or otherwise undertakes to be 
responsible for the failure of a minor to carry out a contractual obligation. 

(1) TORT LIABILITY 

Under present law, subject to the capacity of a minor to form certain 
mental attitudes involved in specific torts, minors are generally held liable for 
their torts. However, as a result of the general rule that minors' contracts 
should not be enforceable against them, minors have not been held liable for 
tortious conduct where the effect of such a holding would be indirectly to 
enforce an unenforceable contract. A distinction has developed between situa- 
tions where the conduct in question can be considered as directly connected to 
the contract (in which case there is no liability) and situations where the conduct 
can be seen as independent of the contract (in which case liability is imposed). 
The question that arises is whether this distinction should be maintained. 

If one takes the view that the law of torts and the law of contracts fulfill 
different purposes and that, while minors should be protected from the world of 
commerce, they should be held accountable for their wrongful acts, then it is 
logical that minors should be liable for their torts regardless of whether the 
cause of action in tort is, in substance, also a cause of action in contract. If, 
however, one takes the view that the law of contracts and the law of torts are 
not very different in function, then it appears that the protection of minors from 
contractual liability would be subverted if there were not special rules limiting 
minors' liability for torts associated with contracts. 

Reform proposals from other jurisdictions have varied considerably in 
approach. The Latey Committee, in England, was tentatively prepared to leave 
the common law rule in place, 238 except as regards fraud unrelated to age. In the 



237 Supra, this ch., sec. 1(e). 

238 England, Report of the Committee on the Age of Majority (Cmnd. 3342, 1967), at 91-93. 



209 



case of fraud unrelated to age, the Committee proposed that minors should be 
liable even if the effect would be indirectly to enforce an otherwise unenforce- 
able contract. 239 The Committee considered, however, that the common law 
limits on tort liability should continue to apply to fraud related to age. 240 

The Law Commission provisionally affirmed the general common law rule 
relating to minors' liability in tort 241 except as regards a minor's fraud. 242 In the 
view of the Law Commission, a minor should be held liable for the tort of 
deceit whether or not the result would be indirectly to enforce a contract. It was 
apparently not considered that fraud related to age should be dealt with 
differently than fraud in general. 

The New South Wales legislation provides that a minor is liable for a tort 
whether or not the tort is connected with a contract. 243 The legislation in New 
Zealand appears to have maintained the common law distinction, except that a 
minor's fraud may be taken into account by a court in an action for restitution 
or compensation. 244 

The Law Reform Commission of British Columbia would maintain the 
common law rule notwithstanding the problems with its application. As to 
fraud, the Commission favoured the New Zealand solution, that is, courts 
should be permitted to take a minor's fraud into account in determining the 
measure of relief available to parties to a contract unenforceable against a 
minor. 245 

The Alberta Institute of Law Research and Reform considered that the 
common law distinction between independent torts and torts connected with 
contracts was artificial and uncertain, and should therefore be abolished. 
However, the Institute suggested that an exception be made with respect to 
fraud related to age and that minors should not be held liable for damages 
resulting from false representations as to age. 246 

We would agree with the position taken by the New South Wales 
legislation and the Alberta Institute of Law Research and Reform to the effect 
that minors should be liable for both independent torts and torts connected with 
contracts. We believe that minors should be liable for their tortious conduct 
even in respect of age misrepresentation. Accordingly, we recommend that 
legislation should provide for the imposition of liability in tort on minors, 



239 Ibid., at 92. 

240 Ibid., at 93. 

241 Working Paper No. 81, supra, note 170, para. 11.4. 

242 Ibid., para. 11.2. 

243 Minors (Property and Contracts) Act, 1970, supra, note 92, s. 48. 

244 Minors' Contracts Act 1969, supra, note 78, s. 15(4). 

245 British Columbia Report, supra, note 133, at 36-37. 

246 Alberta Report, supra, note 148, at 37. 



210 



regardless of whether the tort is connected with a contract and regardless of 
whether the cause of action in tort is in substance a cause of action in contract, 
except where the contract would provide a defence to an individual who had 
attained majority. 

In order to prevent the worst kinds of overreaching, however, we further 
recommend that a minor's liability for damages resulting from a false represen- 
tation as to age should be subject to two limitations. First, legislation should 
provide that, where the false representation has induced the making of a 
contract, a minor's liability in damages for the false representation only arises 
where the person to whom the representation was made had reasonable grounds 
to believe that the representation was true. Secondly, legislation should provide 
that a minor will not be liable in damages for false representations as to age by 
reason only of the fact that the minor has signed or otherwise adopted a 
document relevant to the transaction that contains a statement that the minor has 
attained the age of majority or otherwise has contractual capacity, that was 
prepared and tendered by the person to whom the representation was made or 
with whom the contract was made, and that was preprinted and used by such 
person in like transactions. These limitations, in our view, are necessary to 
prevent potential exploitation of minors and are in accordance with the general 
policy of protecting minors from contractual liability. 



Recommendations 

The Commission makes the following recommendations: 

1 . Subject to the provisions recommended below and to the provisions of 
other legislation, minors' contracts should not, as a general rule, be 
enforceable against them, but minors should have the right to enforce 
their contracts. 

2. Legislation should provide that a contract may be affirmed by a minor 
who has attained the age of majority, and that after such affirmation the 
contract may be enforced against the minor. 

3. Legislation should provide that the mere receipt or retention of a benefit, 
after the age of majority, pursuant to a minor's contract, is not 
conclusive evidence of affirmation of the contract. 

4. Section 7 of the Statute of Frauds should be repealed. 

5. Legislation should provide that a party who contracts with a minor may, 
by notice in writing after the minor has attained the age of majority, 
require the minor to affirm or repudiate the contract within thirty days 
from receipt of the notice. Unless the minor repudiates the contract 
within the thirty day period, or within one year after attaining the age of 
majority, whichever period expires first, the contract may be enforced 
against the minor. 



211 



6. The notice to affirm or repudiate a contract referred to in Recommenda- 
tion 5 should refer to the consequences of a failure to respond to the 
notice. 

7. Legislation should provide that repudiation of a contract by a minor 
includes: 

(a) a refusal to perform the contract or a material term thereof; 

(b) the making of a claim for relief under a contract unenforceable 
against a minor; and 

(c) the giving of an oral or written notice of repudiation to the 
other party. 

8. Legislation should provide that, where a contract is unenforceable 
against a minor because of minority, an action for relief may be brought 
by the minor, before or after attaining majority, or by the other party to 
the contract after the minor has repudiated the contract. In any such 
action, the court should be empowered to grant to any party such relief 
as may be just. 

9. Legislation should provide that a contract may be enforced against a 
minor if the other party to the contract satisfies the court that the 
contract was in the best interests of the minor. 

10. The proposed legislation should apply to executed as well as executory 
contracts. 

11. Legislation should provide that a contract entered into by a minor is 
enforceable against the minor if it is approved by the court. A party to 
the contract should be able to apply for the approval of the court either 
before or after the contract is entered into. Approval should not be given 
unless the court is satisfied that the contract would be for the benefit of 
the minor. 

12. Legislation should provide that, on application by a minor, the court 
may grant to the minor capacity to enter into contracts generally, or into 
any description of contract, subject to such terms and conditions as the 
court thinks fit. The court should not make such an order unless satisfied 
it would be for the benefit of the minor. 

13. Legislation should provide that, subject to the provisions of any other 
legislation, a disposition of property or a grant of a security or other 
interest therein made pursuant to a contract that is unenforceable against 
a minor is effective to transfer the property or interest unless and until 
the court orders otherwise. 



212 



14. Legislation should further provide that, subject to the provisions of any 
other legislation, a subsequent disposition of property or a grant of a 
security or other interest therein to a bona fide transferee or grantee for 
value is not invalid for the reason only that the transferor or grantor 
acquired the property under a contract that was unenforceable against a 
minor. 

15. Legislation should provide that, subject to the provisions of any other 
legislation, a minor may appoint an agent, by power of attorney or 
otherwise, to enter into any contract or make any disposition of property 
or grant any security or other interest. Any contract, disposition or grant 
by such agent should have no greater validity or effect as against the 
minor than it would have had if participated in or effected by the minor 
without an agent. 

16. Legislation should further provide that a person may, by an agent under 
the age of majority, make any contract, dispose of any property or grant 
any security or other interest that a person may make, dispose of or 
grant by an agent who has attained the age of majority. 

17. Legislation should provide that a guarantor of an obligation of a minor is 
bound by the guarantee as if the minor were an adult. If the obligation is 
enforceable against the minor, the guarantor should be entitled to be 
indemnified by the minor to the same extent as if the minor were an 
adult. If the obligation is not enforceable against the minor, the court 
should be empowered to grant the guarantor such relief against the 
minor as is just. 

18. For the purposes of Recommendation 17, "guarantor" should include a 
person who enters into a guarantee or indemnity or otherwise undertakes 
to be responsible for the failure of a minor to carry out a contractual 
obligation. 

19. Subject to Recommendation 20, legislation should provide for the 
imposition of liability in tort on minors, regardless of whether the tort is 
connected with a contract and regardless of whether the cause of action 
in tort is in substance a cause of action in contract, except where the 
contract would provide a defence to an individual who had attained 
majority. 

20. A minor's liability for damages resulting from a false representation as 
to age should be subject to the following limitations: 

(a) where the false representation has induced the making of a 
contract, a minor's liability in damages for the false representa- 
tion should only arise where the person to whom the 
representation was made had reasonable grounds to believe that 
the representation was true; and 



213 



(b) a minor's liability in damages for false representations as to age 
should not arise by reason only of the fact that the minor has 
signed or otherwise adopted a document relevant to the transac- 
tion that contains a statement that the minor has attained the age 
of majority or otherwise has contractual capacity, that was 
prepared and tendered by the person to whom the representa- 
tion was made or with whom the contract was made, and that 
was preprinted and used by such person in like transactions. 



Chapter 11 



CONTRACTS THAT 
INFRINGE PUBLIC POLICY 



1. INTRODUCTION 

Courts face a difficulty when a contract is made that infringes the public 
policy of the community. Contract law represents a part of our attempt to secure 
justice between individuals. Often the principles of contract law require 
enforcement of a contract either by a specific remedy or by awarding compen- 
sation for the loss caused by breach. However, where the contract infringes an 
important public policy, 1 enforcement, compensation and other remedies must, 
at least in some cases, be denied. Thus, in an unreported but often cited case 
said to have been decided in 1725, the Court vigorously repudiated the idea that 
it could hold an accounting between highwaymen. 2 In another case it was said, 
"[n]o polluted hand shall touch the pure fountains of justice". 3 

2. THE PRESENT LAW 

(a) INTRODUCTION 

Illegal contracts can be divided into two classes: contracts illegal at 
common law, and contracts illegal by statute. 

Common law illegality includes a wide variety of cases in which contracts, 
although not prohibited by any statute, have been declared by the courts to be 
contrary to public policy. In a sense, the term "illegal" is not strictly 
appropriate for these contracts, since they are not expressly forbidden by 



1 In the vast majority of cases, questions of infringement of public policy arise in the 
context of contractual disputes. However, there are instances in which property or some 
other benefit is transferred under an arrangement which cannot be characterized as a 
contract. It may be, as was suggested by the Law Reform Commission of British 
Columbia, that such transactions should be dealt with in the same manner as contracts. 
However, such transactions are beyond the scope of this Report and we have not 
addressed them here. See Law Reform Commission of British Columbia, Report on 
Illegal Transactions (1983) (hereinafter referred to as "British Columbia Report (Illegal 
Transactions)"). 

2 Everet v. Williams (1725), referred to in Note, "The Highwayman's Case (Everet v. 
Williams)" (1893), 9 L.Q. Rev. 197. See, also, Palmer, The Law of Restitution (1978), 
Vol. 2, § 8.4. 

3 Collins v. Blantern (1767), 2 Wils K.B. 341, at 350, 95 E.R. 850, at 852. 

[215] 



216 



legislation but rather fall into a class of contracts that a court will decline to 
enforce on the ground that they infringe some public policy. 

There is no agreed scheme of classification of the heads of common law 
illegality. 4 The modern view appears to be that the categories are not fixed, but 
are capable of expansion and reduction to reflect the changing values of 
society. 5 The most significant of the heads of common law illegality at the 
current time would appear to be contracts in restraint of trade. Such contracts 
are not contrary to public policy per se, but may be contrary to public policy if 
the degree of restraint is unreasonable. 

A further difficulty arises because some authors (though not all) draw a 
distinction between contracts that are illegal and void because they offend 
public policy and contracts that are only void. 6 However, even among authors 
that adopt this distinction there is no agreement about the categories of contract 
that are only void. The importance of the distinction is said by some to reside in 
the fact that benefits conferred may be recoverable under contracts that are void 
but not illegal, and that the courts may be prepared to sever the objectionable 
parts of such contracts from the unobjectionable and enforce the latter. 7 

Statutory illegality has assumed a growing importance in this century 
because of the widespread regulation of almost every aspect of modern life. 
There must be few long term contracts that do not potentially involve, in the 
course of performance, some infringement of the terms or object of a statute or 
regulation. 

We turn now to discuss illegal contracts generally. Contracts in restraint of 
trade raise particular issues and will be discussed separately. 

(b) General 

As noted above, where contracts infringe important public policy, enforce- 
ment, compensation and other remedies must be denied, at least in some 
situations. In addition to denying enforcement in these cases, the courts will 
not, save in exceptional circumstances, grant restitution of benefits conferred 
under an illegal contract. Looking at the matter as between the parties only, this 
failure to intervene could be considered unjust: it may be said that the plaintiff 



See Furmston, "The Analysis of Illegal Contracts" (1966), 16 U. Toronto L. J. 267. 

Contracts formerly categorized as sexually immoral might be enforced today: see Farrar 
v. MacPhee (1971), 19 D.L.R. (3d) 720 (P.E.I. S.C.). Contracts that are discriminatory 
on racial or sexual grounds, which were formerly enforced, might be struck down today: 
see Nagel v. Feilden, [1966] 2 Q.B. 633, [1966] 1 All E.R. 689 (C.A.). 

See, for example, Furmston (ed.), Cheshire and Fifoot's Law of Contract (10th ed., 
1981), at 308-78; and compare Treitel, The Law of Contract (6th ed., 1983), at 321-22. 

See Cheshire and Fifoot's Law of Contract, supra, note 6, at 329-78; and compare 
Treitel, supra, note 6, at 370-86. See, also, Carney v. Herbert, [1985] A.C. 301, (1985] 

I All E.R. 438 (P.C.), which suggests that the doctrine of severance may be available 
even for illegal contracts. Carney v. Herbert is discussed in Ziegel, "Comment" (1986), 

II Can. Bus. L.J. 233, at 241-46. 



217 



is unjustly treated vis-d-vis the defendant if a remedy that, in the absence of any 
considerations of public policy would otherwise be appropriate, is withheld. 
Lord Mansfield pointed this out in Holman v. Johnson* where he stated, "[t]he 
objection, that a contract is immoral or illegal as between plaintiff and 
defendant, sounds at all times very ill in the mouth of the defendant." 9 He 
explained the rule of non-intervention as follows: 10 

It is not for his sake, however, that the objection is ever allowed; but it is founded 
in general principles of policy, which the defendant has the advantage of, contrary 
to the real justice, as between him and the plaintiff, by accident, if I may so say. 
The principle of public policy is this: ex dolo malo non oritur actio. No Court will 
lend its aid to a man who founds his cause of action upon an immoral or an illegal 
act. If, from the plaintiffs own stating or otherwise, the cause of action appears to 
arise ex turpi causa, or the transgression of a positive law of this country, there the 
Court says he has no right to be assisted. It is upon that ground the Court goes; not 
for the sake of the defendant, but because they will not lend their aid to such a 
plaintiff. So if the plaintiff and the defendant were to change sides, and the 
defendant was to bring his action against the plaintiff, the latter would then have 
the advantage of it; for where both are equally in fault, potior est conditio 
defendentis. 

The Latin maxims referred to by Lord Mansfield in the passage quoted 
above have often been repeated and applied by modern courts. The maxims, 
taken together, establish the general rule of non-intervention. 

As a result of the rule of non-intervention, property transferred under a 
contract that infringes public policy has been held to have passed to the 
transferee. 11 The effect of non-intervention, therefore, is simply to allow the 
chips to lie where they have fallen. One who has benefitted by such a 
transaction may retain the benefit because, if either party requires the aid of the 
court, he or she will be turned away. 

As Lord Mansfield said, the failure to apply the ordinary principles of 
contract law will have the effect of giving an accidental advantage to the 
defendant "contrary to the real justice" between the parties. The defendant 
gains what is, as between the parties, an unjust enrichment. The problem for 
contract law is to determine whether and in what circumstances the evil of 
permitting such an unjust enrichment is outweighed by the importance of 
upholding the public policy in question. 



8 (1775), 1 Cowp. 341, 98 E.R. 1120 (subsequent references are to 98 E.R.). 

9 Ibid., at 1121. 
10 Ibid. 



ii 



See Taylor v. Chester (1869), L.R. 4 Q.B. 309, [1861-73] All E.R. Rep. 154; Alexander 
v. Rayson, [1936] 1 K.B. 169, [1935] All E.R. Rep. 185 (C.A.); Walsh v. Walsh, [1948] 
O.R. 81, [1948] 1 D.L.R. 630 (H.C.J.), affd [1948] 4 D.L.R. 876 (C.A.); and Elford 
v. Elford (1922), 64 S.C.R. 125, [1922] 3 W.W.R. 339. Clark v. Hagar (1894), 22 
S.C.R. 510, has been cited for the contrary view but appears to support the general rule 
that title passes. 



218 



The anomalous and, as between the parties, unjust, results of the applica- 
tion of the rule of non-intervention can be tolerated in the case of a proposed 
accounting between highwaymen. However, where the contravention of public 
policy or the illegality is trivial, it is difficult to avoid the conclusion that any 
benefit gained by society from upholding public policy is outweighed by the 
injustice of the result between the parties. Achieving a just result in disputes 
between individuals is itself, after all, an important public policy. 

The difficulty with the rule of non-intervention is illustrated by the case of 
Kingshott v. Brunskill. 12 In that case, one farmer sold and delivered his apple 
crop to another farmer without grading the apples as required by regulations 
under The Farm Products Grades and Sales Act. 13 A dispute arose concerning 
the amount due by the buyer to the seller and the sale was found to have been 
illegal because the apples were not graded. The infringement of the regulations 
was entirely technical. Both parties expected that the apples would be graded by 
the buyer before being sold to the public, and the Court went so far as to say 
that it was not unreasonable for a small farmer to sell his crop to a neighbour 
who had the necessary equipment for grading. Because the Act did not provide 
for such a case, the contract was held to be illegal and no part of the price could 
be recovered by the seller. Consequently, in a case of an illegality so trivial that 
no enforcing authority would prosecute, and where, if a prosecution were 
brought, no substantial penalty would be imposed, the Court reached a decision 
that deprived the plaintiff of the value of his entire crop. The penalty was 
wholly disproportionate to the offence and, as Lord Devlin said in a different 
context, the penalty goes not "into the public purse but into the pockets of 
someone who is lucky enough to pick up the windfall or astute enough to have 
contrived to get it." 14 The same judge said, extrajudicially, 15 "[t]hese legal 
attitudes promote neither morality nor obedience to the law. On the contrary 
they shock the conscience and reward knavery." 

Although exacerbated by the proliferation in the present century of 
regulatory statutes like that involved in Kingshott v. Brunskill, the anomalous 
consequences of a strict refusal to intervene were recognized even in the 
eighteenth century. In Sanders v. Kentish, 16 the defendant obtained a loan of 
stock from the plaintiff and then refused to pay for it on the ground that the 
contract was illegal under a statute designed to prevent stock jobbing. Lord 
Kenyon's comments on the merits of this defence are striking: 17 



12 [1953] O.W.N. 133 (C.A.). 

13 R.S.O. 1950, c. 130. 

14 St. John Shipping Corp. v. Joseph Rank Ltd., 119571 1 Q.B. 267, at 288, [1956] 3 All 
E.R. 683, at 690-91. 

15 Devlin, The Enforcement of Morals (1965), at 55. 

16 (1799), 8 T.R. 162, 101 E.R. 1323 (subsequent reference is to 101 E.R.). 

17 Ibid., at 1325. 



219 



To be sure, if such were the positive provisions of that statute, the consequence 
must follow, however hard it might press upon the plaintiff: but before we assented 
to so monstrous a proposition, we would look with eagles' eyes into every part of 
the statute to see that such was the intention of the Legislature. Their intention is to 
be collected from the whole Act taken together. The Act is entitled 'An Act to 
Prevent the Infamous Practice of Stock-Jobbing:' but if the defendant's objection 
were to prevail, the title of the Act ought to be altered; and it should run thus: 'An 
Act to Encourage the Wickedness of Stock-jobbers, and to give them the Exclusive 
Privilege of Cheating the Rest of Mankind'. 



It is not surprising to find that the courts have developed a number of ways 
of avoiding the harshest consequences of the rule of non-intervention. 



One of the ways in which the consequences of non-intervention have been 
avoided, as illustrated by Sanders v. Kentish, has been for the court to find that 
it was not the intention of the legislature to prohibit the contract in question, 18 
or to affect contractual obligations. 19 In some cases, the consequences of non- 
intervention have been avoided by distinguishing between prohibition of con- 
duct and prohibition of an agreement. 20 Similarly, if a contract can be 
performed in one of two ways, legally or illegally, it may be held that the 
contract itself is initially legal. 21 Moreover, if one party undertakes to secure 
compliance with the law but fails to do so, that party may be liable for breach of 
a collateral contract. 22 



The courts have also avoided the worst consequences of illegality by 
permitting restitution in a number of circumstances. Courts have held that, 
where a statute is designed for the protection of persons of a particular class, 
restitution is permitted in favour of a plaintiff who belongs to that class, 23 and 
that restitution may also be available if the plaintiff withdraws from the 
transaction at an early stage, 24 or if the plaintiff can rely on an independent 



18 See, for example, Sidmay Ltd. v. Wehttam Investments Ltd., [1967] 1 O.R. 508, 61 
D.L.R. (2d) 358 (C.A.), aff d [1968] S.C.R. 828, and Maschinenfabrik Seydelmann K- 
G. v. Presswood Bros. Ltd., [1966] 1 O.R. 316, 53 D.L.R. (2d) 224 (C.A.) (subsequent 
reference is to [1966] 1 O.R.). 

19 Ames v. Investo-Plan Ltd. (1973), 35 D.L.R. (3d) 613, [1977] 5 W.W.R. 451 
(B.C.C.A.). 

20 St. John Shipping Corp. v. Joseph Rank Ltd., supra, note 14. 

21 Maschinenfabrik Seydelmann K-G. v. Presswood Bros. Ltd., supra, note 18, at 321. 

22 Strongman (1945), Ltd. v. Sincock, [1955] 2 Q.B. 525, [1955] 3 All E.R. 90 (C.A.). 

23 Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192, [1960] 1 All E.R. 177 (P.C. 
(Eastern Africa)). 

24 Lowry v. Bourdieu (1780), 2 Doug. 468, at 471, 99 E.R. 299, at 300-01; Taylor v. 
Bowers (1876), 1 Q.B. D. 291; and see Goff and Jones, The Law of Restitution (2d ed., 
1978), at 333-36. 



220 



property interest 25 or an independent tort. 26 The Privy Council has also recently 
held that severence is permissible even if part of the contract is prohibited by 
statute. 27 Some more recent Ontario cases have asserted, more directly, that the 
courts should weigh the seriousness of the illegality or contravention of public 
policy in determining whether to refuse aid to the plaintiff, and that, in an 
appropriate case, an illegal transaction can be enforced. 28 

(c) CONTRACTS IN RESTRAINT OF TRADE 

As noted above, the general rule with respect to illegal contracts is that 
they are unenforceable by action. Moreover, the courts will not entertain an 
action based on any matters arising out of a contract that is illegal. On the other 
hand, as will be seen in the following discussion, a contract in restraint of trade 
is unenforceable unless the restraint is no broader than is "reasonable" in the 
circumstances. 29 

A detailed discussion of the history of judicial attitudes to covenants in 
restraint of trade is contained in the 1984 Report of the British Columbia Law 
Reform Commission 30 dealing with restraint of trade and will not be repeated 
here. Suffice it to state that, at present, contracts in restraint of trade, while 
generally unenforceable, may be enforced if shown to be reasonable as between 
the parties and in the public interest. 31 The general principles were stated by 



25 Bowmakers, Ltd. v. Barnet Instruments, Ltd., [1945] 1 K.B. 65, [1944] 2 All E.R. 579 
(C.A.). 

26 Shelley v. Paddock, [1980] Q.B. 348, [1980] 1 All E.R. 1009 (C.A.), affg [1979] 1 
Q.B. 120. 

27 Carney v. Herbert, supra, note 7. 

28 See Re Lambton Farmers Ltd. (1978), 21 O.R. (2d) 516, 91 D.L.R. (3d) 290 (H.C.J.); 
Royal Bank of Canada v. Grobman (1977), 18 O.R. (2d) 636, 83 D.L.R. (3d) 415 
(H.C.J.); and Berne Development Ltd. v. Haviland (1983), 40 O.R. (2d) 238, 27 R.P.R. 
56 (H.C.J.). 

29 See discussion, infra, this sec. 

30 Law Reform Commission of British Columbia, Report on Covenants in Restraint of 
Trade (1984) (hereinafter referred to as "British Columbia Report (Restraint of 
Trade)"). 

31 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] A.C. 269, [1967] 
1 All E.R. 699 (H.L.); Stephens v. Gulf Oil Canada Ltd. (1975), 11 O.R. (2d) 129, 65 
D.L.R. (3d) 193 (C.A.), leave to appeal to Supreme Court of Canada denied, 11 O.R. 
(2d) 129m; and Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, at 
923-24, 83 D.L.R. (3d) 1, at 5-6. The artificiality of the rules respecting severance (see 
infra, this ch., this sec.) combined with the possibility of unjust results if a covenant is 
struck down have led some Canadian courts to take a flexible approach to unreasonable 
covenants in restraint of trade even while affirming the general rule that the court should 
not rewrite the contract between the parties. See Betz Laboratories Ltd. v. Klyn (1969), 
70 W.W.R. (N.S.) 304 (B.C.S.C); Maxwell v. Gibsons Drugs Ltd. (1979), 103 D.L.R. 
(3d) 433, at 441-42 (B.C.S.C); and Nili Holdings Limited v. Rose (1981), 123 D.L.R. 
(3d) 454 (B.C.S.C). 



221 



Dickson, J. (as he then was) in the Supreme Court of Canada decision in Elsley 
v. J.G. Collins Insurance Agencies Ltd.: 32 

A covenant in restraint of trade is enforceable only if it is reasonable between the 
parties and with reference to the public interest. As in many of the cases which 
come before the Courts, competing demands must be weighed. There is an 
important public interest in discouraging restraints on trade, and maintaining free 
and open competition unencumbered by the fetters of restrictive covenants. On the 
other hand, the Courts have been disinclined to restrict the right to contract, 
particularly when that right has been exercised by knowledgeable persons of equal 
bargaining power. In assessing the opposing interests the word one finds repeated 
throughout the cases is the word 'reasonable'. The test of reasonableness can be 
applied, however, only in the peculiar circumstances of the particular case. 
Circumstances are of infinite variety. Other cases may help in enunciating broad 
general principles but are otherwise of little assistance. 

In assessing reasonableness, the courts also look to both the temporal and 
geographical dimensions of the restraint. 33 Moreover, it is clear that a covenant 
restraining trade that is not necessary to protect some legitimate business 
interest is not reasonable between the parties, nor is it in the public interest. 34 

It should be noted that, although the test of reasonableness applies no 
matter what the nature of a covenant in restraint of trade, the courts have 
displayed reluctance to uphold restraints on a person's ability to earn a living 
and, accordingly, employee covenants have always been treated by the courts as 
requiring a higher standard of proof. 

The time for assessing the reasonableness of a covenant is the time it was 
entered into. 35 Courts will consider the probable consequences of applying the 
covenant and will not find it "unreasonable" by reference to extreme situations 
that may never arise. 36 

The current law sometimes permits partial enforcement of a contract in 
restraint of trade by application of what is known as the "blue pencil" or 
"deletion of words" test, 37 whereby illegal portions of a contract are severed 
from legal portions thereof and the covenant is enforced to the extent reasona- 
ble. The power of severance, however, has generally been held to be limited to 
cases in which the court can delete words from the contractual document and 



32 Supra, note 31. 

33 Waddams, The Law of Contracts (2d ed., 1984), at 417. 

34 Connors v. Connors Bros. Ltd., [1939] S.C.R. 162, at 168, and B.A.C.M. Limited v. 
Kowall Holdings Ltd., [1972] 5 W.W.R. 297 (Man. Q.B.), at 303. 

35 Doerner v. Bliss & Laughlin Industries Inc. (1980), 117 D.L.R. (3d) 547 (S.C.C.), at 
556. 

36 Greening Industries Ltd. v. Penny (1965), 53 D.L.R. (2d) 643 (N.S.S.C, T.D.), at 651 . 

37 This doctrine has occasionally been extended to illegal contracts other than those in 
restraint of trade. 



222 



leave words in place that make grammatical sense and are enforceable. 38 As 
noted by the British Columbia Commission, 39 "[c]ourts in Canada have 
disclaimed any power to enforce a covenant in part by rewriting it ...", or to 
modify a covenant to conform to a judge's view of what would be reasonable in 
the circumstances. 

Although the "blue pencil" test may have anomalous results, 40 it has 
deterred covenantees from overreaching. If the rule were that an excessive 
covenant could be amended, a covenantee with superior bargaining power 
would have nothing to lose by stipulating for a covenant against world wide 
competition for life; the worst that could happen would be that the court would 
reduce the restraint to a reasonable size. 



3. EXISTING LAW AND PROPOSALS FOR REFORM IN OTHER 
JURISDICTIONS 

(a) Introduction 

In the light of the foregoing discussion it will be seen that the existing law 
of illegality is unsatisfactory in several important respects. First, there is no 
consensus with respect to the classification of the different types of illegality 
and, more particularly, whether there is a separate class of contracts that is 
treated as being void in contemplation of law but not illegal. 41 Secondly, and 
more importantly, the common law rule of non-intervention in illegal contracts 
can often operate harshly on a party who has, often inadvertently, breached 
some relatively minor statutory provision. This will give the other party a quite 
unjustified windfall. 42 Thirdly, while the doctrine of severance may relieve 
some of the hardship it does not go far enough and suffers from rigidities of its 
own. This is particuarly true of the "blue pencil" test involving covenants in 
restraint of trade. 43 

In our view, therefore, a very persuasive case can be made for statutory 
modification of the existing illegality rules. This conclusion is far from novel 
and it will be convenient at this stage, before putting forward our own 
proposals, to review the recommendations for reform made, and in some cases 
adopted, in other common law jurisdictions. 



38 Atwood v. Lamont, [1920] 3 K.B. 571, [1920] All E.R. Rep. 55 (C.A.), and Bassman v. 
Deloitte, Haskins & Sells of Can. (1984), 44 O.R. (2d) 329, 79 C.P.R. (2d) 43 (H.C.J.). 

39 British Columbia Report (Restraint of Trade), supra, note 30, at 15. 

40 Ibid. 

41 Supra, this ch., sec. 2(a). 

42 Supra, this ch., sec. 2(b). 

43 Supra, this ch., sees. 2(b) and 2(c). 



223 



(b) General 

(i) New Zealand 

Several law reform agencies have examined the problem of contracts that 
infringe public policy. 44 New Zealand has both examined the problem and 
adopted legislation specifically relating to such contracts. 45 The Draft Bill 
proposed by the New Zealand Contracts and Commercial Law Reform Com- 
mittee in its 1969 Report on Illegal Contracts was enacted almost verbatim as 
the Illegal Contracts Act 1970. The Act has since been amended in a number of 
minor respects, 46 but its principal features remain intact. 

The New Zealand Act applies to all illegal contracts, whether the illegality 
arises at common law or by statute. 47 The Act does not otherwise define the 
meaning of "illegal contract". However, section 5 of the Act provides: 48 

5. A contract lawfully entered into shall not become illegal or unenforceable 
by any party by reason of the fact that its performance is in breach of any 
enactment, unless the enactment expressly so provides or its object clearly so 
requires. 

Moreover, section 1 1 of the New Zealand Act expressly excludes contracts in 
restraint of trade, except insofar as they are dealt with in section 8 of the Act, 
and contracts that purport to oust the jurisdiction of any court. 

The Act is remedial in focus and provides in section 6 that, notwithstand- 
ing any rule of law or equity to the contrary, every illegal contract is of no 
effect and that no person shall become entitled to any property under a 
disposition made pursuant to an illegal contract. There is, however, an 
exception in favour of third parties who have acquired such property in good 
faith and without knowledge of its illegal antecedents. 



44 New Zealand Contracts and Commercial Law Reform Committee, Illegal Contracts 
(1969) (hereinafter referred to as "New Zealand Report"); New South Wales Law 
Reform Commission, L.R.C. 9, Report on Covenants in Restraint of Trade (1970) 
(hereinafter referred to as "New South Wales Report"); Law Reform Committee of 
South Australia, Thirty-Seventh Report Relating to the Doctrines of Frustration and 
Illegality in the Law of Contract (1977) (hereinafter referred to as "South Australia 
Report"); British Columbia Report (Illegal Transactions), supra, note 1; British Colum- 
bia Report (Restraint of Trade), supra, note 30. 

45 Illegal Contracts Act 1970, Stat. N.Z. 1970, No. 129. The Act received a mixed 
reception from academic commentators. See Niggins and Fletcher, Law of Partnership in 
Australia and New Zealand (3d ed., 1975), at 42; Sutton, "Illegal Contracts Act" 
(1972), 7 N.Z. Recent Law 28, 56 and 89; and Furmston, "The Illegal Contracts Act 
1970 — An English View" (1972-73), 5 N.Z.U.L. Rev. 151, at 155. 

46 See Stat. N.Z. 1975, No. 53, s. 6(7); Stat. N.Z. 1976, No. 35, s. 45; Stat. N.Z. 1979, 
No. 124, s. 12; and Stat. N.Z. 1979, No. 125, ss. 2(3), 16(1), and 18(2). 

47 Illegal Contracts Act 1970, supra, note 45, s. 3. 

48 Ibid., s. 5. 



224 



Section 7 of the New Zealand Act contains the most innovative provisions. 
The section empowers the court, in the course of any proceedings or in an 
application made for the purpose, to grant to any party to an illegal contract, or 
any person claiming through or under any such party, the widest possible relief 
from the normal consequences of illegality by way of compensation, variation 
of the contract, validation of the contract in whole or in part or for any 
particular purpose, "or otherwise howsoever as the court in its discretion thinks 
just". 49 In exercising its discretion, the court is required to consider the conduct 
of the parties and, in the case of a breach of an enactment, the object of the 
enactment, the gravity of the penalty provided for a breach of its provisions, 
and such other matters as it thinks proper. 50 The only restriction on the court's 
discretion is that relief shall not be granted if it would not be in the public 
interest to do so. 51 Knowledge of the facts or the applicable law by the party 
seeking relief is not an absolute bar but only another factor to be taken into 
consideration. 52 

The effect of the New Zealand Act is to abolish the common law 
consequences of illegality and to substitute a new and exclusive statutory 
scheme. The Act has been criticized, however, because of its failure to define 
illegal contracts and because of the wide discretion that it confers on the 
courts. 53 On the face of it, the express exclusion in section 1 1 of the Act of 
certain void but not illegal contracts seems illogical. The result is that contracts 
that are truly illegal at common law are treated more favourably than contracts 
considered to be merely void at common law. It would appear that serious 
thought should be given to the desirability of assimilating void contracts and 
illegal contracts in any scheme of legislative reform. In our view, there is little 
to commend in the perpetuation of the distinction between void contracts and 
illegal contracts. 

There is also some question as to the soundness of section 6 of the New 
Zealand Act. Even in terms of existing law, it is debatable whether it is correct 
to describe an illegal contract as being of no effect. In addition, it seems 
somewhat contradictory, section 6 having declared an illegal contract to be of 
no effect, to confer on a court, under section 7(1), power to validate an 
ineffective contract. Section 6 also raises important interpretational questions as 
to the types of property and conveyances that are caught by it, and it may 
greatly complicate transactions by forcing parties to the original bargain, or 



49 Ibid., s. 7(1). 

50 Ibid., s. 7(3). 

51 Ibid. 

52 Ibid., s. 7(4). 

53 Furmston, supra, note 45. But see Schwartz, "Law Reform Commission of British 
Columbia, Report on Illegal Contracts" (1985), 10 Can. Bus. L.J. 83, at 88, where he 
states: 

Despite initial doubts about the soundness of its key provisions and rather cumber- 
some drafting, the Act has been tested on a number of occasions and most 
commentators agree that it has worked well in practice. 



225 



those claiming from or under them, to seek a judicial validation order whenever 
there is any suggestion of illegality affecting it. Even third parties may feel 
insecure although section 6 purports to protect them. 54 

(ii) South Australia 

The Law Reform Committee of South Australia examined the doctrine of 
illegality in the law of contracts in its 1977 Report Relating to the Doctrines of 
Frustration and Illegality in the Law of Contract. 55 

Essentially, the South Australia Committee endorsed the New Zealand 
approach. However, the Committee recommended that the term "illegal" 
contract be given a wider definition than under the New Zealand Act. 56 The 
South Australia Committee also diverged from the New Zealand position in that 
it recommended that any remedies available under the statutory scheme be in 
addition to those available at common law. 57 

(iii) British Columbia 

Following publication in 1982 of a Working Paper in respect of Illegal 
Contracts 58 the Law Reform Commission of British Columbia issued, in 
November, 1983, its Report on Illegal Transactions , 59 The Report dealt not 
only with contracts, but also with non-contractual arrangements such as trusts 
and gifts. 60 The Report did not deal with covenants in restraint of trade on the 
ground that, while they might infringe public policy, they raise issues different 
from those that arise with respect to other contracts infringing public policy. In 
April, 1984, the British Columbia Commission issued a separate Report 
examining covenants in restraint of trade. 61 



54 See Sutton, supra, note 45, at 60-63. 

55 South Australia Report, supra, note 44. 

56 The South Australia Committee wished to include both contracts illegal at common law 
and contracts considered to be void at common law, including, specifically, contracts 
void as being in restraint of trade, in derogation or ouster of the jurisdiction of the 
courts, or in derogation of the interdependent rights and liabilities of husband and wife or 
parent and child (South Australia Report, supra, note 44, at 24). 

57 South Australia Report, supra, note 44, at 25-26. 

58 Law Reform Commission of British Columbia, Working Paper No. 38, Illegal Contracts 
(1982). 

59 British Columbia Report (Illegal Transactions), supra, note 1. 

60 The British Columbia Commission concluded that, while extending a scheme for relief to 
non-contractual transactions and arrangements went beyond recommendations for reform 
made in other jurisdictions that had considered the problem, the application of the 
general rule in the cases of trusts, gifts and other transactions might lead to unjust results 
and that problems raised by such transactions were "amenable to reform paralleling that 
which applies to illegal contracts". See British Columbia Report (Illegal Transactions), 
supra , note 1 , at 63 . 

61 British Columbia Report (Restraint of Trade), supra, note 30. 



226 



The British Columbia Commission was of the view that retention of the 
current law with respect to illegal transactions was undesirable. It noted that 
other Commonwealth law reform agencies that had considered the question of 
illegal contracts had settled on schemes that vested in the courts a discretion to 
depart from the strictures of the general rule when necessary in the interests of 
justice, and that support for this approach was found in existing provincial 
legislation in British Columbia. 62 

The British Columbia Commission considered several possible models for 
reform, including the New Zealand Illegal Contracts Act 1970, which, as will 
be recalled, substituted an exclusive statutory scheme for the common law 
consequences of illegality. In the end, the Commission concluded that the 
appropriate vehicle for reform was a model somewhere between the New 
Zealand statutory scheme and a model at the other end of the spectrum. 63 The 
model proposed by the British Columbia Commission entailed legislation 
vesting in the courts a discretionary power to deviate, in an appropriate case, 
from the result dictated by the application of the common law rule. The 
Commission's conclusion rested, in part, on what was perceived to be a 
generally favourable reaction to the New Zealand statute. Accordingly, the 
Commission recommended that legislation be enacted to reform the law 
governing illegal transactions as follows: the common law rules would continue 
to apply to illegal transactions, subject to a discretionary power in the court 
under such legislation to grant relief from the consequences of illegality. 64 

(c) CONTRACTS IN RESTRAINT OF TRADE 

(i) New South Wales 

In its Report on Covenants in Restraint of Trade, 65 the New South Wales 
Law Reform Commission recommended the enactment of legislation respecting 
the partial enforcement of covenants in restraint of trade. Its recommendations 
were implemented by the Restraints of Trade Act. 66 Section 4(1), (2), and (3) of 
that Act provides as follows: 

4.-(l) A restraint of trade is valid to the extent to which it is not against public 
policy, whether it is in severable terms or not. 

(2) Subsection (1) does not affect the invalidity of a restraint of trade by 
reason of any matter other than public policy. 

(3) Where, on application by a person subject to the restraint, it appears to the 
Supreme Court that a restraint of trade is, as regards its application to the 
applicant, against public policy to any extent by reason of, or partly by reason of, a 
manifest failure by a person who created or joined in creating the restraint to 



62 British Columbia Report (Illegal Transactions), supra, note 1, at 55. 

63 See, generally, Schwartz, supra, note 53, at 87-89. 

64 British Columbia Report (Illegal Transactions), supra, note 1, at 56. 

65 New South Wales Report, supra, note 44. 

66 No. 67 of 1976. 



227 



attempt to make the restraint a reasonable restraint, the Court, having regard to the 
circumstances in which the restraint was created, may, on such terms as the Court 
thinks fit, order that the restraint be, as regards its application to the applicant, 
altogether invalid or valid to such extent only (not exceeding the extent to which 
the restraint is not against public policy) as the Court thinks fit and any such order 
shall, notwithstanding subsection (1), have effect on and from such date (not being 
a date earlier than the date on which the order was made) as is specified in the 
order. 

In its 1984 Report on Covenants in Restraint of Trade, the Law Reform 
Commission of British Columbia criticized the New South Wales approach. It 
considered the Restraints of Trade Act both complex and confusing and noted 
that, insofar as the wording of section 4(3) of the statute seemed to require as a 
precondition to relief that there be a "manifest failure" to attempt to draw a 
reasonable covenant, it was arguable that partial enforcement would only be 
available if there had been deliberate overreaching. 67 

(ii) New Zealand 

Section 8 of the Illegal Contracts Act 197(P S deals with contracts in 
restraint of trade, and provides as follows: 

8.-(l) Where any provision of any contract constitutes an unreasonable 
restraint of trade, the Court may — 

(a) Delete the provision and give effect to the contract as so amended; or 

(b) So modify the provision that at the time the contract was entered into 
the provision as modified would have been reasonable, and give effect 
to the contract as so modified; or 

(c) Where the deletion or modification of the provision would so alter the 
bargain between the parties that it would be unreasonable to allow the 
contract to stand, decline to enforce the contract. 

(2) The Court may modify a provision under paragraph (b) of subsection (1) 
of this section, notwithstanding that the modification cannot be effected by the 
deletion of words from the provision. 

Two features of section 8 should be emphasized. First, the court's power 
to cure a covenant that is too wide is not as extensive as the powers given to the 
court with respect to illegal contracts. Secondly, the court's powers under 
section 8 go well beyond its common law powers. Section 8(2) makes it clear 
that the court may modify a provision even though the modification cannot be 
effected by the deletion of words from the provision. It is clearly intended to 
override the restrictions of the "blue pencil" test previously applied by the 
courts. 



67 See British Columbia Report (Restraint of Trade), supra, note 30, at 55. 

68 Supra, note 45. 



228 



Section 8 is open to criticism on the ground that it does not require the 
party seeking to enforce the term to have included the term in the contract in 
good faith and in accordance with reasonable standards of fair dealing. 69 
Moreover, because the power under section 8(b) to modify the contract would 
include substitution and reformulation and not just a reduction in extent, the 
danger exists that it may be construed by the parties as an invitation to 
overreach in the hope that an excessive covenant will be cured by an accommo- 
dating court. 

(iii) South Australia 

The Law Reform Committee of South Australia in its Report Relating to 
the Doctrines of Frustration and Illegality in the Law of Contract, discussed 
above, concluded that a provision similar to section 8 of the New Zealand 
Statute should be adopted, with minor revisions, in that State. 70 

(iv) British Columbia 

The Law Reform Commission of British Columbia concluded, in its 1984 
Report on Covenants in Restraint of Traded that the current law, "under which 
covenants in restraint of trade are wholly unenforceable if a court finds them to 
be unreasonable, is becoming increasingly unworkable in the modern day 
marketplace". 72 

The Commission observed that the general rule as it currently stands 
"represents a compromise between the public policy favouring freedom of 
trade and that favouring the protection of legitimate business interests". 73 
Consequently, the content of the test of reasonableness that governs the 
enforceability of contracts in restraint of trade is uncertain, with the result that 
some such contracts are enforceable while others are not. Judicial reaction to a 
contract in restraint of trade is, in many cases, unpredictable, and the traditional 
test can place onerous burdens on a covenantee seeking to justify the ambit of 
the restrictive covenant on which he or she relies. 74 

The Commission noted 75 that the difficulty of gauging the requirements of 
public policy can lead to adverse consequences if the covenantee falls into error 
and draws his covenants in restraint of trade too widely. The penalty for any 
overreaching is complete invalidity, with the result that the covenantee is left 
only with the remedies he may have at common law or in equity. Moreover, the 



69 See American Law Institute, Restatement of the Law, Second — Contracts, 2d (1979) 
(hereinafter referred to as "Second Restatement'"), § 184. 

70 South Australia Report, supra, note 44, at 27. 

71 British Columbia Report (Restraint of Trade), supra, note 30. 

72 Ibid., at 46. 

73 Ibid., at 50. 

74 Ibid., at 48. 

75 Ibid., at 47. 



229 



striking down of an invalid covenant will result in unjust enrichment for the 
party who has been paid for what he has succeeded in recovering. 

The British Columbia Commission considered that the best approach to 
reforming the law was to address the consequences of infringing the general 
rule. It considered that the law would operate more equitably if courts were not 
bound to refuse to enforce an unreasonable convenant without regard to the 
difficulty faced by the covenantee in drawing a covenant in restraint of trade 
that does not infringe the test of reasonableness. 76 

On the whole, the British Columbia Commission preferred the New 
Zealand formulation as a model for reform in respect of covenants in restraint 
of trade. It considered that the New Zealand statute clearly and succinctly set 
out the options open to the court and, in particular, made it plain that the power 
to modify a covenant did not depend on the "blue pencil" test. 77 Moreover, the 
New Zealand legislation makes it clear that the court need not rewrite the 
covenant; that relief is purely discretionary. 

The Commission did, however, express some reservations concerning 
certain aspects of the New Zealand legislation. Section 8 of the New Zealand 
Act is framed in terms of a "modification" of the invalid covenant. The British 
Columbia Commission considered "modification" a broad term that could be 
read as authorizing the court to extend the ambit of the covenant, and therefore 
preferred to speak of a power to limit a covenant, so that there could be no 
doubt that the plaintiff cannot have greater protection than is provided for in the 
contract itself. 78 

As well, the British Columbia Commission noted that the New Zealand 
legislation refers only to "provisions in contracts" and suggested that the 
remedial jurisdiction of the courts should not be restricted to "provisions", 
since an entire contract may be in restraint of trade. 79 

The Commission also referred to section 8(c) of the New Zealand 
legislation, which authorizes the court to decline to enforce a contract where 
"the deletion or modification of the provision would so alter the bargain 
between the parties that it would be unreasonable to allow the contract to 
stand". Although the British Columbia Commission agreed that the "commer- 
cial unreasonableness of a covenant is a proper concern when the court 



76 Ibid., at 51. 

77 Ibid., at 55. The British Columbia Report (Illegal Transactions), supra, note 1, also 
considered the law governing severance in some detail. The Commission suggested that 
the power to sever be reformulated and recommended that the court be empowered to 
make an order that "certain rights or obligations arising out of the illegal transaction are 
not binding on the parties and that the remainder of the rights and obligations constitute a 
binding and enforceable transaction" {ibid., at 79). This amounts to a power of 
severance divorced from the "blue pencil" test. 

78 British Columbia Report (Restraint of Trade), supra, note 30, at 55-56. 

79 Ibid., at 56. 



230 



exercises its discretion to decline to limit an overly broad covenant", it believed 
that "reforming legislation should expressly provide for a wider discretion 
which would permit a court to take any relevant factor into account". 80 

The basic recommendation of the British Columbia Commission in respect 
of covenants in restraint of trade was that legislation should be enacted to 
provide as follows: 81 



(a) If a contract or a portion of a contract constitutes an unreasonable 
restraint of trade, a court may, by order: 

(i) delete a portion of the contract, or 

(ii) limit the effect of that contract so that, as modified, the contract 
would have been a reasonable restraint of trade at the time it was 
entered into, and 

(iii) subject to the rules of law and equity, enforce the contract as 
modified. 

(b) The court may refuse relief under paragraph (a) and decline to enforce 
the contract where 

(i) the deletion or limitation would so alter the bargain between the 
parties that it would be unreasonable to give effect to the contract as 
modified, or 

(ii) the conduct of the party seeking to enforce the contract with or 
without modification disentitles him to relief. 

The British Columbia Commission was of the view that the above 
recommendation was sufficiently broad to enable a court to examine the 
circumstances surrounding the formation of the contract and to decline to 
enforce it when it was obtained by culpable overreaching. 82 Accordingly, the 
British Columbia Commission concluded that there was no need for a special 
provision to discourage overreaching by covenantees. 83 

With respect to covenants in restraint of trade found in employment 
contracts the Commission considered that the judicial discretion exercisable 
under its main recommendation was sufficient to deter deliberate or negligent 
overreaching. 84 Nevertheless, in order to emphasize that the main recommenda- 
tion was not intended to affect rigorous tests imposed in respect of employee 

80 Ibid. 

81 Ibid., at 56 and 72. 

82 Ibid., at 70. 

83 Ibid., at 71. 

84 Ibid. 



231 



convenants in restraint of trade, the British Columbia Commission recom- 
mended that reforming legislation should specify that, in exercising its 
discretion to enforce partially a covenant in restraint of trade contained in a 
contract of employment, the court should have special regard to the circum- 
stances of the formation of the contract. 85 



4. PROPOSALS FOR REFORM 

(a) General 

In a previous section of this chapter we referred to the various techniques 
used to avoid the consequences of the rule of non-intervention. 86 Unfortunately, 
these techniques have no coherence among themselves and do not operate 
predictably or reliably. Many modern cases have continued to assert the strict 
rule exemplified by Kingshott v. Brunskill* 1 We have concluded therefore that 
remedial legislation should make it clear that the court has the power, in a 
proper case, to give some measure of relief to a party to a contract that infringes 
public policy. 

We are not engaged in a project to codify the law of contracts. Accord- 
ingly, we see no need to define and list the heads of common law illegality. In 
our view this would not be desirable even if it were feasible, for the courts 
should, in our opinion, maintain the ultimate power to decide whether the 
values represented by freedom of contract are outweighed in a particular case 
by other values held by society. 

Another question that we have considered is whether reforming legislation 
should specify the consequences of illegality. It will be recalled that the New 
Zealand Illegal Contracts Act 1970 provides that all illegal contracts are of no 
effect and do not transfer property. 88 It seems to us that there are dangers in this 
approach. As the British Columbia Law Reform Commission pointed out, a 
provision stating that illegal contracts are ineffective to transfer title would have 
the effect of throwing into doubt the title to property, including land titles, and 
might create anomalies by enabling the transferor to resort to self-help or 
proprietary remedies to recover the property. 89 There might also be criminal 
law problems if the transferee attempted to put the property to a use inconsistent 
with the transferor's ownership. 90 



85 Ibid. 

86 Supra, this ch., see 2(b). 

87 Supra, note 12. 

88 Illegal Contracts Act 1970, supra, note 45, s. 6. 

89 British Columbia Report (Illegal Transactions), supra, note 1, at 81-82. 

90 See Criminal Code, R.S.C. 1970, c. C-34, s. 283, which creates the offence of criminal 
conversion of another's property. 



232 



It may be said that these problems can be overcome by giving the court 
wide powers of the sort contained in the New Zealand Act, including the power 
to validate illegal contracts. 91 However, the exercise of this power would be 
dependent on an application to the court, which would be a time consuming and 
expensive process. Moreover, we have doubts about the wisdom of a general 
power of the court to validate such contracts. This would seem, in some cases, 
to go too far, by enabling a court to declare valid what the legislature may have 
expressly intended to declare invalid. The problem of when a specific statute 
had the effect of displacing the general provision would be acute. We consider 
therefore that the wiser course is to omit any provision making ineffective the 
transfer of title to property and to omit any general power to declare valid, 
contracts that are illegal. 

In the absence of a power of validation, we consider that the existing 
common law should be left in place, for if the existing devices whereby courts 
have held contracts to be enforceable were removed, with nothing put in their 
place, there would be a danger of exacerbating, rather than alleviating, the 
anomalies and injustices caused by the law of illegal contracts. While we would 
retain the existing law as to unenforceability of illegal contracts, we would give 
the court power to relieve against the consequences of illegality, in particular by 
granting an order for restitution and compensation for loss. However, in order 
to avoid any unintended anomalies that might be caused by disputes concerning 
the exact boundaries of restitution and compensation, we believe that the power 
of relief should not be rigidly confined to those categories. 

For these reasons, we recommend that legislation should be enacted to 
provide that where a contract, or any term thereof, is unenforceable by reason 
of public policy (including the effect of any statutory provision), the court may 
grant such relief by way of restitution, compensation, or otherwise, as it thinks 
just and as is not inconsistent with the policy underlying the unenforceability of 
the contract. 

Our recommendation does not invite the court to validate or even to 
enforce an illegal contract. It assumes that the contract itself has been found to 
be unenforceable for good reason. It does not enlarge the class of illegal 
contracts, nor does it restrict the existing powers of courts to enforce illegal 
contracts. It does not empower the court to contravene the policy of other 
statutes. It does, however, enable the court to do justice in cases like Kingshott 
v. BrunskilP 2 where, under the present law, injustices have occurred. We 
consider that this is as much as can be expected of statutory reform in the area, 
but that it is an object well worth achieving. 

We wish to emphasize, however, that the relieving power we favour 
conferring on the courts is not one to be exercised lightly or automatically. It is 
not an invitation to contracting parties to ignore legal prohibitions with 
impunity. In every application for relief the court must always balance the 



91 Illegal Contracts Act J 970, supra, note 45, s. 7. 

92 Supra, note 12. 



233 



importance of protecting the public interest represented by the prohibition 
against a policy opposed to unjustly enriching one of the parties. 93 We have in 
mind that the court might, for example, take into account such factors as the 
gravity of the violation committed by the parties, whether it goes to the heart of 
the contract, and whether the parties knew or ought to have known that they 
were breaching the law. 

(b) Restraint of Trade 

As discussed in a previous section of this chapter, 94 contracts in restraint of 
trade are unenforceable unless shown to be reasonable between the parties and 
in the public interest. In our view, it would not be desirable to alter the general 
test of reasonableness as the criterion of validity. This is already a flexible test 
that enables the court to take account of all relevant factors. 

We consider, however, that a separate remedial provision relating to 
contracts in restraint of trade is desirable. This is because contracts in restraint 
of trade, particularly those between employer and employee, often exemplify a 
use of superior bargaining power by the covenantee. 

Earlier in this chapter, we discussed the difficulties with the "blue pencil" 
test whereby partial enforcement of an unreasonable contract in restraint of 
trade is sometimes permitted by severing the illegal from the legal portions of 
the contract. The Commission considers that, while the "blue pencil" test 
should be abolished, some provision is necessary to deal directly with the 
problem of overreaching. The Commission bases its proposal on a modified 
version of section 8 of the New Zealand legislation that would limit the power 
of the court to a reduction, rather than a reformulation, of the extent of the 
restrictive covenant and would make this power contingent on the covenantee 
having acted in good faith and in accordance with reasonable standards of fair 
dealing. 95 

Accordingly we recommend that, where any provision of a contract 
constitutes an unreasonable restraint of trade, and where the party seeking to 
enforce the provision has acted in good faith and in accordance with reasonable 
standards of fair dealing, the court should have the following powers: to delete 
the provision and to give effect to the contract as so amended; or to so reduce 
the scope of the provision that, at the time the contract was entered into, the 
provision as so reduced would have been reasonable, and to give effect to the 
contract as so modified. The court should have the latter power notwithstanding 
that the reduction of scope cannot be effected by the deletion of words from the 
provision. We further recommend that, where the deletion or reduction of scope 
would so alter the bargain between the parties that it would be unreasonable to 



93 The need to balance those considerations appears to have been overlooked by the Court 
in Berne Development Ltd. v. Haviland, supra, note 28. 

94 Supra, this ch., sec. 2(c). 

95 These words are derived from § 184(2) of the Second Restatement, supra, note 69. 



234 



allow the contract to stand, the court should have the power to decline to 
enforce the contract. 

Recommendations 

The Commission makes the following recommendations: 

1. The existing common law doctrines with respect to illegal contracts 
should be retained, but the court should be given power to relieve 
against the consequences of illegality. Accordingly, legislation should 
be enacted to provide that, where a contract or any term thereof is 
unenforceable by reason of public policy (including the effect of any 
statutory provision) the court may grant such relief by way of restitution 
and compensation for loss or otherwise as it thinks just and as is not 
inconsistent with the policy underlying the unenforceability of the 
contract. 

2. Where any provision of any contract constitutes an unreasonable 
restraint of trade, the court should have the power to 

(a) delete the provision and give effect to the contract as so 
amended; 

(b) so reduce the scope of the provision that at the time the contract 
was entered into the provision as so reduced would have been 
reasonable, and give effect to the contract as so modified; or 

(c) where the deletion or reduction of scope of the provision would 
so alter the bargain between the parties that it would be 
unreasonable to allow the contract to stand, decline to enforce 
the contract. 

3. The court should also be able to reduce the scope of a provision under 
Recommendation 2(b) notwithstanding that the reduction of scope can- 
not be effected by the deletion of words from the provision. 

4. The court should not exercise its powers under Recommendation 2(a) or 
(b) unless the party seeking to enforce the provision has acted in good 
faith and in accordance with reasonable standards of fair dealing. 



CHAPTER 12 



MISREPRESENTATION 



1. THE LEGAL BACKGROUND 

(a) INTRODUCTION 

Misrepresentation in its widest sense means simply a false statement. In the 
contractual context, it means a false statement made by one party to a contract 
that induces another party to the contract to enter into the contract. The present 
law of contractual misrepresentation is quite complex, and cuts across the three 
main areas of the law of obligations, namely, contracts, torts, and restitution. 
Misrepresentations that induce contracts may amount to promises that are part 
of a contract, or they may constitute legal wrongs in themselves. They often 
result in contractual exchanges of unequal value. 

(b) MISREPRESENTATION AND CONTRACTUAL TERMS 

The question whether a representation constitutes a part or term of a 
contract has important practical consequences. While a statement that is 
regarded as a term of a contract gives a person who has suffered loss as a result 
of a breach of the term a right to damages measured by the value of the 
expected contractual performance, a representation that is not a term of the 
contract gives rise to different remedies and, in some cases, no remedy at all. 

The test for determining when a statement is a term of a contract is 
generally said to be whether the statement is made with contractual intention. 1 
This has often been criticized as an elusive test. It has, however, the merit of 
flexibility, and the courts have, in practice, quite often found a remedy in cases 
they consider deserving by categorizing the statement as a contractual term or 
warranty, while refusing to find the necessary intention when damages are 
claimed that the courts consider extravagant. Lord Denning has been very open 
about this judicial flexibility. He commented, extrajudicially: 2 

Whenever a judge thinks that damages ought to be given he finds that there was a 
collateral contract rather than an innocent representation. In practice whenever I 
get a misrepresentation prior to a contract which is broken and the man ought to 
pay damages I treat it as a collateral contract. I have never known any of my 
colleagues to do otherwise. 



1 Heilbut, Symons & Co. v. Buckleton, [1913] A.C. 30, [1911-13] All E.R. Rep. 83 
(H.L.). 

2 See Allan, "The Scope of the Contract" (1967), 41 Aust. L.J. 274, at 293. 

[235] 



236 



In Esso Petroleum Co. Ltd. v. Mardon the same judge said: 3 

Ever since Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30, we have had to 
contend with the law as laid down by the House of Lords that an innocent 
misrepresentation gives no right to damages. In order to escape from that rule, the 
pleader used to allege — I often did it myself — that the misrepresentation was 
fraudulent, or alternatively a collateral warranty. At the trial we nearly always 
succeeded on collateral warranty. We had to reckon, of course, with the dictum of 
Lord Moulton, at p. 47 that 'such collateral contracts must from their very nature 
be rare'. But more often than not the court elevated the innocent misrepresentation 
into a collateral warranty: and thereby did justice. 



Besides that experience, there have been many cases since I have sat in this court 
where we have readily held a misrepresentation — which induces a person to enter 
into a contract — to be a warranty sounding in damages. 

The adjective "collateral" is ambiguous in that it may, but does not always, 
imply the existence of two, theoretically separate, contracts. In an earlier case 
Lord Denning had said: "It is not necessary to speak of [the warranty] as being 
collateral. Suffice it that the representation was intended to be acted on and was 
in fact acted on". 4 

Suggestions have often been made that the distinction between representa- 
tions and terms should be abolished. This seems attractive in light of the elusive 
test of intention. The difficulty, however, is that the normal measure of 
damages for breach of a contractual term includes damages measured by the 
promisee's expectation and, subject to the rules of remoteness, consequential 
damages including, for example, compensation for loss caused by personal 
injuries. 5 These measures may be excessive in the case of an entirely innocent 
misstatement by a private person who is not in a position to absorb or spread 
large losses. As will be indicated below, the measure of damages for fraudulent 
misrepresentation does not include compensation for the plaintiffs expectation 
losses. It would be anomalous to introduce a higher measure of damages for 
innocent misrepresentation, and anomalous, in the light of general tort princi- 
ples, to impose damages for consequential losses such as personal injuries in the 
absence of proof of fraud or negligence. 



[1976] Q.B. 801, at 817, [1976] 2 All E.R. 5, at 13 (C.A.). 

Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd., [1965] 1 W.L.R 623, at 
627, [1965] 2 All E.R. 65, at 67 (C.A.). 

Expectation damages do not, however, figure prominently in cases involving the 
distinction between non-promissory and promissory representations; nor do they appear 
to have given rise to difficulties under s. 12 of the American Uniform Sales Act 
(National Conference of Commissioners on Uniform State Laws (1906)), applying a 
reliance test to determine whether an express warranty has been given. 



237 



(c) MISREPRESENTATION AND TORT 

A misrepresentation may constitute a tort. A fraudulent misrepresentation, 
that is, one made with knowledge of its falsity or made recklessly without 
regard to its truth or falsity, constitutes the tort of deceit. The misrepresentor is 
liable for the plaintiffs out-of-pocket loss, 6 including consequential damages, 7 
but not for the benefit of the bargain the plaintiff would have gained had the 
misrepresentation been true. 8 It is now established that a negligent misrepresen- 
tation is also actionable in tort. 9 

The extension of the law of negligence over the past twenty years has 
greatly enlarged the number of cases in which damages are available for 
misrepresentation, but, as indicated, there remains the category of purely 
innocent, that is, neither fraudulent nor negligent, misrepresentation for which 
damages cannot be recovered. In such a case, no action in tort will be available. 

(d) MISREPRESENTATION AND RESCISSION 

In the case of fraudulent misrepresentation, it is clearly established that the 
contract may be rescinded at the option of the defrauded party, 10 although 
rescission may be barred by inability to restore benefits under the contract, 11 by 
intervention of third party rights, 12 or by affirmation. 13 

The courts of equity extended the right of rescission to cases of innocent 
misrepresentation, on the principle that a person should not profit by his or her 
own false statement at another's expense. 14 It should be noted that the 
underlying basis of relief was not the enforcement of promises, nor compensa- 
tion for wrongful conduct, but, rather, avoidance of unjust enrichment. 
Rescission, however, was unavailable in the cases, mentioned above, where 
rescission for fraud was barred, that is, in cases of inability to restore benefits, 
intervention of third party rights, or affirmation. In addition, some cases, 
particularly those involving land sales, have held that rescission for innocent 
misrepresentation is barred by execution or performance of the contract, 15 



6 McConnel v. Wright, [1903] 1 Ch. 546, 72 L.J. Ch. 347 (C.A.). 

7 Doyle v. Olby (Ironmongers) Ltd., [1969] 2 Q.B. 158, [1976] 2 All E.R. 119 (C.A.). 

8 Parna v. G. & S. Properties Ltd., [1971] S.C.R. 306, 15 D.L.R. (3d) 336. 

9 Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. , [1964] A.C. 465, [1963] 2 All E.R. 
575 (H.L.); Haig v. Bamford, [1977] 1 S.C.R. 466, [1976] 3 W.W.R. 331; and Esso 
Petroleum Co. Ltd. v. Mardon, supra, note 3. 

10 Jarvis v. Maguire (1961), 28 D.L.R. (2d) 666, 38 W.W.R. 289 (B.C.C.A.). 

11 Clarke v. Dickson (1858), El. Bl. & El. 148, 120 E.R. 463. 

12 Clough v. London & Northwestern Ry. Co. (1871), L.R. 7 Exch. 26, at 35. 

13 United Shoe Machinery Co. of Canada v. Brunei, [1909] A.C. 330 (P.C. (Can.)) 

14 Redgrave v. Hurd (1881), 20 Ch.D. 1 (C.A.). 

15 Redican v. Nesbitt, [1924] S.C.R. 135, [1924] 1 D.L.R. 536. 



238 



although other cases have denied that there is any general rule to this effect. 16 
Other bars to rescission have also been suggested. 17 

The net effect is that, in the case of a wholly innocent misrepresentation, 
that is, a non-fraudulent and non-negligent misrepresentation, there is a prima 
facie right to rescission but, if rescission is barred, there may be no remedy 
available at all. One can accept that there may be sound reasons for refusing to 
reopen an executed contract, particularly in the case of a complex transaction 
where positions may have changed beyond recall and a long interval of time has 
passed. However, the rational conclusion would then seem to be not to deny the 
plaintiff any remedy, but to permit an award of money in substitution for 
rescission. This award of damages would not be measured by promissory or 
tortious principles but, rather, would be a sum of money designed to have the 
same economic effect as rescission. 



2. PRECEDENTS FOR REFORM 

(a) Solutions that treat Representations as 
Contractual terms 

A number of jurisdictions have enacted legislation that departs from the 
common law test for determining when a statement is a term of the contract. To 
varying degrees, these jurisdictions, in effect, have treated as terms of the 
contract, or warranties, representations that at common law would not satisfy 
the test of contractual intention. 

(i) The United States 

The American Uniform Sales Act, 18 adopted in 1906, defined as an 
express warranty "any affirmation of fact or any promise by the seller relating 
to the goods if the natural tendency of such affirmation or promise is to induce 
the buyer to purchase the goods, and if the buyer purchases the goods relying 
thereon". 19 The Uniform Commercial Code has now superseded the Uniform 
Sales Act, and adds the rather ambiguous requirement that the statement must 
become "part of the basis of the bargain". 20 



16 Solle v. Butcher, [1950] 1 K.B. 671, [1947] 2 All E.R. 1107 (C.A.). 

17 For example, in Leaf v. International Galleries, [1950] 2 K.B. 86, at 90, [1950] All E.R. 
693, at 695 (C.A.), Denning L.J. (as he then was) suggested that a buyer's right to 
rescind a contract of sale for innocent misrepresentation would be barred if the right to 
reject for breach of a condition were barred. 

18 Supra, note 5. 

19 Ibid., s. 12. See, further, Ontario Law Reform Commission, Report on Sale of Goods 
(1979) (hereinafter referred to as "Sales Report"), Vol. I, at 135-36. 

20 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978), § 2- 
313 (i)(a). 



239 



(ii) Ontario 

In our Report on Consumer Warranties and Guarantees in the Sale of 
Goods 11 published in 1972, we recommended that all statements by business 
sellers inducing consumer sales should be treated as warranties. This proposal, 
although not implemented in Ontario, has been adopted in Saskatchewan 22 and 
New Brunswick 23 in consumer product warranty statutes. 

In our 1979 Report on Sale of Goods, 1 * we recommended that all 
representations relating to goods, by both business and non-business sellers, 
should be treated as warranties. While we were concerned about the possibility 
of imposing heavy damages on non-business sellers, we decided, in the end, to 
make no special provision on the point. 25 

When the Commission's Report came to be considered by the Uniform 
Law Conference of Canada, 26 the Conference felt it necessary to maintain the 
distinction between representations and terms, and the Draft Bill approved by 
the Conference included a provision empowering the court to depart from the 
normal remedy in the case of a breach of warranty not constituting a term of the 
contract of sale. 27 

(iii) New Zealand 

The New Zealand Contractual Remedies Act 1979 1S also contains a 
provision that treats a representation as a contractual term. Section 6(1) 
provides as follows: 

6.-(l) If a party to a contract has been induced to enter into it by a 
misrepresentation, whether innocent or fraudulent, made to him by or on behalf of 
another party to that contract — 



21 Ontario Law Reform Commission, Report on Consumer Warranties and Guarantees in 
the Sale of Goods (1972), at 29. 

22 The Consumer Products Warranties Act, R.S.S. 1978, c. C-30, s. 8. 

23 Consumer Product Warranty and Liability Act, S.N.B. 1978, c. C-18.1, s. 4(1). 

24 Sales Report, supra, note 19, Vol. I, at 136, and Draft Bill, s. 5.10. 

25 Ibid., at 140-41, and Vol. 2, at 489-91. 

26 Initially, the Report on Sale of Goods was considered at the Annual Meeting of the 
Uniform Law Conference of Canada in 1979. A Sale of Goods Committee was struck 
and reported in 1981. (See Uniform Law Conference of Canada, Proceedings of the 
Sixty-third Annual Meeting (1981), at 185). The Draft Uniform Sale of Goods Act that 
formed part of the 1981 Report was referred to the Legislative Drafting Section and, as 
amended, was adopted as the Uniform Sale of Goods Act. (See Uniform Law Conference 
of Canada, Proceedings of the Sixty-fourth Annual Meeting (1981), Appendix HH 
(hereinafter referred to as "Uniform Sale of Goods Act")). 

11 Uniform Sale of Goods Act, supra, note 26, s. 114(l)(b). See, also, Uniform Law 
Conference of Canada, Proceedings of the Sixty-third Annual Meeting (1981), Appendix 
S, Draft Bill, s. 9.19 and Comment. 



28 



Contractual Remedies Act 1979, Stat. N.Z., No. 11, s. 6(l)(a). 



240 



(a) He shall be entitled to damages from that other party in the same 
manner and to the same extent as if the representation were a term of 
the contract that has been broken; and 

(b) He shall not, in the case of a fraudulent misrepresentation, or of an 
innocent misrepresentation made negligently, be entitled to damages 
from that other party for deceit or negligence in respect of that 
misrepresentation . 

This provision is criticized by Dawson and McLauchlan in their book on the 
New Zealand Act 29 on the ground that the imposition of damages measured by 
the contractual expectation would place "an unfair burden" on an innocent 
misrepresentor. 30 

(b) Other Solutions 

(i) United Kingdom 

The Misrepresentation Act 1967 3] is a complex piece of legislation that 
modifies the law relating to representations in several respects. Section 1 
enlarges the common law power of rescission, making it available even where 
the representation has become a term of the contract 32 or where the contract has 
been performed. Section 2(1) entitles a representee to claim damages unless the 
representor proves that the representation was not negligently made. Section 
2(2) reduces the right to rescission by giving the court power to refuse 
rescission and to award damages in lieu thereof, but only in cases where the 
representee "would be entitled, by reason of the misrepresentation, to rescind 
the contract". Thus, in a case where rescission is barred, for example because 
of the inability of the plaintiff to restore benefits received under the contract, 
the Act still makes no provision for a money award in substitution for 
rescission. 

(ii) Ontario Business Practices Act 

The Ontario Business Practices Act 33 gives a right of rescission in respect 
of misrepresentations inducing contracts for the sale of goods and certain 
services supplied to consumers. 34 The Act also provides, in section 4(l)(b), 
that: 



29 Dawson and McLauchlan, The Contractual Remedies Act 1979 (1981). 

30 Ibid., at 35. 

31 (1967), c. 7 (U.K.). 

32 At common law, there was authority for the view that the representation "merged" with 
the term so that no remedies would be available for the misrepresentation. See 
Pennsylvania Shipping Co. v. Compagnie Nationale de Navigation, 11936] 2 All E.R. 
1137 (K.B.D.). 

33 R.S.O. 1980, c. 55. 

34 Ibid., s. 4(l)(a). 



241 



... where rescission is not possible because restitution is no longer possible, or 
because rescission would deprive a third party of a right in the subject matter of the 
agreement that he has acquired in good faith and for value, the consumer is entitled 
to recover the amount by which the amount paid under the agreement exceeds the 
fair value of the goods or services received under the agreement or damages, or 
both. 

This provision empowers the court to make a money award in lieu of rescission, 
for which the primary measure envisaged rests on restitutionary principles. 



3. PROPOSALS FOR REFORM 

The defects in the present law may be summarized as follows. A 
misrepresentation that is neither fraudulent nor negligent and that does not 
constitute a term of a contract is actionable neither in tort nor in contract. While 
a plaintiff who has been induced to enter into a transaction by a defendant's 
false statement may seek rescission of the transaction, in some cases the right of 
rescission may be too narrow and, in others, too broad. For example, if the law 
is that rescission is barred merely by execution of a contract, the right of 
rescission may be too narrow. Moreover, cases can be envisaged in which a 
prima facie right of rescission should be restricted because of the difficulty of 
unwinding a contractual transaction or the intervention of third party rights. 
Finally, the court has no power to make a money award in substitution for, or in 
addition to, rescission. 

A simple amalgamation of representations with contractual terms would, in 
our opinion, impose too great a liability on the innocent non-business 
representor. Rather, we would propose the following modifications to the 
existing law. First, we believe that the right to rescind on the basis of 
misrepresentation should be enlarged by removing execution as an automatic 
bar, even in land sale cases. Accordingly, we recommend that, subject to the 
following recommendation, a representee should be able to rescind a contract 
that has been induced by misrepresentation even though the contract has been 
wholly or partly performed and even though, in the case of a contract for the 
sale of an interest in land, the interest has been conveyed to the representee. 

Secondly, and balancing this enlarged right of rescission, we recommend 
that, where a party to a contract would otherwise have a prima facie right to 
rescission, the court should have power to deny rescission, or to declare it 
ineffective, awarding damages in lieu thereof. We further recommend that, in 
exercising this power, the court should take into consideration, inter alia, the 
following factors: undue hardship to the representor or to third parties; 
difficulty in reversing performance or long lapse of time after performance; 
whether a money award would give adequate compensation to the representee; 
the nature and scope of the representation; and the conduct of the representor 
and whether or not he or she was negligent in making the representation. 

We recognize that in some cases there will be a period of uncertainty 
during which it will not be clear whether or not a purported rescission is valid, 
but this is bound to occur under any system. The Rules of Civil Procedure make 



242 



provision for interim preservation orders of property, which can be used in 
appropriate cases. 35 

Thirdly, we recommend that, whether or not a contract is rescinded, the 
court should have power to allow just compensation by way of restitution, or 
for losses incurred in reliance on the representation. In exercising this power 
the court should take into account such factors as whether the misrepresentation 
was made in the course of a business, whether the representor had personal 
knowledge of the facts, and whether he or she used reasonable care. 

There has been some uncertainty about whether the law relating to 
misrepresentation applies to misrepresentations of law. 36 Since misrepresenta- 
tions of law can be just as misleading as misrepresentations of fact, we 
recommend that legislation should make it clear that misrepresentation includes 
a misrepresentation of law. 

We have directed our attention to innocent, that is, non-fraudulent misrep- 
resentations, intending to leave in place the existing law relating to fraudulent 
misrepresentations. However, it would seem that there is no need to exclude 
fraudulent misrepresentations from the scope of our first recommendation, 
removing certain bars to rescission. We would not want to open the door to an 
argument that the rights of a misrepresentee were less in the case of fraud than 
in the case of innocent misrepresentation. In respect of the other recommenda- 
tions, it should be made clear that they apply to innocent misrepresentations, 
including negligent misrepresentations. 

On one matter that was dealt with in the U.K. Misrepresentation Act 
1967 31 we make no recommendation. This is the question of control of 
contractual clauses excluding liability for misrepresentation. In our opinion, 
such clauses can be satisfactorily dealt with under our general recommendations 
on unconscionability. 38 



Recommendations 

The Commission makes the following recommendations: 

1. Subject to Recommendation 2, a representee should be able to rescind a 
contract that has been induced by misrepresentation even though the 
contract has been wholly or partly performed and even though, in the 
case of a contract for the sale of an interest in land, the interest has been 
conveyed to the representee. 



35 Rules of Civil Procedure, O. Reg. 560/84, Rule 45. 

36 Lewis v. Jones (1825), 4 B. & C. 506, 107 E.R. 1 148. But see MacKenzie v. Royal Bank 
of Canada, [1934] A.C. 477 (P.C. (Can.)). 

37 Supra, note 31, s. 3. 

38 See supra, ch. 6. 



243 



(1) The courts should have power to deny rescission for misrepresenta- 
tion or to declare it ineffective, awarding damages in lieu thereof. 

(2) In exercising the power referred to in Recommendation 2(1), the 
courts should take into consideration, inter alia, 

(a) undue hardship to the representor or to third parties; 

(b) difficulty in reversing performance or long lapse of time after 
performance; 

(c) whether a money award would give adequate compensation to 
the representee; 

(d) the nature and scope of the representation; 

(e) the conduct of the representor; and 

(f) whether or not the representor was negligent in making the 
representation. 

(1) Whether or not a contract is rescinded, the court should have power 
to allow just compensation by way of restitution, or for losses 
incurred in reliance on the representation. 

(2) In deciding whether to award compensation, the court should take 
into account such factors as whether the representation was made in 
the course of a business, whether the representor had personal 
knowledge of the matters represented by him or her, and whether he 
or she used reasonable care in making the representation. 

Legislation should make it clear that a misrepresentation includes a 
misrepresentation of law. 

With the exception of Recommendation 1, which should apply to all 
misrepresentations including fraudulent misrepresentations, the forego- 
ing recommendations should apply to innocent misrepresentations, 
including negligent misrepresentations. 



CHAPTER 13 



WAIVER OF CONDITIONS 



1. THE PRESENT LAW AND THE CASE FOR REFORM 

This chapter deals with the rights of parties to a contract to waive 
conditions of that contract. The term "condition" has many meanings in Anglo- 
Canadian contract law. 1 For the purposes of this chapter, we use express 
condition to mean "an explicit contractual provision which provides either: (1) 
that a party to the contract is not obliged to perform one or more of his duties 
thereunder unless some state of events occurs or fails to occur; or, (2) that if 
some state of events occurs or fails to occur, the obligation of a party to 
perform one or more of his duties thereunder is suspended or terminated". 2 An 
implied condition has the same effect as an express condition, that is, it offers 
an excuse for a party's refusal to perform or to continue performance. 

As a practical matter, the problems related to waiver of conditions have 
arisen mainly in the context of express conditions in contracts for the purchase 
and sale of land. A prospective purchaser of land is commonly concerned to 
ensure that his or her proposed use of the land will be permitted. The use may 
require a decision from a planning authority that cannot be obtained instantly. 
Where both parties wish to enter into a binding contract immediately, the 
purchaser's concerns are usually met by the simple expedient of providing that 
performance will be conditional upon the desired decision being obtained by a 
certain date. It sometimes happens that the terms of the condition are not met 
but the purchaser wishes to waive the condition and proceed in any event, while 
the vendor seeks to avoid the transaction by relying on non-fulfilment of the 
condition. 

In Canada, the position, as held by the Supreme Court of Canada in 
Barnett v. Harrison, 3 relying on Turney v. Zhilka, 4 would seem to be that if a 



1 See Wickman Machine Tool Sales Ltd. v. Schuler A. G. , [ 1972] 1 W.L.R. 840, at 849-5 1 , 
[1972] 2 All E.R. 1173, at 1179-81 (C.A.), per Denning M.R. 

2 Fuller and Eisenberg, Basic Contract Law (4th ed., 1981), at 956. See, also, Treitel, Tlie 
Law of Contract (6th ed., 1983), at 47-50, and Waddams, 77?^ Law of Contracts (2d cd., 
1984), at 436-37. 

3 Barnett v. Harrison, [1976] 2 S.C.R. 531, 57 D.L.R. (3d) 225 (subsequent references 
are to 1 19761 2 S.C.R.). 

4 Turney v. Zhilka, [1959J S.C.R. 578, 18 D.L.R. (2d) 447 (subsequent reference is to 
[1959] S.C.R.). 

[245J 



246 



condition can be characterized as a "true condition precedent" 5 it cannot be 
waived by one party unilaterally even though it has been inserted solely for the 
benefit of that party and even if it is wholly severable, unless the contract 
expressly provides for the waiver. 



It is possible to suppose circumstances in which, from the beginning, the 
vendor has a genuine interest in avoiding the transaction if the condition is not 
fulfilled. For example, if the vendor retains adjoining land, as was the case in 
Turney v. Zhilka, 6 he or she may have an interest in the future use of the land to 
be sold. In such cases, there can be no objection to the vendor relying on the 
condition. In many cases, however, at the time of the agreement, the vendor has 
no interest in the condition. Usually the vendor prefers an unconditional sale, 
but the condition is inserted for the purchaser's benefit. Subsequently, the 
vendor concludes that he or she has made a bad bargain and seizes on non- 
fulfilment of the condition as a ground for avoiding the contract. In Barnett v. 
Harrison, the Supreme Court of Canada permitted a vendor to avoid a contract 
on such grounds, relying on Turney v. Zhilka and holding that it was irrelevant 
to show that the condition was inserted for the sole benefit of the purchaser. 



This conclusion gives us some difficulty. The function of the court in such 
a case, as the Supreme Court of Canada itself stressed, 7 is to give effect to the 
parties' intentions. There are no overriding considerations of justice apart from 
giving a fair construction to the agreement. In most cases it seems improbable 
that the parties intended, or reasonably expected, that the failure to secure 
planning approval would afford an excuse to the vendor to avoid the contract. 



In Turney v. Zhilka, ibid., at 583, the Court said the following with respect to a true 
condition precedent: 

But here there is no right to be waived. The obligations under the contract, on 
both sides, depend upon a future uncertain event, the happening of which depends 
entirely on the will of a third party — the Village council. This is a true condition 
precedent — an external condition upon which the existence of the obligation 
depends. Until the event occurs there is no right to performance on either side. The 
parties have not promised that it will occur. In the absence of such a promise there 
can be no breach of contract until the event does occur. The purchaser now seeks to 
make the vendor liable on his promise to convey in spite of the non-performance of 
the condition and this to suit his own convenience only. This is not a case of 
renunciation or relinquishment of a right but rather an attempt by one party, without 
the consent of the other, to write a new contract. Waiver has often been referred to 
as a troublesome and uncertain term in the law but it does at least presuppose the 
existence of a right to be relinquished. 

There are, however, difficulties with the concept of a true condition precedent. See 
discussion, infra, this ch., sec. 2. 

Turney v. Zhilka, supra, note 4. 

See Barnett v. Harrison, supra, note 3, per Dickson J. (as he then was), where he stated 
at 558 that "the Court [should not run] roughshod over the agreement", and at 559 that, 
"[i]f in any case the parties agree that the rule shall not apply, that can be readily written 
into the agreement." 



247 



The vendor's legitimate interest is usually to obtain the agreed price. If he or 
she is permitted to avoid the contract for a reason not contemplated by the 
parties, the vendor will be afforded an excuse for which he or she has not 
bargained. 



A single case, or even a number of cases, on the interpretation of 
individual contracts would hardly justify legislative intervention, however much 
one might disagree with the results. However, Barnett v. Harrison, while 
purporting to concede supremacy to the parties' intentions, appears to enshrine 
some sort of rule of interpretation that, as some passages in the judgment 
suggest, can only be displaced by express language. 8 



We consider it contrary to the general spirit of contract law to demand that 
parties express their intentions in a particular verbal formula. To do so is to set 
a trap for the unwary. Indeed, many courts seem to have recognized this, 
whether implicitly or explicitly, and have declined to follow Turney v. Zhilka 
and Barnett v. Harrison, either by distinguishing these cases on less than 
convincing grounds, or by ignoring them. 9 The result is uncertainty and 
unevenness in the law. 



It may be argued, of course, that if the parties retain legal advisers no 
problem should arise. Thus, in the case of an agreement for the sale of land, the 
agreement can be drafted to provide expressly either that the non-satisfaction of 
the condition is an event that either party can claim as an excuse for non- 
performance, or that only the purchaser can rely upon the non-satisfaction of 
the condition to excuse his or her performance. Similarly, the agreement can 
specifically provide that the purchaser may waive the condition at will. 



However, parties do not always have legal advice; nor should the law be 
such as to increase their transaction costs unnecessarily. It cannot be desirable 
for a court to refuse to give effect to what the parties obviously and reasonably 
wanted their agreement to achieve just because they have not had legal advice. 



See ibid., at 559, where Dickson J. (as he then was) stated that, "[i]n the interests of 
certainty and predictability in the law, the rule should endure unless compelling reason 
for change be shown." 

See, for example, Beauchamp v. Beauchamp, [1973] 2 O.R. 43, 32 D.L.R. (3d) 693 
(C.A.), affd (1974), 40 D.L.R. (3d) 160/z (S.C.C.); McCauley v. McVey, [1980] 1 
S.C.R. 165, 98 D.L.R. (3d) 577; Re Crema and Blake (1981), 33 O.R. (2d) 121, 123 
D.L.R. (3d) 427 (H.C.J.); Whitehall Estates Ltd. v. McCallum (1975), 63 D.L.R. (3d) 
320 (B.C.C.A.); Brooks v. Alker (1975), 9 O.R. (2d) 409, 60 D.L.R. (3d) 577 (H.C.J. ); 
Cameron v. Albrecht (1981), 121 D.L.R. (3d) 767 (B.C.S.C. (Chambers)); and Re 
Grandby Investments Ltd. and Wright (1981), 33 O.R. (2d) 341, 20 R.P.R. 30 (H.C.J.). 



248 



There is no reason, in effect, to impose formal requirements to cope with 
situations where no one is caught by unfair surprise or where the agreement is 
commercially reasonable. This is, however, precisely what can happen if the 
approach taken in Barnett v. Harrison 10 is followed. 

We believe that a legislative provision that would re-establish the court's 
power to give effect to the parties' intentions is warranted, and we now turn to a 
discussion of the form that such a provision should take. 



2. PROPOSALS FOR REFORM 

The difficulty with the existing law is that a fairly rigid rule of interpreta- 
tion may function to override the intentions of the parties. In seeking a 
legislative solution to this difficulty, it is important to reaffirm the primacy of 
the parties' intentions. The circumstances of contracts are so many and varied 
that an overprecise provision might do more harm than good, and might 
produce unexpected results in unforeseen circumstances. 

British Columbia has enacted legislation dealing with this problem. Section 
49 of the Law and Equity Act provides as follows: 11 

49. Where the performance of a contract is suspended until the fulfilment of a 
condition precedent, a party to the contract may waive the fulfilment of the 
condition precedent, notwithstanding that the fulfilment of the condition precedent 
is dependent upon the will or actions of a person who is not a party to the contract 
if 



(a) the condition precedent benefits only that party to the contract; 

(b) the contract is capable of being performed without fulfilment of the 
condition precedent; and 



(c) where a time is stipulated for fulfilment of the condition precedent, the 
waiver is made before the time stipulated, and where a time is not 
stipulated for fulfilment of the condition precedent, the waiver is made 
within a reasonable time. 



This provision appears to us to be unduly specific, and we see several 
problems with it. First, the opening words "[wjhere the performance of a 
contract is suspended" may not deal with cases where the condition does not 
suspend the performance of the whole contract. Many cases make it clear that 
the contract is, in the types of case we have been discussing, in force from the 
moment of the agreement. The condition that provides an excuse in certain 



10 Supra, note 3. 

11 Law and Equity Act, R.S.B.C. 1979, c. 224. 



249 



circumstances is a term of the contract, not something that suspends the 
operation of it. 12 

Secondly, the use of the term "condition precedent" should, in our 
opinion, be avoided. It is an ambiguous term sometimes used to describe 
circumstances where the contract does not come into existence until the 
condition is fulfilled, and sometimes used to indicate a term of a valid contract 
that excuses a party in certain circumstances from one or more contractual 
obligations. 13 

Thirdly, the reference to fulfilment of the condition depending on the will 
and actions of third parties gives an unduly narrow focus and can hardly be 
understood without a reading of Turney v. Zhilka. 14 

Fourthly, section 49(a) may give rise to difficulties in that the provision 
does not make it clear that the time to test the question of benefit must be the 
time the contract is formed rather than the time of the purported reliance on the 
condition. 

Finally, paragraphs (b) and (c) of section 49, in our opinion, are 
unnecessarily detailed and constitute potential pitfalls. The phrase "capable of 
being performed" does not have an obvious meaning. Presumably it means 
reasonably capable of being performed, or capable of being performed without 
injustice to the other party, and it would perhaps be so interpreted. Similarly, 
the provision dealing with time seems redundant. 

Where it is appropriate for the courts to proceed on a common sense basis 
by way of interpretation of an agreement, detailed legislation is, in our opinion, 
undesirable. There is a great danger in drafting overly precise and detailed 
legislation applicable to every kind of contract, while having in mind a 
particular problem that has arisen mainly in land sales cases. Such legislation 
may lead to consequences that are unforeseen and unintended at the time of 
drafting. We favour a provision that is as simple and spare as possible, and that 
would give effect to the parties' intentions. 



12 This can be noted from the fact that one party may be under an obligation to seek, in 
good faith, to have a condition satisfied: see Dynamic Transport Ltd. v. O.K. Detailing 
Ltd., [1978] 2 S.C.R. 1072, 85 D.L.R. (3d) 19, and Hamelin v. Hore (1976), 16 O.R. 
(2d) 170, 77 D.L.R. (3d) 546 (C. A.). Such an obligation can be enforced by a decree of 
specific performance that orders one party, for example, to seek development 
permission: see Dynamic Transport Ltd. v. O.K. Detailing Ltd. Similarly, damages may 
be awarded for breach of such an obligation: see BEM Enterprises Ltd. v. Campeau 
Corp. (1981), 32 B.C.L.R. 116, 22 R.P.R. 240 (C.A.), and Multi-Malls Inc. v. Tex- 
Mall Properties Ltd. (1980), 28 O.R. (2d) 6, 108 D.L.R. (3d) 399 (H.C.J. ), affd 
(1981), 37 O.R. (2d) 133 (C.A.), leave to appeal denied (1982), 41 N.R. 360n. 

13 The different meanings are explained in Trans Trust S.P.R.L. v. Danubian Trading Co. , 
Ltd., [1952] 2 Q.B. 297, at 304, [1952] 1 All E.R. 970, at 976-77 (C.A.). 

14 Supra, note 4. 



250 



Accordingly, we recommend that legislation should provide that, unless a 
contrary intention appears, a party to a contract may waive a provision inserted 
into the contract solely for his or her own benefit. 

Recommendation 

The Commission makes the following recommendation: 

1. Legislation should provide that, unless a contrary intention appears, a 
party to a contract may waive a provision inserted into the contract 
solely for his or her own benefit. 



CHAPTER 14 



MISTAKE AND 
FRUSTRATION IN THE LAW 
OF CONTRACT 



1. INTRODUCTION 

We find it convenient to treat mistake and frustration in the law of contract 
in the same chapter since there is a close connection between the two. 1 At one 
end of the spectrum, the question arises whether the parties should be bound, or 
continue to be bound, by a bargain that they were induced to enter into as the 
result of a mistaken assumption about a basic factor affecting the contract. At 
the other end of the spectrum, the question for consideration is whether an 
adversely affected party should be excused from further performance of a 
contract because of an unexpected event arising after the conclusion of the 
contract making performance impossible or much more onerous. It will be seen 
therefore that both types of case present the important policy question whether 
the law should give effect to an extrinsic event for which no provision has been 
made in the parties' bargain. Again, if relief is deemed appropriate because of 
an operative mistake or frustrating event, then similar questions must be 
addressed about the remedies to be afforded the parties and, in particular, to 
what extent reliance and restitutionary remedies should be made available. 
Finally, the close relationship between mistake and frustration is shown by the 
fact that the same facts, or a slight variation in them, can be characterized as a 
mistake affecting the formation of the contract or as an event frustrating the 
parties' expectations with respect to performance of the contract, depending on 
how the facts are viewed or the type of question being asked. 

We turn first to the role of mistake. 



2. MISTAKE IN THE LAW OF CONTRACT 

Some aspects of the law of mistake were dealt with in our Report on Sale 
of Goods, 1 but we made it clear that the other aspects should be dealt with in a 
law of contract amendment project. We must confess that we have found our 



Atiyah, An Introduction to the Law of Contract (3d ed., 1981), at 199-200; Farnsworth, 
Contracts (1982), at 647-49; and Waddams, The Law of Contracts (2d ed., 1984), at 
265-66. 

Ontario Law Reform Commission, Report on Sale of Goods (1979) (hereinafter referred 
to as "Sales Report"), Vol. I, at 103-07, and Vol. II, at 285-88. 

[251] 



252 



mandate one of unusual difficulty. There is great uncertainty about what the 
present Anglo-Canadian law of mistake is. No two authors agree in their 
analysis of it and the same confusion exists in the case law. Reputable scholars 
often disagree about the interpretation of the same case. 3 Some scholars deny 
altogether that English contract law recognizes an independent doctrine of 
mistake. 4 Others acknowledge its existence but give it a very limited scope 5 
while a third group is prepared to concede the doctrine of mistake a substan- 
tially larger role. 6 American law with respect to mistake has developed along 
very different lines from Anglo-Canadian law and is exerting increasing 
influence on doctrinal thinking in Canada as well as in other parts of the 
Commonwealth. 

Further difficulties arise because equity has asserted a jurisdiction in this 
area that is significantly wider and more flexible than the jurisdiction exercised 
by the common law courts. However, no one is quite sure how the two bodies 
of rules mesh (if indeed they mesh at all) and what the precise boundary is 
between them. Again some scholars question altogether the existence of an 
independent equitable doctrine of mistake. 7 

These differences and uncertainties reflect the intractable character of one 
of the most difficult branches of contract law. Needless to say, they are not due 
to a lack of goodwill or intelligence; rather, they express an underlying concern 
that the protection of expectation interests, generally viewed as one of the basic 
goals of modern contract law, not be undermined by too expansive a role for the 
mistake defence. 

We too share this concern and are fully conscious of the dangers of trying 
to legislate in an area so peculiarly fraught with pitfalls. Were the alternative 
open to us, an Ontario type restatement of the law of contractual mistake — 
persuasive for, but not binding on, the courts — might be a superior alternative 
to the legislative solution; but it is not. Nor is it realistic to rely on judicial 
developments to rectify the anomalies from which the existing rules suffer and 
to put the whole subject on a sounder conceptual footing, since the difficulties 
and uncertainties are themselves the product of judicial doubts and hesitations. 
We have accordingly reached the conclusion that a package of legislative 



This is particularly true of the House of Lords decision in Bell v. Lever Bros. , Ltd. , 
[1932] A.C. 161, [1931] All E.R. Rep. 1 (subsequent references are to [1932] A.C.), the 
leading English case on the scope of the doctrine of mistaken assumptions. 

For example, Slade, "The Myth of Mistake in the English Law of Contract" (1954), 70 
L.Q.R. 385. 

For example, Furmston (ed.), Cheshire & Fifoot's Law of Contract (10th ed., 1981), at 
200. 

Canadian authors, on the whole, appear to fall into this category. See, for example, 
Swan, "The Allocation of Risk in the Analysis of Mistake and Frustration", in Reiter 
and Swan (eds.), Studies in Contract Law (1980), at 181-233, and Waddams, supra, note 
1, at 262-300. 

For example, Atiyah and Bennion, "Mistake in the Construction of Contracts" (1961), 
24 Modern L. Rev. 421, and Slade, supra, note 4, esp. at 403-07. 



253 



reforms is the best compromise solution, although we recognize that not 
everyone will agree that we have struck the right balance in every case. We 
proceed to divide our discussion into the well accepted distinction between 
mistakes in assumption and mistakes in understanding. 

(a) MISTAKES IN ASSUMPTION 

A mistake in assumption is said to occur when one or more of the parties 
has been induced to enter into a contract on the basis of a false assumption 
involving a material aspect of the bargain. Definitionally, the assumption is not 
a term of the contract, but without the belief in its correctness it may fairly be 
assumed that the mistaken party or parties would not have been willing to enter 
into the contract, or, at least, not on the same terms. The false assumption may 
be shared by all the parties ("common mistake") or it may be limited to only 
one of the parties ("unilateral mistake"). In the latter case it is also customary 
to distinguish between those situations where the other party knew or had 
reason to know of the first party's mistake and those where the other party was 
not aware of it at the time of the conclusion of the contract. 

(i) Common Mistakes 

a. General Considerations 

There is no doubt that some types of common mistake are recognized by 
the common law, but it is not clear what the test of recognition is. Mistakes 
concerning the existence of specific goods at the time of their sale 8 or of the 
ownership of other property 9 have long been accepted as vitiating factors. The 
same is true of the subsistence of a valid marriage as the underpinning for a 
separation agreement 10 or the existence of a person whose life is being insured 
under a life insurance policy 11 or who is the annuitant in a contract for the sale 
of an annuity contract. 12 These cases, and others like them, led some of the law 
lords comprising the majority in Bell v. Lever Bros., Ltd. 13 to express the 
opinion that common mistake was only an available defence when it went to the 
identity or very existence of the subject matter of the contract. This rationaliza- 
tion, however, has been questioned by scholars who find it difficult to reconcile 
with many of the decided cases. 14 



8 Couturier v. Hastie (1856), 5 H.L.C. 673, 10 E.R. 1065; McRae v. Commonwealth 
Disposals Commission (1951), 84 C.L.R. 377 (Aust. H.C.). 

9 Bingham v. Bingham (1748), 1 Ves. Sen. 126, 27 E.R. 934, and Cochrane v. Willis 
(1865), 1 Ch. App. 58, 35 L.J. Ch. 36. 

10 Galloway v. Galloway (1914), 30 T.L.R. 531 (Div. Ct.). 

11 Scott v. Coulson, [1903] 2 Ch. 249, 19 T.L.R. 440 (C.A.). 

12 Strickland v. Turner (1852), 7 Exch. 208, 155 E.R. 919. 

13 Supra, note 3. 

14 Waddams, supra, note 1, at 286-89. 



254 



As noted previously, it may also be fairly claimed, based on past 
precedents, that equity takes a wider view of its jurisdiction than does the 
common law. In Solle v. Butcher, ]5 a leading if controversial case, Lord 
Denning asserted that equity will grant relief "if the parties were under a 
common misapprehension either as to facts or as to their relative and respective 
rights, provided that the misapprehension was fundamental and that the party 
seeking to set it aside was not himself at fault". 16 However, the correctness of 
this proposition has been challenged, 17 and both this and the existence of an 
independent mistake doctrine in equity must be regarded as unsettled in English 
law until such time as the disagreement is authoritatively resolved by the House 
of Lords. 

We find it disturbing that there should be two such divergent if disputed 
bases on which the courts will recognize mistakes in assumption, and equally 
unsatisfactory that the consequences of an operative mistake should differ so 
markedly at common law and in equity. At common law a mistake meeting the 
requisite test wholly avoids the contract. 18 This result has serious implications 
for the rights of third parties who may have acquired property in good faith 
from one of the parties to the transaction. It also precludes the courts from 
giving more flexible and appropriate forms of relief. In equity, on the other 
hand, the contract is not void ab initio but only voidable 19 and the adversely 
affected party will only be allowed to avoid the contract if he or she acts 
promptly and can do so without prejudicing the rights of third parties. Equity 
can, and frequently does, attach terms to an order of rescission in favour of an 
adversely affected party. 20 We are of the view that the equitable approach 
should apply to all cases where a defence of mistaken assumption is raised and, 
as will be explained more fully hereafter, that the actual remedy should be in 
the court's discretion subject, in every case, to the protection of third party 
interests. 

The questions remain, however, what type of mistake should trigger the 
court's jurisdiction and what conditions should qualify the availability of relief. 
We recognize that not to impose any restrictions would create too much 
uncertainty and interfere unduly with the rights of parties to have their 
contractual expectations respected. On the other hand, a test that is too 



15 [1950] 1 K.B. 671, [1949] 2 All E.R. 1107 (C.A.) (subsequent references are to [1950] 1 
K.B.). 

16 Ibid., at 692-93. See, also, Denning L.J.'s observations in Frederick E. Rose (London) 
Ltd. v. William H. Pirn Jr. & Co. Ltd., [1953] 2 Q.B. 450, at 460-61, [1953] 2 All E.R. 
739, at 746-47 (C.A.). 

17 See Atiyah and Bennion, supra, note 7, and Slade, supra, note 4. See, also, Goff and 
Jones, The Law of Restitution (2d ed., 1978), at 146-47. 

18 Cheshire & Fifoot's Law of Contract, supra, note 5, at 202-10. 

19 Ibid., at 210-13. 

20 See, for example, Solle v. Butcher, supra, note 15, and compare Devald v. Zigeuner, 
[1958] O.W.N. 381, 16 D.L.R. (2d) 285 (H.C.J. ), discussed infra, this ch., sec. 
2(b)(ii). 



255 



demanding would undermine equally important objectives of the law of mistake 
— the prevention of unjust enrichment or the imposition of onerous obligations 
as a result of the mistaken assumption. 

Slightly varying answers to these questions are given in the New Zealand 
Contractual Mistakes Act 1977 2] and in the First and Second American 
Restatements of the Law of Contracts. 22 In the New Zealand Act the test is 
whether the parties have made a "material mistake" which, in the absence of 
judicial relief, would result in a "substantially unequal exchange of values". 23 
In the First Restatement , 24 the parties' mistaken assumption must have formed 
"the basis" on which they entered into the transaction and enforcement of the 
contract must make it "materially more onerous" to the mistaken party. In the 
Second Restatement , 25 the test is whether the mistake relates to a "basic 
assumption on which the contract was made" and whether it has "a material 
effect on the agreed exchange of performances". 

The point has been made in a frequently cited article by Professor Rabin 26 
that the critical issue is less the quality of the mistake than its impact on the 
agreed exchange of values. He proposes a test that would require only that the 
mistake be "material", in the sense that the mistaken party would not have 
entered into the transaction but for the error in question, rather than "basic" or 
"fundamental". Rabin defends this on the basis that the essential consideration 
in a mistake case is whether the mistake results in a grossly more unequal 
exchange of values. Because, according to Rabin, the "basic" or "fundamen- 
tal" test appears to operate so as to identify such cases, it would, in his view, be 
more straightforward to place the criterion on the explicit basis of inequality of 
exchange. It should be noted that his formulation is designed to capture 
unilateral as well as common mistakes in assumption, and this is an aspect to 
which we return later in this chapter. 

Our own view is that the quality of the common mistake as well as its 
consequences are essential considerations. Merely to focus on the consequences 
of a mistake would, we believe, lead to the undesirable result of allowing a 
contract to be set aside where the mistaken assumption involves a matter of 
secondary importance. After all, it is the existence of the mistake that motivates 
the law's interference with the parties' bargain. Inequality of exchange alone, 
however marked, would not, in our view, justify that interference. Accord- 
ingly, we favour the test set out in the Second Restatement. 



21 



Stat. N.Z. 1977, Vol. I, No. 54. 



22 American Law Institute, Restatement of the Law, Contracts (1932) (hereinafter referred 
to as "First Restatement"), § 502; Restatement of the Law, Second — Contracts, 2d 
(1981) (hereinafter referred to as "Second Restatement"), § 152. 

23 Supra, note 21, s. 6(1 )(a) and (b). 

24 Supra, note 22, § 502. 

25 Supra, note 22, § 152. 

26 Rabin, "A Proposed Black-Letter Rule Concerning Mistaken Assumptions in Bargain 
Transactions" (1967), 45 Tex. L. Rev. 1273, at 1282-84. 



256 



b. Allocation of Risk 

Modern commentators generally agree 27 that any test for granting relief 
from a mistake in assumption is seriously incomplete if it does not also take into 
account whether the parties have, expressly or impliedly, made provision for 
allocating the risk of a mistake to one or other of them and, if they have not 
done so, whether a court should be free to do so on a proper consideration of all 
the factors. The need for this additional inquiry arises because an unqualified 
right to relief could lead to abuses. It is only when all the relevant factors have 
been canvassed and the court is satisfied that the risk has not been allocated by 
agreement, custom of the trade or other circumstances that it will be appropriate 
to grant relief to the adversely affected party. 

The risk factor is expressly recognized in the New Zealand Act 28 and plays 
a central role in the design of the Second Restatement provisions. Section 154 of 
the Second Restatement provides that a party bears the risk of a mistake in three 
circumstances, when: 

(a) the risk is allocated to him by agreement of the parties, or 

(b) he is aware, at the time the contract is made, that he has only limited 
knowledge with respect to the facts to which the mistake relates but 
treats his limited knowledge as sufficient, or 

(c) the risk is allocated to him by the court on the ground that it is 
reasonable in the circumstances to do so. 

With respect to subparagraph (c), the Comment to the section explains that 
"fi]n some instances it is reasonably clear that a party should bear the risk of a 
mistake for reasons other than those stated in Subparagraphs (a) and (b)." 29 
This explanation is not particularly helpful. We think a better justification for a 
provision of this sort is that since the court is exercising a discretionary remedy 
the court should be satisfied that it is not contrary to sound social, economic or 
business interests to do so or, as it is put more succinctly by Professor Rabin, 30 
that there are no countervailing social policies. This said, we agree with the 
design of the Second Restatement with respect to allocation of risk. 

c. Remedies 

We have already stated our conclusion that the distinction between the 
common law and equitable remedies should be abolished and that all mistakes in 
assumption should be governed by a common remedial regime. It remains for 
us to consider what those remedies should be. 



27 For example, Atiyah, supra, note 1; Rabin, supra, note 26; Swan, supra, note 6; and 
Second Restatement, supra, note 22, § 152, Comment e. 

28 Supra, note 21, s. 6(l)(c). 

29 Supra, note 22, Comment d. 

30 Supra, note 26. 



257 



It is sometimes said that in equity the effect of an operative mistake is to 
make the contract voidable. If this means (as, in the American context, section 
152 of the Second Restatement suggests it does) that once the mistake is proven 
and the other tests of eligibility for relief have been satisfied the mistaken party 
has a right to rescind the contract, this, in our view, would unreasonably fetter 
the hands of the court. In the past, equity courts have not construed their powers 
so narrowly and conditions have often been attached to the granting of 
rescissionary relief. Just as frequently, the non-adversely affected party to the 
contract has been given the option of retaining the benefits of the contract if he 
or she will agree to a revision of its terms. So, for example, 31 in Solle v. 
Butcher 32 a landlord was only allowed rescission of a lease if he gave the tenant 
the option of staying on in the premises at a rent that would have obtained 
absent the operative mistake in assumption. Likewise, in Grist v. Bailey, 33 a 
house was sold for £850, both parties believing that it was in the occupation of a 
protected tenant. In fact the protected tenant had died before the sale so that 
vacant possession of the house could be obtained. This would have made it 
worth much more. Goff J. dismissed the vendor's claim for specific perform- 
ance only on condition that the defendant agree to enter into a fresh contract at a 
proper vacant possession price. 

These precedents point clearly to the desirability of allowing the court to 
make such order as seems just without fettering its discretion. However, we 
also favour adding an illustrative list of remedies to assist the court in making 
its determination. This would be consistent with what we have done in the 
chapters in this Report dealing with the consequences of unconscionable 
contracts, 34 and illegal contracts. 35 The New Zealand Contractual Mistakes Act 
797736 ii S ( S m e following illustrative orders that the court can make: 37 

(a) Declare the contract to be valid and subsisting in whole or in part or 
for any particular purpose: 

(b) Cancel the contract: 

(c) Grant relief by way of variation of the contract: 

(d) Grant relief by way of restitution or compensation. 



31 See Treitel, The Law of Contract (6th ed. , 1983), at 239-41 . The account that follows of 
the orders made in Solle v. Butcher, supra, note 15, and Grist v. Bailey, [19671 Ch. 532, 
[1966] 2 All E.R. 875, is based in part on Professor Treitel' s summary of them. 

32 Supra, note 15. 

33 Supra, note 31. 

34 Supra, ch. 6. 

35 Supra, ch. 11. 

36 Supra, note 21. 

37 Ibid., s. 7(3). 



258 



While we agree with this list as far as it goes, we believe that it should be 
clarified and amplified in two respects. First, it should be made clear that the 
restitution referred to in clause (d) is for benefits conferred on a contracting 
party, including benefits conferred on a third party at the request of a 
contracting party, and that the compensation is for expenses (that is, reliance 
losses) incurred by a party. Second, the court should be given an explicit power 
to apportion reliance losses between the contracting parties where it appears just 
to do so. 



Legislation should also address the difficult question how far the negli- 
gence of the adversely affected party should preclude him or her from obtaining 
relief. Section 157 of the Second Restatement provides that a mistaken party's 
fault in failing to know or discover the facts before making the contract does not 
"bar" him from seeking avoidance or reformation of the contract "unless his 
fault amounts to a failure to act in good faith and in accordance with reasonable 
standards of fair dealing". 



If section 157 means that a self-induced mistake is not an absolute bar to 
relief then we have no quarrel with it, 38 but if it means that the court must 
disregard it in all cases then we think it goes too far. It appears from the 
reported cases 39 that the courts have taken the factor into consideration, 
especially where the other party has altered his or her position in reliance on the 
contract, and in our view rightly so. Where the contract is still fully executory 
on both sides and the other party has not acted on it to his or her detriment, the 
fault of the mistaken party may well be disregarded although, in a close case, 
the court may still wish to take it into account. It would be anomalous if, in 
determining the allocation of risk, the court could take every circumstance into 
consideration other than the fault of the party seeking relief. In any event, we 
do not think it desirable to lay down any rigid rules with respect to the role of 
negligence. In our view, it is best left as a discretionary element for the court to 
consider in determining whether relief should be granted and on what basis. 40 



The same reasoning applies to other equitable defences that have been 
raised in actions for rescission for mistake. We have in mind unreasonable 
delay by the adversely affected party in seeking relief or that the non-mistaken 
party can no longer be restored to its original position. We consider that the 
court should be explicitly empowered to take those matters into consideration in 
determining whether relief should be granted, and if so what type. 



38 Second Restatement, supra, note 22, § 157, Comment a is to this effect. A familiar 
example of a self-induced mistake is where a party bidding for a contract fails to exercise 
reasonable care in tallying and verifying his or figures. 

39 For example, Solle v. Butcher, supra, note 15, per Denning L.J., at 693. 

40 This is the approach adopted in the New Zealand Act, supra, note 21, s. 7(2). 



259 



We have already mentioned our view that no order for relief made by the 
court should impair the rights obtained by a third party acting in good faith and 
for valuable consideration. The New Zealand Act so provides 41 and this too 
should be made explicit in the Ontario legislation. 

d. Mistakes of Law 

Since Lord Ellenborough's controversial and much discussed judgment in 
Bilbie v. Lumley 41 it has often been said that a contract entered into under a 
mistake of law will not entitle the mistaken party to relief even though he or she 
would have been eligible for it had the mistake been one of fact. The distinction 
between mistakes of fact and mistakes of law has been repeatedly criticized as 
mischievous and untenable, and over the years the courts have carved out many 
exceptions to the rule in Bilbie v. Lumley. 47 ' We believe the distinction should 
now be abolished. 

The distinction was convincingly criticized by Mr. Justice Dickson (as he 
then was) in his dissenting judgment in Hydro-Electric Commission of Nepean 
v. Ontario Hydro Commission. 44 The distinction is not adopted in American law 
and does not appear in the Restatement. It has been abolished in the New 
Zealand Act 45 and its abolition is also recommended in the British Columbia 
Law Reform Commission's Report on Benefits Conferred Under a Mistake of 
Law. 46 The Report recommends the abolition of the distinction in the contrac- 
tual area as well as generally. It will be seen, therefore, that our own 
recommendation is supported by an impressive body of precedent. 

(ii) Unilateral Mistakes in Assumption 

a. Unilateral Mistake Known to the Other Party or Where 
he or she had Reason to Know of it 

A unilateral mistake in assumption is said to occur when the mistake is 
made by only one of the parties although the other party may know or have 
reason to know of the mistake. We consider first the position where the non- 
mistaken party does know or have reason to know of the mistake. 



41 Ibid., s. 8. 

42 (1802), 2 East 469, 102 E.R. 448 (K.B.). 

43 In his dissenting judgment in Hydro-Electric Commission of Nepean v. Ontario Hydro 
Commission, [1982] 1 S.C.R. 347, 132 D.L.R. (3d) 193 (subsequent references are to 
[1982] 1 S.C.R.), Dickson J., at 365-67, identified five such exceptions. 

44 Ibid., at 358-70. 

45 Supra, note 21, s. 2, definition of "mistake". 

46 Law Reform Commission of British Columbia, Report No. 51, Report on Benefits 
Conferred Under a Mistake of Law (1981), at 92. 



260 



Since the decision of the Court of Queen's Bench in Smith v. Hughes, 41 it 
has been said to be the established rule of Anglo-Canadian law that relief is not 
available for a unilateral mistake in assumption (as distinct from a mistake 
affecting the terms of an offer) made by one of the parties even if the other party 
knew of it. In this case Cockburn C.J. said, 48 "The question is not what a man 
of scrupulous morality or nice honour would do under such circumstances," 
and Blackburn J. said, 49 "whatever may be the case in a court of morals, there 
is no legal obligation on the vendor to inform the purchaser that he is under a 
mistake, not induced by the act of the vendor". This view of the law has 
subsequently been confirmed by high authority 50 but was criticized in his non- 
judicial capacity by Lord Wright on the ground that it is not in "accord with the 
feelings of ordinary decent people". 51 American courts have rejected the 
Anglo-Canadian position for a considerable time and the voidability of such 
contracts is recognized in section 153 of the Second Restatement. It is also 
recognized in the New Zealand Act. 52 



In our view, Ontario law should follow the Second Restatement position, 
not merely because of the dubious ethical conduct of the party who remains 
silent but for other reasons as well. When considered against a spectrum of 
misapprehensions that can occur when a person enters an agreement, the rule in 
Smith v. Hughes appears anomalous. One who is induced to enter an agreement 
by fraudulent or innocent misrepresentation can rescind. So too can a person 
who shares a fundamental mistake with the other party. But where the other 
party has full knowledge and exploits it to his or her advantage, the rule denies 
relief to the mistaken party. 



It occasions no surprise, then, that the courts have found methods for 
departing from the spirit of Smith v. Hughes. Duties of disclosure, for example, 
have been imposed on fiduciaries and on parties to so-called uberrimae fidei 
agreements. 53 Failure to disclose material facts has been deemed to be a 
misrepresentation in cases where a partial disclosure has been viewed as 



47 (1871), 6 L.R.Q.B. 597, 25 L.T. 329 (subsequent references are to 6 L.R.Q.B.). 

48 Ibid., at 603. 

49 Ibid., at 607. 

50 Bell v. Lever Brothers Ltd. , supra, note 3, at 227, per Lord Atkin. See, also, Cheshire & 
Fifoot's Law of Contract, supra, note 5, at 240-41, and Waddams, supra, note 1, at 322- 
25. 

51 Lord Wright, Book Review (1943), 59 L.Q. Rev. 122, at 128. 

52 Supra, note 21, s. 6(a)(i). 

53 See Waddams, supra, note 1, at 323. Uberrimae fidei agreements are agreements 
requiring the most abundant good faith and the absence of any concealment or deception, 
however slight: see Black's Law Dictionary (5th ed., 1979). 



261 



misleading. 54 Further, the courts have developed elaborate doctrines of implied 
terms, particularly in the law of sale of goods, 55 imposing liability of certain 
kinds regardless of the fact that neither misrepresentation nor express warranty 
is present. 56 And the recently developed negligent misstatement doctrine has 
been employed to rescue victims of silent deception. 57 While it could not be 
seriously maintained that the Smith v. Hughes line of authority has been 
completely discredited by these developments, it is suggested that their cumula- 
tive effect, coupled with the rule's rather anomalous nature, present a 
persuasive case for reform. 

Of course, the availability of relief for the self-deceived party should not 
be unqualified lest this in turn lead to its own injustices, and we favour 
limitations similar to those recommended by us for common mistakes in 
assumption. 58 This means that the mistake must be as to a basic assumption and 
that it must also have a material effect on the agreed exchange of values. 
Moreover, as with common mistakes, the question of risk allocation should be 
addressed. It may be thought that the actual or constructive knowledge of the 
non-mistaken party should be sufficient to justify the granting of relief. 
However, in our view, it should still be open to the mistaken party, expressly or 
impliedly, to assume the risk of his or her own mistake, unlikely though that 
may be in a case of this kind. Likewise, if the circumstances justify it, a court 
should be able to find that the custom of the trade or established business 
practices relieve a party from having to disabuse the other party of the self- 
induced mistake. In short, the duty of disclosure of the non-mistaken party 
ought to yield to exceptions. 59 

The Second Restatement rule is that the mistaken party is entitled to seek 
relief where the other party knew of his mistake or had reason to know of it. 60 
The reason for including a test of constructive knowledge ("or had reason to 



54 See Aaron's Reefs Ltd. v. Twist, [1896] A.C. 273, 74 L.T. 794 (H.L.); R. v. Kyslant 
(Lord), [1932] 1 K.B. 442, 146 L.T. 21; Kerr on Fraud and Mistake (7th ed., 1952), at 
97 et seq.; Bank of British Columbia v. Wren (1973), 38 D.L.R. (3d) 759 (B.C.S.C); 
Royal Bank of Canada v. Hale (1961), 30 D.L.R. (2d) 138 (B.C.S.C). But compare 
Bank of Nova Scotia v. Boehm, [1973] 3 W.W.R. 757 (B.C.S.C). 

55 See now Sale of Goods Act, R.S.O. 1980, c. 462, ss. 13-16. 

56 See, generally, Atiyah, "Judicial Techniques and the English Law of Contract" (1968), 
2 Ottawa L. Rev. 337. 

57 Walter Cabott Construction Ltd. v. The Queen (1974), 44 D.L.R. (3d) 82 (F.C, T.D.). 

58 The Second Restatement, supra, note 22, §§ 153 and 154, is to the same effect. 

59 In view of this general conclusion we find it unnecessary to consider Professor 
Kronman's interesting suggestion, based on an economic analysis of mistake doctrine, 
that a distinction should be drawn in unilateral mistake cases between information 
casually acquired by the non-mistaken party and information deliberately acquired in the 
course of his or her business or profession. Only in the former case would the non- 
mistaken party be under a duty of disclosure to the other party: see Kronman, "Mistake, 
Disclosure, Information and the Law of Contracts" (1978), 7 J. Legal Studies 1. 



60 



Section 153(b) only speaks of the other party having reason to know of the mistake. 
Obviously this includes the case where the other party actually knew of the mistake. 



262 



know") is that it is often difficult to prove a person's state of mind and that the 
evidentiary difficulties can be avoided by allowing a court to impute knowledge 
on the strength of evidence that would have put the average person on notice. 61 
A good illustration of such a case is where a subcontractor's bid for a job is 
markedly below the contractor's own estimate of the likely cost and markedly 
less than the bids received from other subcontractors. Though the contractor 
may fairly deny knowledge of the subcontractor's mistake in calculation, the 
"reason to know" test will still enable the court to grant relief to the mistaken 
party if the court is satisfied that an average person in the contractor's position 
would have appreciated that a mistake had been made. 62 

Section 153(b) of the Second Restatement also applies to a case where the 
"fault" of the non-mistaken party caused the mistake. Although the accom- 
panying Comment does not explain its rationale, the justification for including a 
fault test is obvious. If a party by his or her negligent conduct induces a 
mistaken belief by the other party about an important feature relevant to the 
contract he or she cannot in good conscience insist on strict performance of the 
contract. 63 Often the mistaken party may also have a defence based on other 
doctrines, such as negligent misrepresentation. Under the Hedley Byrne doc- 
trine, 64 there may also be a claim in damages. However, the mistaken party 
should not be limited to these alternatives and we agree that the fault of the non- 
mistaken party should by itself trigger the court's power to grant relief to the 
mistaken party. 



61 Corbin, Corbin on Contracts (1972), Vol. 3, § 610, at 692-97. 

62 A point of difficulty that has been much litigated in Canada and the United States is 
whether a contractor who has put in an irrevocable bid for a construction project is 
entitled to relief where the contractor discovers a mistake in its calculations and so 
advises the offeree before the bid is accepted. The Canadian case law is unsettled. See, 
for example, Imperial Glass Ltd. v. Consolidated Supplies Ltd. (1960), 22 D.L.R. (2d) 
759 (B.C. C. A.); McMaster University v. Wilchar Construction Ltd., [1971] 3 O.R. 801, 
22 D.L.R. (3d) 9 (H.C.J. ), affd (1973), 12 O.R. (2d) 512*, 69 D.L.R. (3d) 400n 
(C.A.); Belle River Community Arena Inc. v. W.J.C. Kaufmann Co. Ltd. (1978), 20 
O.R. (2d) 447, 87 D.L.R. (3d) 761 (C.A.); R. v. Ron Engineering, [1981] 1 S.C.R. Ill, 
119 D.L.R. (3d) 267; and Calgary v. Northern Construction Company Division of 
Morrison-Knudsen Co. Inc. (1985), 42 Alta. L.R. (2d)l, [1986] 2 W.W.R. 426 (C.A.), 
leave to appeal to the Supreme Court of Canada granted June 12, 1986. See also Carr, 
"Case Comment" (1961), 39 Can. B. Rev. 625; Blom, "Case Comment" (1982), 6 
Can. Bus. L.J. 80; and Swan, "Case Comment" (1981), 15 U.B.C. L. Rev. 447. In our 
view, a unilateral mistake in an irrevocable offer should prima facie be treated in the 
same manner as a unilateral mistake in a revocable offer that has been accepted. 
Accordingly, we do not propose in this Report a special statutory rule to govern mistakes 
in irrevocable offers. However, this would not preclude further judicial development of 
this area. See further, infra, this ch., sec. 2(b)(i). 

63 Compare the position where the negligent conduct of one party induces a mistake by the 
other party with respect to the proposed terms of the contract. See A. Roberts & Co. Ltd. 
v. Leicestershire County Council, [1961] Ch. 555, [1961] 2 All E.R. 545, and infra, this 
ch., sec. 2(b)(ii). 

64 Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. , [1964] A.C. 465, [1963] 2 All E.R. 
575 (H.L.). 



263 



b. Unilateral Mistake not Known to the Other Party and 
Where he or she had No Reason to Know of it 

Modern American restitutionary theory favours relief for the mistaken 
party not only where the other party was aware or should have realized that a 
mistake was being made but also where he or she was wholly innocent of 
knowledge. The Second Restatement formally endorses this position. 65 On the 
other hand, this broader basis of relief was consciously omitted from the New 
Zealand Act because the Contracts and Commercial Law Reform Committee, 
whose Report led to the enactment of the legislation, 66 was of the view that "the 
law of contract is concerned with the enforcement of agreements independently 
of the question whether such agreements were prudently or imprudently 
made". 67 

We have given the question careful consideration and have concluded that 
it would not be wise at this stage in the evolution of Canadian mistake theory for 
Ontario law to adopt a much expanded rule for unilateral mistakes that has no 
basis in precedent (in fact the great majority of precedents and dicta are firmly 
opposed to it) 68 and that, so far as we are aware, has only limited or little 
support in the business community or in the community at large. 

The justification given in the Second Restatement for the adoption of the 
extended jurisdiction is that "[t]here has, in addition, been a growing willing- 
ness [among American courts] to allow avoidance where the consequences of 
the mistake are so grave that enforcement of the contract would be unconscion- 
able." 69 The cases relied upon appear principally to involve unilateral mistakes 
in bidding for construction jobs. We appreciate that section 153 of the Second 
Restatement does not entitle the mistaken party to obtain relief without also 
meeting the other important tests imposed by the section. While this may reduce 
some of the objections to the rule (although, it seems to us, only at the expense 
of adding a new dimension of uncertainty), it does not remove the objection of 
principle. 



65 Second Restatement , supra, note 22, § 153. The First Restatement, supra, note 22, did 
not recognize this type of unilateral mistake. Note also that where the other party had no 
reason to know of the mistake, § 153(a) of the Second Restatement requires the mistaken 
party to prove, in addition, that the effect of the mistake is such that enforcement of the 
contract would be unconscionable. 

66 New Zealand, Contracts and Commercial Law Reform Committee, Report on the Effect 
of Mistakes on Contracts (1976). 

67 Ibid., at 17. 



68 



69 



For example, Devald v. Zigeuner, supra, note 20; Bell v. Lever Bros. Ltd., supra, note 
3; Riverlate Properties Ltd. v. Paul, [1975] Ch. 133, [1974] 2 All E.R. 656 (C.A.); 
Tamplin v. James (1880), 15 Ch. D. 215, 43 L.T. 520 (C.A.), per Baggallay L.J.; and 
Stewart v. Kennedy (1890), 15 A.C. 108 (H.L.), cited in Goff & Jones, supra, note 17, 
at 147. 

Second Restatement, supra, note 22, Comment a. 



264 



Until now the general principle in our law has been that if an agreement 
has not been procured by unfair or unlawful means it will be enforced even 
though one party may gain much more from the transaction than the other. This 
principle has recently been reaffirmed by the Privy Council in dealing with the 
contractual capacity of a person suffering from mental illness. 70 Mere disparity 
in gains and losses, even very great disparity, has not in the past been deemed a 
sufficient ground for interfering with the agreement. 71 If such a principle were 
now to be introduced into Ontario law it would be difficult to justify limiting its 
operation to unilateral mistakes. It is true that the prevention of unjust 
enrichment underlies the granting of relief in cases of common mistake and 
unilateral mistake where the mistake is known to the other party. But unjust 
enrichment or hardship per se is not the basis of relief. It is unjust enrichment 
plus something else that triggers the court's jurisdiction. It is that "something 
else" that is missing where the other party is not privy to the mistake and had 
no reason to know of it. 

Although, as indicated by the foregoing discussion, we do not believe that 
the availability of relief for a unilateral mistake not known to the other party 
would be consistent with the existing state of Anglo-Canadian contract law, we 
recognize that this branch of contract law, like most others, is not static. We 
conclude that reform legislation addressing this area of the law should explicitly 
state that courts should not be precluded from further developing it if changes in 
circumstances, trade usage, or new insights into the problem should justify 
further development. 

(iii) Conclusions 

We shall here gather together our conclusions relating to mistakes in 
assumption. In view of the complexity of this area of the law, we considered 
that it would be helpful to cast these conclusions in draft statutory form, as 
follows: 

Mistakes in Assumption 

l.-(l) This section applies to a contract where at the time of the making of the 
contract, 

(a) a mistake common to both parties, or 

(b) a mistake of one of the parties known to the other party, or where the 
other party had reason to know of the mistake or where his or her fault 
caused the mistake, 



70 Hart v. O'Connor, [1985] A.C. 1000, [1985] 3 W.L.R. 214 (P.C.). 

71 This is true even in the case of consumer transactions governed by the Business Practices 
Act, R.S.O. 1980, c. 55. Section 4 of the Act gives a court broad powers to set aside an 
agreement procured by an "unfair" practice, but the power is always predicated on 
deceptive or unconscionable conduct on the part of the other contracting party: see ibid., 
ss. 2 and 4. 



265 



as to a basic assumption on which the contract was made has a material effect on 
the agreed exchange of performance. 

(2) This section does not apply where the adversely affected party bears the 
risk of the mistake. 

(3) In a case to which this section applies, a court may grant such relief as 
may be just, including one or more of the following types of relief: 

(a) a declaration that the contract is valid and subsisting in whole or in part 
or for any particular purpose; 

(b) cancellation of the contract; 

(c) variation of the contract; 

(d) restitution for benefits conferred under the contract; and 

(e) indemnification in whole or in part for expenses incurred by one or 
more of the parties in relation to the contract, and such expenses may be 
divided equally among the parties or otherwise as the court may deem 
just, 

but no order made pursuant to this subsection shall prejudice or invalidate the 
rights of a third party acquired by him or her from or under any party to the 
contract in good faith, for valuable consideration, and without notice of the 
mistake. 

(4) In determining whether relief should be granted and if so what type, the 
court may take into consideration the following factors: 

(a) the conduct of the party seeking relief; 

(b) the extent to which the other party to the contract has changed his or her 
position in reliance on the contract; and 

(c) the fault of the party seeking relief in failing to know or discover the 
facts before making the contract, 

but none of the above factors shall necessarily be a bar to relief. 

(5) In this section, mistake includes a mistake of law. 
Allocation of Risk 

2. A party bears the risk of a mistake where, 

(a) the risk is allocated to him or her by agreement of the parties, expressly 
or impliedly; 

(b) that party is aware, at the time of the formation of the contract, that he 
or she has only limited knowledge with respect to the facts to which the 
mistake relates but treats that limited knowledge as sufficient; or 



266 



(c) having regard to all the circumstances it is reasonable that that party 
should do so. 

Unilateral Mistake Not Known to Other Party 

3. Nothing in section 1 shall preclude a court from giving, or require the 
court to give, relief in the case of a mistake of one party where the mistake was not 
known to the other party to the contract and he or she had no reason to know of the 
mistake. 

(b) MISTAKES AS TO CONTRACTUAL TERMS (MISTAKES IN 
UNDERSTANDING) 

As we have noted, a mistake in understanding involves the actual terms of 
the contract and thus rests on a different conceptual footing from mistakes in 
assumption. A mistake in understanding raises the question whether the parties 
to an apparent agreement have in fact concluded an agreement valid at law. 72 
The present law is, in our view, unclear or unsatisfactory in a number of 
respects and these are discussed in the present section. 

(i) Unilateral Mistake Not Known to the Other Party and 
Where he or she had No Reason to Know of it 

This is parallel to the problem discussed by us in relation to mistakes in 
assumption. 73 Since we have opposed the introduction of statutory relief for a 
unilateral mistake in understanding not known to the other party and of which 
he or she could not reasonably be expected to know, consistency dictates that 
our answer should be the same in this context. 

It was at one time thought that Bacon V.C.'s judgment in Paget v. 
Marshall, 14 which was followed by McRuer C.J. in Devoid v. Zigeuner, 15 as 
well as earlier nineteenth century cases lent support for a broadly based 
jurisdiction in equity to grant relief where the mistake in the terms of an offer 
was not known to the other party, and where seemingly he or she could not 
reasonably have been expected to be aware of it. However, any such proposi- 
tion was firmly rejected by the English Court of Appeal in Riverlate Properties 
Ltd. v. PauP 6 and is no longer good law in England, assuming it ever was. 77 
The basis then for conferring such jurisdiction on the courts would be not that it 
exists now but that it is desirable to do so on policy grounds. For the reasons we 
have previously given, we do not believe the arguments in its favour are 



72 See Cheshire & Fifoot's Law of Contract, supra, note 5, at 199 et seq., and Waddams, 
supra, note 1, at 189-209. 

73 Supra, this ch., sec. 2(a)(ii)b. 

74 (1884), 28 Ch. D. 255, 54 L.J. Ch. 575. 

75 Supra, note 20. 

76 Supra, note 68. See, also, Waddams, "Comment" (1975), 53 Can. B. Rev. 340. 

77 See Goff & Jones, supra, note 17, at 154-55. 



267 



sufficiently convincing to justify the introduction of such an important new 
principle in Ontario law. 

We wish to emphasize that our conclusion is addressed to cases where the 
other party neither knew nor had reason to know of the first party's mistake. 
Some commentators 78 have interpreted Riverlate Properties Ltd. v. Paul as 
denying relief even where the defendant should have realized the mistake, 
although the evidence fell short of showing that he or she actually knew of it. If 
the case goes this far, then we do not agree with it, particularly since we have 
previously indicated our view that sound policy reasons argue in favour of a 
"reason to know" test in cases of a unilateral mistake in assumption. 

Finally, while we do not recommend that reform legislation provide that 
relief should be available in the case of a unilateral mistake in understanding not 
known to the other party or where that party had no reason to know of it, 
neither would we preclude judicial developments in this area. As we noted in 
connection with unilateral mistakes in assumption not known to the other 
party, 79 it should be open to the courts to respond to changes in circumstances 
or theoretical developments. 

(ii) Unilateral Mistake Known to the Other Party or Where he 
or she had Reason to Know of it 



Our concern in this section is with the following problem. If B purports to 
accept an offer in the terms expressed by A knowing or suspecting that A has 
made a mistake and really intended to make a different offer, is there a binding 
contract between the parties and, if so, what are its terms? Surprising as it may 
seem, there is no firm answer to the question. 80 The reported cases and the 
views of authors support widely divergent theories. One theory is that the 
parties are not ad idem (A intended to make one offer and B intended to accept 
another) and there is therefore no contract. This approach is reflected in such 
cases as Hartog v. Colin & Shields. 81 At the other end of the spectrum is the 
theory that there is a binding agreement based on the terms previously discussed 
between the parties although the document signed by A, to the knowledge of B, 
contains different terms. The rationale for this conclusion is that B is estopped 
from arguing that A agreed to the written terms since he was aware of the true 
position. This solution was adopted by Pennycuick J. in A Roberts & Co. Ltd. 



78 For example, Waddams, supra, note 76. 

79 Supra, this ch., sec. 2(a)(ii)b. 



80 



A variation of the same problem arises where, after the parties have been negotiating on 
the basis of one set of terms, B sends an offer to A containing different terms, without 
drawing A's attention to the changes. See A. Roberts & Co. Ltd. v. Leicestershire County 
Council, supra, note 63. 

(1939] 3 All E.R. 566 (K.B.). 



268 



v. Leicestershire County Council* 2 and was referred to with approval by the 
Court of Appeal in Riverlate Properties Ltd. v. Paul* 3 

Another approach focuses on flexible relief and fair results rather than on 
strict characterization of the contractual position. This approach was taken by 
the Vice-Chancellor in Paget v. Marshall* 4 and earlier nineteenth century cases 
and was followed by McRuer C.J. in Devoid v. Zigeuner* 5 It accepts the 
proposition that the parties were never ad idem and that A is therefore entitled 
to have the agreement rescinded. However, it allows the court to impose terms 
for the granting of rescissionary relief and gives B the option of agreeing to 
rectification of the agreement to reflect the true intentions of A. 

Whether Paget v. Marshall and the earlier cases are still sound law in 
England is unclear in view of the doubts expressed about them in Riverlate 
Properties. Nevertheless, it appears to us that Paget v. Marshall represents a 
sound and equitable approach. Analytically it cannot be right to say, following 
A. Roberts & Co. Ltd. , that B has agreed to accept the offer that A intended to 
make when all B did was to express assent to the offer that A actually made. 86 
The real questions, it seems to us, are whether A should be entitled to obtain 
relief from his or her mistake and whether the court should be entitled to give 
relief on terms. In our view, the answer in both cases should be yes, and we 
recommend that this be made clear in reform legislation. 

(iii) Agreements That Fail Because of Ambiguity 

This section addresses cases where it appears that there is no binding 
agreement because the parties have misunderstood each other. An objective 
meaning cannot be given to the apparent agreement because, unbeknown to the 
parties, the terms of the contract have more than one meaning and the parties 
have not made clear which meaning they intend to apply, or have in fact 
adopted different meanings. 87 Such agreements therefore fail for ambiguity and 
are considered, under existing law, to be void. 88 The remedies available to the 
parties in such cases are, in our view, seriously deficient since existing law 
provides only limited restitutionary relief and no relief at all where one or more 
of the parties has incurred reliance expenditures on the assumption that there is 



82 Supra, note 63. 

83 Supra, note 68. 

84 Supra, note 74. 

85 Supra, note 20. 

86 See Waddams, supra, note 1, at 202. 

87 The classical example of such misunderstanding remains Raffles v. Wichelhaus (1864), 2 
H. & C. 906, 159 E.R. 375 (Ex.), where the contract of sale stipulated for the arrival of 
goods ' 'ex Peerless from Bombay". There were in fact two vessels called Peerless, one 
of which sailed from Bombay in October and the other in December. Each party had a 
different vessel in mind: the buyer meant the October vessel and the seller the December 
vessel. The Court held that there was no binding agreement between the parties. 

88 Raffles v. Wichelhaus, ibid. See, also, Waddams, supra, note 1, at 66-67. 



269 



a valid contract. 89 We therefore recommend that reform legislation should 
confer on the courts a broad power to grant such relief as may be just. 

(iv) Position of Third Parties 

A consequence of the existing law with respect to mistakes in understand- 
ing is that it may nullify the property rights of third parties acquired by them in 
good faith from one of the contracting parties to whom they were transferred 
under the terms of a defective agreement. In our Report on Sale of Goods 90 we 
attempted to meet this problem by recommending that mistakes in a contract of 
sale involving a mistake of such character as to render the agreement void at 
common law be treated as only making the contract voidable. We recommended 
as well that a person with a voidable title should have power to transfer a good 
title to a buyer who receives the goods in good faith, for value, and without 
notice of the defect in the title of the transferor. We see no reason why a similar 
rule in favour of third parties should not be adopted to cover the transfer of 
property other than goods, and we so recommend. 

(v) Apportionment of Losses 

In our Report on Sale of Goods 91 we discussed a proposal empowering the 
courts to apportion losses where an owner has been fraudulently induced to part 
with goods and those goods have been sold by the rogue to a third party, who 
has acquired them in good faith. We were unable to reach agreement on the 
proposal in the Sales Report, but put forward for discussion purposes a draft 
provision 92 that would only apply where goods have been negligently entrusted 
to a person and disposed of by him or her to a third person who also fails to 
exercise reasonable care in their acquisition. 

Further consideration of the proposal has led us to the conclusion, though 
with considerable regret, that it raises as many difficulties as it solves and that it 
should not be adopted. The major difficulties are as follows. First, a power of 
apportionment is quite inconsistent with the policy of security in transactions 
intended to be promoted by making the initial transaction voidable and not void. 
If the third party can still be involved in litigation, and perhaps be required to 
absorb a substantial loss, his or her title is not secure after all. Secondly, if 
apportionment is to be allowed where the transfer from the owner has been 
procured by fraud, it must likewise be considered with respect to the other 
numerous exceptions to the nemo dat rule recognized under existing law. We 
note that in our Report on Sale of Goods we recommended 93 several significant 
extensions of the exceptions to the rule. Some of the existing and recommended 
exceptions involve predominantly commercial transactions in which, it is safe to 



89 We appreciate, of course, that where fraud or negligent misrepresentation is involved the 
mistaken party may have adequate remedies in tort. 

90 Sales Report, supra, note 2, Vol. II, at 285-88, and Vol. Ill, Draft Bill, s. 6.5. 

91 Ibid., Vol. II, at 310-11. 

92 Ibid., Vol. Ill, Draft Bill, s. 6.4(3). 

93 Ibid., Vol. II, at 316-18. 



270 



predict, a power of apportionment would meet with much opposition from the 
commercial community. Difficult and cumbersome distinctions would therefore 
have to be drawn between those situations where an apportionment power 
would be appropriate and those where it would not. 

Finally, as the English Law Reform Committee pointed out in 1966, 94 further 
complications would arise where the property has passed through a succession 
of hands. How would the power of apportionment be affected by this circum- 
stance and how would it be applied among the different links in the chain of 
title? 



(vi) Conclusions 

Again, for the sake of clarity we have cast our recommendations in draft 
statutory form. The section numbers follow from the draft statutory provisions 
respecting mistake in assumption, above. 95 

Accordingly, we recommend that legislation should be enacted dealing 
with mistakes in understanding along the following lines: 

Mistakes in Understanding 



4.-(l) This section applies where the parties believe themselves to have 
entered into a binding contract but such a contract is defective because of a 
misunderstanding between the parties as to the terms of the contract. 

(2) Where, apart from this section, a contracting party would be entitled to 
relief by reason of the matters mentioned in subsection 1 , the contract shall be 
deemed to be voidable and not void and a court may grant such relief as may be just 
and the provisions of subsection 1(3) of this Act shall apply mutatis mutandis. 



(3) No order made by a court under subsection (2) shall prejudice or 
invalidate the rights of a third party acquired by him or her from or under any party 
to the contract in good faith, for valuable consideration, and without notice of the 
defect in the contract. 



(4) Nothing in this section shall preclude a court from giving, or require the 
court to give, relief in the case of a mistake of one party where the mistake was not 
known to the other party to the contract and he or she had no reason to know of the 
mistake. 



94 England, Law Reform Committee, Twelfth Report (Transfer of Title to Chattels) (Cmnd. 
2958, 1966), paras. 9-12, at 6-8. 

95 Supra, this ch., sec. 2(a)(iii). 



271 



3. FRUSTRATION IN THE LAW OF CONTRACT 

(a) The Substantive Bases of Frustration 

(i) Introduction 

In our Report on Sale of Goods, we pointed out that much uncertainty still 
surrounds important aspects of the Anglo-Canadian law of frustration. 96 In 
particular, it is not clear to what extent, if at all, impracticability of perform- 
ance, as distinct from impossibility, constitutes an excuse to the promisor and 
whether frustration of purpose is also a solidly established defence. Again, 
existing law does not adequately spell out the consequences of the promisor's 
excused performance on the obligations of the promisee. The uncertainty is 
largely due to a conceptual confusion in the case law between performance that 
is excused because of a frustrating event and a frustrating event that also leads 
to the discharge of the contract. The two issues are quite distinct. This may be 
seen when the question arises whether a temporary or partial impracticability of 
performance or frustration of purpose excuses one or both parties from further 
performance of the obligations not affected by the frustrating event.' The 
accepted rule that it does not affect them indicates that discharge of the contract 
and excuse from performance are two discrete concepts that must be considered 
separately. 

Article 2 of the Uniform Commercial Code contains important provisions 
on these questions 97 and, with some modifications, our Report on Sale of Goods 
recommended their adoption in Ontario in the sale of goods context. 98 We did 
so both because we deemed it desirable to bring Ontario law into alignment with 
American law in this important branch of commercial law, and because we 
believed that the Article 2 rules were clearer conceptually and better reflected 
contemporary business practices and the expectations of the commercial com- 
munity than the existing position. 

The American Law Institute has since adapted the Code rules andr 
incorporated them in the Second Restatement as part of its provisions on 
impracticability of performance and frustration of purpose. 99 The question we 
have asked ourselves is whether we should follow this precedent in addressing 
ourselves to the same issues in relation to the general law of contracts. We are 
satisfied that the answer should be yes, and this on two grounds. First, we 
consider that the same principles apply here as in the context of sale of goods. 
The recommendations made below, together with those in the Report on Sale of 
Goods, form an internally consistent whole. It would be manifestly unsatisfac- 
tory for Ontario to have one set of frustration rules in the sales context and 
another set in the non-sales area, particularly if those rules proceed from 



96 



Sales Report, supra, note 2, Vol. II, at 365. 

97 American Law Institute, Uniform Commercial Code, Official Text (9th ed., 1978) 
(hereinafter referred to as "Uniform Commercial Code"), §§ 2-613—2-616. 



98 



Sales Report, supra, note 2, Vol. II, at 382-85. 
99 Second Restatement, supra, note 22, §§ 261-72. 



272 



different conceptual bases. In the second place, we believe that a statutory 
statement of the impracticability and frustration of purpose rules along the lines 
proposed would materially clarify the Ontario law and put it on a sounder 
footing. 

Having reached this general conclusion, we now proceed to consider the 
individual Restatement provisions and the extent to which we favour their 
adoption in Ontario. 

(ii) The Second Restatement Sections on Frustration 

The general organization and titles of the Second Restatement provisions 
dealing with frustration are as follows: 

261. Discharge by Supervening Impracticability 

262. Death or Incapacity of Person Necessary for Performance 

263. Destruction, Deterioration or Failure to Come into Existence of Thing Neces- 
sary for Performance 

264. Prevention by Governmental Regulation or Order 

265. Discharge by Supervening Frustration 

266. Existing Impracticability or Frustration 

267. Effect on Other Party's Duties of a Failure Justified by Impracticability or 
Frustration 

268. Effect on Other Party's Duties of a Prospective Failure Justified by Impractica- 
bility or Frustration 

269. Temporary Impracticability or Frustration 

270. Partial Impracticability 

271. Impracticability as Excuse for Non-Occurrence of a Condition 

272. Relief Including Restitution 

Sections 261, 265 and 267 are the key sections and filter out the critical 
strands of modern frustration doctrine. Section 261 10 ° spells out the kinds of 
post-contract formation changes that will excuse the promisor from further 



100 Section 261 reads: 

§261. Discharge by Supervening Impracticability 

Where, after a contract is made, a party's performance is made impracticable 
without his fault by the occurrence of an event the non-occurrence of which 
was a basic assumption on which the contract was made, his duty to render 
that performance is discharged, unless the language or the circumstances 
indicate the contrary. 



273 



performance and corresponds to section 2-615 of the Uniform Commercial 
Code. The test is not impossibility but "impracticability", and impracticability 
is determined by criteria similar to those used in the Second Restatement 
provisions on mistakes in assumption. 101 The essential elements of impractica- 
bility are, first, that it must not have been self-induced; secondly, that its 
occurrence was a basic assumption on which the contract was made; and, 
thirdly, that there is nothing in the language of the contract or the circumstances 
surrounding its conclusion to indicate a different intention. The third test echoes 
the allocation of risk provisions in the mistake sections of the Second Restate- 
ment. 102 As we pointed out in the Sales Report, 103 American courts have applied 
the impracticability provisions in section 2-615 of the Uniform Commercial 
Code cautiously and have shown little disposition to allow them to be invoked 
simply on the grounds that economic circumstances have changed and that the 
contract has become much less profitable for the promisor. 

Section 265 104 is the mirror image of section 261 in determining when 
frustration of a party's principal purpose will excuse further performance. 
Finally, section 267 105 prescribes the effect on the promisee's duties of the 
promisor being discharged from further performance. The cross-reference in 
the section to sections 237 and 238 is to the Restatement provisions dealing with 
the effect of breach of contract on the other party's obligations. We have not in 
this Report recommended the enactment of provisions parallel to sections 237 
and 238. In the absence of such provisions it could be provided, in the same 
vein as section 267, that a party's failure to render or offer performance will 
affect the other party's performance in the same manner as if the frustrating 
event were a breach of contract. Subject to this, we recommend that legislation 
should be enacted in Ontario along the lines of sections 261, 265 and 267 of the 
Restatement. 



101 
102 
103 



Second Restatement, supra, note 22, §§ 152 and 153. 

Ibid., § 154. 

Supra, note 2, Vol. II, at 376-77. 

104 Section 265 reads: 

§265. Discharge by Supervening Frustration 

Where, after a contract is made, a party's principal purpose is substantially 
frustrated without his fault by the occurrence of an event the non-occurrence 
of which was a basic assumption on which the contract was made, his 
remaining duties to render performance are discharged, unless the language 
or the circumstances indicate the contrary. 



105 



Section 267 reads: 

§ 267. Effect on Other Party's Duties of a Failure Justified by Impracticability or 
Frustration 

(1) A party's failure to render or to offer performance may, except as stated 
in Subsection (2), affect the other party's duties under the rules stated in 
§§ 237 and 238 even though the failure is justified under the rules stated in 
this Chapter. 

(2) The rule stated in Subsection ( 1 ) does not apply if the other party assumed 
the risk that he would have to perform despite such a failure. 



274 



Section 262, 263 and 264 106 simply provide specific instances of the 
application of the general principle enunciated in section 261. For this reason 
we see no need to include them in the proposed Ontario legislation dealing with 
frustration. Section 266 107 extends the doctrine of frustration to existing 
impracticability or frustration of purpose. Since these cases are also covered by 
the Restatement 's mistake rules (and the same is true, mutatis mutandis, of 
Ontario law), it is not clear why the drafters thought it desirable to have two, 
not necessarily identical, sets of rules covering the same situations. In any 
event, we do not recommend including section 266 in the proposed Ontario 
legislation dealing with frustration. 

Section 268 108 is an extension of section 267 and addresses itself to the 
effect on the promisee's duties of the promisor's prospective failure of 
performance on grounds of frustration. The Restatement entitles the promisee to 
suspend or terminate further performance, and to exercise rights to require an 



106 These sections read: 

§ 262. Death or Incapacity of Person Necessary for Performance 

If the existence of a particular person is necessary for the performance of a 
duty, his death or such incapacity as makes performance impracticable is an 
event the non-occurrence of which was a basic assumption on which the 
contract was made. 

§263. Destruction, Deterioration or Failure to Come into Existence of Thing 
Necessary for Performance 

If the existence of a specific thing is necessary for the performance of a duty, 
its failure to come into existence, destruction, or such deterioration as makes 
performance impracticable is an event the non-occurrence of which was a 
basic assumption on which the contract was made. 

§ 264. Prevention by Governmental Regulation or Order 

If the performance of a duty is made impracticable by having to comply with 
a domestic or foreign governmental regulation or order, that regulation or 
order is an event the non-occurrence of which was a basic assumption on 
which the contract was made. 

107 Section 266 reads: 

§ 266. Existing Impracticability or Frustration 

(1) Where, at the time a contract is made, a party's performance under it is 
impracticable without his fault because of a fact of which he has no reason to 
know and the non-existence of which is a basic assumption on which the 
contract is made, no duty to render that performance arises, unless the 
language or circumstances indicate the contrary. 

(2) Where, at the time a contract is made, a party's principal purpose is 
substantially frustrated without his fault by a fact of which he has no reason to 
know and the non-existence of which is a basic assumption on which the 
contract is made, no duty of that party to render performance arises, unless 
the language or circumstances indicate the contrary. 

108 Section 268 reads: 

§ 268. Effect on Other Party's Duties of a Prospective Failure Justified by 
Impracticability or Frustration 



275 



assurance of performance, conformably with the Restatement 's earlier provi- 
sions on anticipatory repudiation. This Report does not deal with anticipatory 
repudiation or the giving of assurances and accordingly we do not deem it 
appropriate to recommend the enactment in Ontario of a provision correspond- 
ing to section 268 of the Restatement. 

Section 269 of the Restatement 109 deals with the effect of temporary 
impracticability or frustration of purpose and adopts the rule that the promisor's 
duty to perform is revived after the impediment has been removed unless the 
performance would be materially more burdensome than if there had been no 
frustrating event. The applicability of frustration doctrine to interruptions of 
prolonged or uncertain duration is well established in Anglo-Canadian law, 110 
though the result has usually been couched in terms of what the parties intended 
should happen in such circumstances, or the effect of the interruption on the 
"foundation" of the adventure, rather than in terms of the burden that a duty to 
perform would impose on the promisor after the interruption has ceased. In our 
view, to the extent that there is any practical difference between the several 
tests, the section 269 test is to be preferred. It focuses on what may fairly be 
regarded as the single most important element in determining whether further 
performance should be required — the burden it would impose on the promisor. 
Accordingly, we recommend that legislation should be enacted in Ontario along 
the lines of section 269 of the Restatement. 

Section 270 deals with the different situation of partial impracticability, as, 
for example, where only part of a parcel of specific goods agreed to be 
delivered under a contract of sale has been destroyed prior to delivery, or where 
a fire has reduced but not destroyed a supplier's productive capacity. Existing 
law, in the absence of a clearly divisible contract, treats the contract as wholly 

(1) A party's prospective failure of performance may, except as stated in 
Subsection (2), discharge the other party's duties or allow him to suspend 
performance under the rules stated in §§ 251(1) and 253(2) even though the 
failure would be justified under the rules stated in this Chapter. 

(2) The rule stated in Subsection ( 1 ) does not apply if the other party assumed 
the risk that he would have to perform in spite of such a failure. 

109 Section 269 reads: 

§ 269. Temporary Impracticability or Frustration 

Impracticability of performance or frustration of purpose that is only tempo- 
rary suspends the obligor's duty to perform while the impracticability or 
frustration exists but does not discharge his duty or prevent it from arising 
unless his performance after the cessation of the impracticability or frustra- 
tion would be materially more burdensome than had there been no 
impracticability or frustration. 



110 



For example, Geipel v. Smith (1872), L.R. 7 Q.B. 404, [1861-73] All E.R. Rep. 861; 
Tamplin 5.5. Co. v. Anglo-Mexican Petroleum Products Co., |1916J 2 A.C. 397, [1916- 
17] All E.R. Rep. 104; Metropolitan Water Board v. Dick, 1 1918] A.C. 119, [1916-17] 
All E.R. Rep. 122; and see further Williston on Contracts (3d ed., 1957), Vol. 18, 
§ 1957, at 151-53. 



276 



discharged 111 and apparently does not give the promisee the option of requiring 
performance of the balance of the contract, even though he or she is willing to 
pay for it, unless the contract manifests such an intention. 

Section 270 adopts a different approach, as follows: 

§ 270. Partial Impracticability 

Where only part of an obligor's performance is impracticable, his duty 
to render the remaining part is unaffected if 

(a) it is still practicable for him to render performance that is substan- 
tial, taking account of any reasonable substitute performance that 
he is under a duty to render; or 

(b) the obligee, within a reasonable time, agrees to render any remain- 
ing performance in full and to allow the obligor to retain any 
performance that has already been rendered. 

We have encountered difficulties with this section. First, it does not appear 
to apply to partial frustration of purpose. The Restatements Reporter envisaged 
this type of situation being dealt with under section 272(2), 112 a broad 
discretionary relief provision that reads: 

§ 272. -(2) In any case governed by the rules stated in this Chapter, if those 
rules together with the rules stated in Chapter 16 will not avoid injustice, the court 
may grant relief on such terms as justice requires including protection of the 
parties' reliance interests. 

In our view, it would be clearer and more consistent with the rest of the 
provisions relating to frustration to address partial impracticability and partial 
frustration of purpose in one provision. 

Secondly, we find the requirements in clauses (a) and (b) of section 270 
too rigid. Circumstances may well arise where performance could reasonably 
be required of a promisor whether or not substantial performance by him or her 
is still practicable, and whether or not the promisee agrees to render any 
remaining performance in full. This is recognized in the Comment to section 
270, but the restrictive terms of section 270 are justified on the ground that they 
represent two situations in which it is "relatively easy" "to salvage at least 
some of the unexecuted part of the agreement." 113 In more complex situations, 
where the promisee's duty to perform must be adjusted to avoid injustice, the 



111 See Barrow, Lane & Ballard Ltd. v. Phillip Phillips & Co. Ltd., [1929] 1 K.B. 574, 
[1928] All E.R. Rep. 74; Lovatt v. Hamilton (1839), 5 M. & W. 639, 151 E.R. 271 
(Exch.); and compare H.R. & S. Sainsbury Ltd. v. Street, [1972] 3 All E.R. 1127, 
[1972] 1 W.L.R. 834 (Q.B.D.). See, also. Sale of Goods Act, R.S.O. 1980, c. 462, ss. 8 
and 30. 

112 Second Restatement, supra, note 22, § 270, Comment a. 

113 Ibid. 



277 



Restatement contemplates recourse to section 272(2) to salvage part of the 
agreement. 114 

In our view, this approach is unnecessarily circuitous. We would prefer 
the enactment in Ontario of a provision that addressed both partial impractica- 
bility and partial frustration of purpose, and that embraced a wide range of 
circumstances in which performance of the unaffected part of the agreement 
may reasonably be required. We further conclude that such a provision should 
be supplemented by a companion provision conferring on the court such powers 
to adjust the terms of the agreement as may be just. We adopt this approach 
because it appears to us that, even where substantial performance is practicable, 
some adjustments in the terms of the agreement are likely to be needed, for 
example with respect to the time or manner of the promisor's performance, or 
the price recoverable by him or her. 

Sections 269 and 270 of the Restatement do not refer to any duty by the 
promisee to render any performance due after the impediment justifying 
suspension of the promisor's performance has been lifted or where impractica- 
bility or frustration is only partial. Section 267 115 only purports to apply to 
events totally frustrating the promisor's duty to perform. There is evidence, 
however, that the Restatements Reporter expected section 267 to be applied 
analogically to these other situations. 116 Once again, we would prefer that 
legislation make this explicit, and we so recommend. Again, as in connection 
with the consequences of partial impracticability or frustration, we conclude 
that the court should be empowered to adjust the terms of the agreement as 
seems just. 

Section 27 1 117 of the Restatement addresses another aspect of frustration 
doctrine that does not appear to be adequately covered by existing Anglo- 
Canadian law. If a party to a contract, for reasons beyond his or her control, is 
unable to satisfy a contractual condition requisite to his or her claiming an 
entitlement under the contract, as where, for example, a builder must produce 
an architect's certificate of completion before he or she can be paid and the 
architect has died, should relief be denied? Section 271 sensibly answers this in 
the negative, and excuses non-occurrence of the condition if occurrence of the 
condition is not a material part of the agreed exchange of promises and 
forfeiture would otherwise result. We recommend the inclusion of a similar 
provision in Ontario legislation dealing with frustration of contracts. 



114 Ibid. 

115 Supra, note 105. 

116 See Farnsworth, supra, note 1, at 699. Professor Farnsworth was the Reporter for the 
Second Restatement. 

117 Section 271 reads: 

§271. Impracticability as Excuse for Non-Occurrence of a Condition 

Impracticability excuses the non-occurrence of a condition if the occurrence 
of the condition is not a material part of the agreed exchange and forfeiture 
would otherwise result. 



278 



We have already mentioned section 272(2), providing the court with 
discretion to grant relief on such terms as justice requires. It remains for us to 
add that section 272(1) 118 recognizes that either party may have a claim for 
relief, including restitutionary relief, where a contract has been wholly or partly 
frustrated or performance has been justifiably suspended in accordance with the 
preceding Restatement provisions. It is indeed a striking feature of American 
frustration law that American courts were able to fashion satisfactory remedial 
tools without the need for statutory intervention. 119 Unfortunately, this has not 
been true of the Anglo-Canadian law, and we will turn our attention to the 
protection of restitutionary and reliance interests shortly. 

(iii) Conclusions 

Again, because of the complexity of this area of the law, we have 
concluded that it would be helpful to cast our recommendations in draft 
statutory form, as follows: 

Discharge by Supervening Impracticability 

1. Where, after a contract is made, a party's performance is made impractica- 
ble without his or her fault by the occurrence of an event the non-occurrence of 
which was a basic assumption on which the contract was made, his or her duty to 
render that performance is discharged unless the language of the contract or the 
circumstances surrounding its conclusion indicate the contrary. 

Discharge by Supervening Frustration 

2. Where, after a contract is made, a party's principal purpose is substantially 
frustrated without his or her fault by the occurrence of an event the non-occurrence 
of which was a basic assumption on which the contract was made, his or her 
remaining duties to render performance are discharged unless the language of the 
contract or the circumstances surrounding its conclusion indicate the contrary. 

Temporary Impracticability or Frustration 

3. Where impracticability of performance or frustration of purpose is only 
temporary, it suspends the obligor's duty to perform while the impracticability or 
frustration exists but shall not discharge his or her duty or prevent it from arising 
unless his or her performance after the impracticability or frustration has ceased 
would be materially more burdensome than if there had been no impracticability or 
frustration. 



118 Section 272(1) reads: 

§272. Relief Including Restitution 

(1) In any case governed by the rules stated in this Chapter, either party may 
have a claim for relief including restitution under the rules stated in §§ 240 
and 377. 

119 This is shown by the fact that, to our knowledge, no American state has deemed it 
necessary to adopt a Frustrated Contracts Act or comparable legislation. The explanation 
for this lies in the much more highly developed and complete concepts of unjust 
enrichment and restitution in American law, which makes it easy to adapt them to cases 
of frustrated contracts. 



279 



Partial Impracticability or Frustration 

4. Where only a part of an obligor's performance is impracticable or only a 
part of the principal purpose of an obligor's agreement is frustrated, his or her duty 
to perform the remaining part of the agreement is unaffected if the other party so 
elects and it is not unduly burdensome to require partial performance by the 
obligor. 

Adjustment of Contract 

5. Where, pursuant to sections 3 and 4, an obligor is required to continue 
with performance after the impracticability or frustration has ceased or to render 
the remaining performance where only a part of the contract has been made 
impracticable or has been frustrated, the court may make such consequential 
adjustments in the terms of the parties' contract as may be necessary to avoid 
injustice. 

Effect on Other Party's Duties of a Failure Justified by Impracticability or 
Frustration 

6.-(l) Where sections 1 to 4 apply, the failure of a party to render or to offer 
performance shall affect the other party's duties in the same manner as if the 
frustrating event were a breach of contract. 

(2) Subsection (1) does not apply if the other party assumed the risk that he or 
she would have to perform despite such a failure. 

Impracticability as Excuse for Non-Occurrence of a Condition 

7. If a party is unable to comply with a condition in a contract or the condition 
can otherwise not be met because of impracticability, the non-occurrence of the 
condition is excused if its occurrence is not a material part of the agreed exchange 
and the non-performing party would otherwise suffer serious prejudice. 

(b) RELIEF FOLLOWING FRUSTRATION 

(i) The Common Law Position 

Three principal issues arise in considering what relief should be made 
available following the frustration of a contract. The first is whether compensa- 
tion should be allowed for benefits conferred on a party prior to frustration even 
though the contract does not provide for it and, where the benefit consists of 
non-pecuniary performance, performance is only partial. The second issue is 
whether reliance expenditures incurred by the parties in performance of their 
obligations should be recoverable and to what extent. The third issue is whether 
a court should be free to examine the surrounding circumstances to determine 
whether it is appropriate to allocate the reliance losses on some other basis than 
would otherwise be appropriate because of the implied agreement of the parties, 
trade usages, or general economic considerations. 

The common law answers to these questions are both rigid and unsatisfac- 
tory. Briefly, the general position at common law regarding compensation for 



280 



benefits conferred may be considered under two heads: recovery of monies paid 
and recompense for non-pecuniary benefits conferred. Turning first to recovery 
of monies paid, the 1904 case of Chandler v. Webster 120 held that money paid 
under a frustrated contract could not be recovered on the theory that the action 
for money had and received would not lie unless the contract was void ab initio. 
A frustrated contract was avoided, it was thought, only from the occurrence of 
the frustrating event. Moreover, obligations accrued before the frustrating event 
would remain enforceable on the same theory. 

The decision of the House of Lords in Fibrosa Spolka Akcyjna v. Fairbairn 
Lawson Combe Barbour, Ltd. m overruled Chandler and discredited the theory 
underlying it. In Fibrosa, a buyer who had made partial payment before the 
frustrating event sought recovery. The House of Lords recognized the buyer's 
right to recover money paid, provided that the seller's consideration wholly 
failed. In the absence of total failure of consideration, however, it would seem 
that restitutionary relief would be denied. 



As to recompense for non-pecuniary benefits conferred, in England, 
recovery for the value of partial performance is made difficult by the rule in 
Appleby v. Myers. m This case held that, in the case of non-pecuniary benefits 
conferred under a contract that has been frustrated, recovery is not available for 
partial performance of an entire contract: the performing party must perform 
fully to earn his or her payment. 

In Canada, the position of a party who has partly performed should be 
more promising in the light of the Supreme Court of Canada's embrace of a 
general doctrine of unjust enrichment in Deglman v. Guaranty Trust Co. of 
Canada. 123 However, the Deglman doctrine only applies (assuming it is applied 
to frustration cases) to restitutionary claims for benefits conferred. Neither 
Canadian nor English law offers indemnification to a party who has incurred 
reliance expenditures in preparation for, or partial performance of, contractual 
obligations not resulting in benefits conferred on the other party. The loss lies 
where it falls. Given this rule, the common law courts obviously do not have to 
concern themselves with any implied agreement between the parties for the 
allocation of reliance expenditures. The common law rule on the non-recover- 
ability of reliance expenditures is defensible on policy grounds, but it may lead 
to anomalies. It means, for example, that a party who has prepaid all or part of 
the price but received no return benefits is entitled to recover his payments in 



120 [1904] 1 K.B. 493, 20 T.L.R. 222 (C.A.). 

121 [1943] A.C. 32, [1942] 2 All E.R. 122. 

122 (1867), L.R. 2 C.P. 651, [1861-73] All E.R. Rep. 452 (Ex.). 

123 [1954] S.C.R. 725, [1954] 3 D.L.R. 785. 



281 



full, while the other party who may have spent as much or more in part 
performance of his obligations is entitled to nothing. 



(ii) Legislative Developments 

In the United Kingdom the Law Reform (Frustrated Contracts) Act, 
1943 m was adopted to remedy the shortcomings in the common law position. 
The Act was approved shortly afterwards by the Uniform Law Conference of 
Canada as a Uniform Frustrated Contracts Act 115 and was enacted, more or less 
verbatim, in many of the common law provinces, including Ontario. 126 



The principal features of the Ontario Act are these. The Act abolishes the 
rule in Chandler v. Webster by relieving a contracting party from liability to 
make payments accruing before the date of frustration, but without affecting 
any claim against him or her for damages, 127 and allows recovery of any 
payments made before this time. 128 So far as non-pecuniary benefits are 
concerned, the court may, not must, allow recovery of their value. 129 The 
recovery of reliance expenditures is still more circumscribed. Section 3(2) of 
the Act provides that the court may permit the party incurring such expenses to 
retain so much of any payments received from the other party as is necessary to 
indemnify him or her for such expenses or to recover them from the other party 
if monies were payable to the other party before the date of frustration. These 
limited rights of recovery for reliance expenditures appear to have been 
animated by the theory that prepayment of the price is intended to protect the 
other party's reliance interests. The theory has little to commend it and has 
justly been criticized. 130 



Finally, certain exclusions in the Ontario Act that follow those in the 
British Act should be noted. The Ontario Act does not apply to maritime 
contracts, insurance contracts, or to a contract for the sale of specific goods. 131 



124 6 & 7 Geo. 6, c. 40 (U.K.). 

125 Uniform Law Conference of Canada, Proceedings of the Thirtieth Annual Meeting 
(1948), at 18. The text of the Uniform Act is set out at Appendix G. 

126 For the Ontario version, see Frustrated Contracts Act, R.S.O. 1980, c. 179. 

127 Ibid., s. 3(1). 

128 Ibid., s. 3(2). 

129 Ibid., s. 3(3). 

130 See Goff and Jones, supra, note 17, at 567. 

131 Supra, note 126, s. 2(2). 



282 



Whatever might be said in favour of the first two exclusions, we noted in our 
Report on Sale of Goods 132 that there was no justification for the third. We shall 
return to this point. 

In 1974 British Columbia enacted a new Frustrated Contracts Act. 133 The 
Act was also adopted at the same time by the Uniform Law Conference of 
Canada as a new Uniform Frustrated Contracts Act. 134 The British Columbia 
Act ("the Act") was based on the recommendations in a Report of the British 
Columbia Law Reform Commission 135 and was designed to remove the short- 
comings in the first Uniform Act. It was largely successful in this objective 
although, in our view, a number of further improvements are desirable. 



The Act introduces three important changes. First, it removes a discretion- 
ary element in the first Uniform Act in allowing, as of right, the recovery of 
compensation for non-pecuniary benefits conferred before discharge of the 
contract. 136 Second, it provides that reliance losses shall be divided equally 
between the parties without regard to any prepayments that may have been 
made under the contract. 137 Third, it recognizes explicitly that the parties may 
have intended to allocate the risk of loss of reliance expenditures on a basis 
different from that provided for in the Act, and establishes criteria for 
determining whether they have done so in fact. 138 



The first change is entirely satisfactory and requires only a small comment. 
The point has been made by Professor Mullan that the British Columbia Act 
makes no provision for benefits that may have been conferred after frustration 
by a party not aware that the contract had been frustrated. 139 We would 
ourselves expect a court to grant compensation for this type of performance 
either by analogy to the statutory provisions or on common law grounds. 



132 Sales Report, supra, note 2, Vol. II, at 381-82. 

133 S.B.C. 1974, c. 37. 

134 Uniform Law Conference of Canada, Proceedings of the Fifty-sixth Annual Meeting 
(1974), at 28. For the text of the Uniform Act, see Uniform Law Conference of Canada, 
Proceedings of the Fifty-fifth Annual Meeting (1973), Appendix Q. 

135 Law Reform Commission of British Columbia, Report on the Need for Frustrated 
Contracts Legislation in British Columbia (1971). 

136 Supra, note 133, s. 5(1). 

137 Ibid., 5(3). Section 5(3) provides as follows: 

5. -(3) Where the circumstances giving rise to the frustration or avoidance 
cause a total or partial loss in value of a benefit to a party required to make 
restitution under subsection (1), that loss shall be apportioned equally between the 
party required to make restitution and the party to whom such restitution is required 
to be made. 

138 Ibid., s. 6. 

139 N ova Scotia Law Advisory Commission, Frustrated Contracts Law, Study Paper by 
David Mullan (1976), at 26-27. 



283 



However, we see no harm in adding suitable language to the proposed Ontario 
legislation to make it clear that post-frustration benefits are included. 



The second important change made in the British Columbia Act and 
involving the recovery of reliance expenditures is sound in principle but 
achieves its objective in a curiously roundabout way. Section 5(4) defines 
"benefit" somewhat artificially as meaning something done in the fulfillment of 
contractual obligations, whether or not the person for whose benefit it was done 
received the benefit of them. Section 5(1) then entitles the creator of these 
benefits to restitution from the imputed beneficiary. However, section 5(3) 
recognizes that the benefit constructively attributed to the recipient may in fact 
be a total or partial loss and therefore provides that the loss shall be apportioned 
equally between the parties. In our view, the commendable goal of section 5(3) 
could be achieved much more simply by relegating the subsection to a separate 
section providing for the recovery of reliance expenditures. 

The allocation of risk provisions in section 6 of the British Columbia Act 
are also not free from difficulty. Section 6 is as follows: 

6.-(l) A person who has performed or partly performed a contractual 
obligation is not entitled to restitution under section 5 in respect of a loss in value, 
caused by the circumstances giving rise to the frustration or avoidance, of a benefit 
within the meaning of section 5, if there is 

(a) a course of dealing between the parties to the contract; or 

(b) a custom or a common understanding in the trade, business, or 
profession of the party so performing; or 

(c) an implied term of the contract, 

to the effect that the party so performing should bear the risk of such loss in value. 

(2) The fact that the party performing such an obligation has in respect of 
previous similar contracts between the parties effected insurance against the kind of 
event that caused the loss in value is evidence of a course of dealing under 
subsection (1). 

(3) The fact that persons in the same trade, business, or profession as the 
party performing such obligations, on entering into similar contracts, generally 
effect insurance against the kind of event that caused the loss in value is evidence of 
a custom or common understanding under subsection (1). 

The section appears to overlap with section 2, which is to the effect that the Act 
only applies insofar as the parties' contract contains no contrary provisions. 
Section 2 reads: 

2. This Act applies to a contract referred to in section 1(1) only to the extent 
that, upon the true construction of that contract, it contains no provision for the 
consequences of frustration or avoidance. 



284 



Applying normal canons of statutory construction, section 2 is broad 
enough to include contractual risk provisions. Presumably, section 6 was 
perceived by the drafter as a particular application of section 2 although, 
arguably, the drafter may also have thought implied contractual risk provisions 
would fall outside section 2 because section 6 only deals with implied exclu- 
sions of the entitlements under section 5. In our view, a cross-reference in 
section 2 to the provisions in section 6 would resolve this apparent ambiguity. 

A further difficulty is that section 6 is deficient as a comprehensive 
statement of factors pointing to a different allocation of reliance losses from 
those contemplated in section 5(3), 140 assuming, as appears to be the case, that 
the drafter was aiming for comprehensiveness. It does not allow for an express 
contractual stipulation varying or excluding the statutory apportionment provi- 
sion. Section 6 also appears to confine its reach to circumstances pointing to a 
greater assumption of risk by the performing party than is presumed under the 
Act; the same test ought surely also to apply to assumption of risk by the non- 
performing party. Finally, section 6 leaves the impression that the implied 
terms of the agreement and the other circumstances enumerated in the section 
are not relevant in determining whether the parties intended to vary or exclude 
restitutionary rights that would otherwise arise under the Act on frustration of 
the contract. 141 Presumably this too was not intended. In any event, the position 
should be clarified. 

Attention should also be drawn to two provisions in the first Uniform Act 
that are omitted in the British Columbia Act. First, the provision indicating that 
an arbitration provision in an agreement will survive its frustration 142 has been 
deleted. Secondly, section 4(4) of the first Uniform Act providing that benefits 
conferred on a third party may be treated as benefits received by a party to the 
contract for the purpose of the remedial scheme of the Act has been omitted. 
These provisions might well be reinstated. The British Columbia Act also omits 
the provision in the first Uniform Act 143 excluding contracts for the sale of 
specific goods. This is a welcome correction of an error in the earlier Act. 

(iii) Report on Sale of Goods 

The Report on Sale of Goods 144 dealt only marginally with the conse- 
quences of a frustrated contract of sale. It noted the exclusion of contracts for 
the sale of specific goods from the Ontario Frustrated Contracts Act and 
recommended the deletion of this provision. 145 The Report recommended a 
detailed review of the Ontario Act in light of the new Uniform Frustrated 



140 Supra, note 137. 

141 It will be borne in mind that the reference to restitution in s. 6(1) is not to be read 
literally, and in fact means reliance losses recoverable under s. 5. 

142 Uniform Frustrated Contracts Act, supra, note 125, s. 1, definition of "court". 

143 Ibid., s. 4(5). 

144 Sales Report, supra, note 2, Vol. II, at 381-82. 

145 Ibid. 



285 



Contracts Act and the improvements introduced in it. This review we have 
attempted to offer, albeit in cursory form. 

(iv) Conclusions 

In light of the foregoing discussion we recommend the adoption by Ontario 
of a modified version of the scheme for relief following frustration set out in the 
new Uniform Frustrated Contracts Act, in lieu of the scheme set out in the 
existing Ontario Frustrated Contracts Act. The modifications recommended by 
us are the following: 

(1) A straightforward section providing for the equal apportionment of 
reliance expenditures should be included in substitution for the 
circuitous provisions in the Uniform Act. 

(2) The allocation of risk provisions should be properly coordinated with 
the general section in the Uniform Act enabling the Act's provisions 
to be varied or excluded by agreement of the parties. 

(3) The allocation of risk provisions should be extended to include 
circumstances indicating the parties' intention to vary or deny the 
availability of restitutionary claims for benefits conferred. 

(4) The allocation of risk provisions should be amended to permit the 
drawing of an inference that the risk of reliance losses has shifted to 
the non-performing party. 

(5) The list of criteria to determine whether the parties intended to vary 
the statutory allocation of reliance expenditures should be non- 
exhaustive and include the express terms of the agreement. 

(6) The proposed legislation should permit recovery of benefits conferred 
on the mistaken assumption that the agreement was not frustrated. 

(7) The arbitration provision in the old Uniform Act should be retained in 
the proposed Ontario legislation. 

(8) The provision in the old Uniform Act relating to benefits conferred on 
third parties should also be included in the proposed Ontario 
legislation. 



Recommendations 

The Commission makes the following recommendations: 

In view of the substantial uncertainty in the existing law with respect to 
the availability of relief for mistakes in assumption and the scope of the 
relief where relief is available at all, the following remedial legislation 
should be adopted: 



286 



(a) The distinction between common law and equitable approaches 
to contractual mistake should be abolished. 

(b) Relief should be available where, at the time of the making of 
the contract, 

(i) there is a mistake common to both parties, or 

(ii) one of the parties is operating under a mistake known 
to the other party, or where the other party had reason 
to know of the mistake or where his or her fault caused 
the mistake, 

and, in either event, the mistake is as to a basic assumption on 
which the contract was made and has a material effect on the 
agreed exchange of performance. 

(c) Relief should not be available where the adversely affected 
party may be deemed to have assumed the risk of the mistake. 

(d) Where relief is available, a court should be able to grant such 
relief as may be just, including one or more of the following 
types of relief: 

(i) a declaration that the contract is valid and subsisting in 
whole or in part or for any particular purpose; 

(ii) cancellation of the contract; 

(iii) variation of the contract; 

(iv) restitution for benefits conferred under the contract; 
and 

(v) indemnification in whole or in part for expenses 
incurred by one or more of the parties in relation to the 
contract, and such expenses may be divided equally 
among the parties or otherwise as the court may deem 
just, 

but no such order should prejudice the rights of a third party 
acquired from or under any party to the contract in good faith, 
for valuable consideration, and without notice of the mistake. 

(e) In determining whether or not to grant relief, the court should 
be permitted to take into consideration the following factors: 

(i) the conduct of the party seeking relief; 









287 



(ii) the extent to which the other party to the contract has 
changed his or her position in reliance on the contract; 
and 

(iii) the fault of the party seeking relief in failing to know 
or discover the facts before making the. contract, 

but none of these factors should necessarily be a bar to relief. 

(f) A party should be deemed to bear the risk of a mistake where, 

(i) the risk is allocated to him or her by agreement of the 
parties, expressly or impliedly; 

(ii) that party is aware, at the time of the formation of the 
contract, that he or she has only limited knowledge 
with respect to the facts to which the mistake relates 
but treats that limited knowledge as sufficient; or 

(iii) having regard to all the circumstances it is reasonable 
that that party should do so. 

(g) For the purposes of the above recommendations, mistake 
should include a mistake of law. 

(h) The court should not be precluded from giving, or required to 
give, relief in the case of a mistake of one party where the 
mistake was not known to the other party to the contract and he 
or she had no reason to know of the mistake. 

2. In order to clarify the existing law and in particular to enlarge the 
remedies available to the parties where there is a mistake in understand- 
ing, remedial legislation along the following lines should be adopted: 

(a) The legislation should apply where the parties believe them- 
selves to have entered into a binding contract but where such a 
contract is defective because of a misunderstanding between the 
parties as to the terms of the contract. 

(b) Where, apart from the proposed legislation, a contracting party 
would be entitled to relief by reason of the matters mentioned 
in the preceding paragraph, the contract should be deemed to 
be voidable and not void and a court should be empowered to 
grant such relief as may be just. The types of relief the court 
should be empowered to grant should be the same as those 
mentioned in Recommendation 1(d) concerning mistakes in 
assumption. 






288 



(c) Any such court order should not affect rights acquired by a 
third party in good faith, for valuable consideration, and 
without notice of the defect in the contract. 

(d) The court should not be precluded from giving, or required to 
give, relief in the case of a mistake of one party where the 
mistake was not known to the other party to the contract and he 
or she had no reason to know of the mistake. 

The approach to the treatment of frustration doctrines recommended in 
our Report on Sale of Goods should be adopted with respect to the 
general law of contract. 

More particularly, legislative provisions along the following lines 
should be adopted in Ontario: 

(a) Where, after a contract is made, a party's performance is made 
impracticable without his or her fault by the occurrence of an 
event the non-occurrence of which was a basic assumption on 
which the contract was made, his or her duty to render that 
performance should be discharged unless the language of the 
contract or the circumstances surrounding its conclusion indi- 
cate the contrary. 

(b) Where, after a contract is made, a party's principal purpose is 
substantially frustrated without his or her fault by the occur- 
rence of an event the non-occurrence of which was a basic 
assumption on which the contract was made, his or her remain- 
ing duties to render performance should be discharged unless 
the language of the contract or the circumstances surrounding 
its conclusion indicate the contrary. 

(c) Where impracticability of performance or frustration of pur- 
pose is only temporary, it should suspend the obligor's duty to 
perform while the impracticability or frustration exists but 
should not discharge his or her duty or prevent it from arising 
unless his or her performance after the impracticability or 
frustration has ceased would be materially more burdensome 
than if there had been no impracticability or frustration. 

(d) Where only a part of an obligor's performance is impracticable 
or only a part of the principal purpose of an obligor's agree- 
ment is frustrated, his or her duty to perform the remaining part 
of the agreement should be unaffected if the other party so 
elects and it is not unduly burdensome to require partial 
performance by the obligor. 

(e) Where, pursuant to the recommendations made in paragraphs 
4(c) and (d) above, an obligor is required to continue with 
performance after the impracticability or frustration has ceased 



289 



or to render the remaining performance where only a part of 
the contract has been made impracticable or has been frus- 
trated, the court should be permitted to make such 
consequential adjustments in the terms of the parties' contract 
as may be necessary to avoid injustice. 

(f) (i) In the cases described in paragraphs 4(a) to 4(d), the 

failure of a party to render or to offer performance 
should affect the other party's duties in the same 
manner as if the frustrating event were a breach of 
contract. 

(ii) The recommendation contained in the preceding sub- 
paragraph should not apply if the other party assumed 
the risk that he or she would have to perform despite 
such a failure. 

(g) If a party is unable to comply with a condition in a contract or 
the condition can otherwise not be met because of impractica- 
bility, the non-occurrence of the condition should be excused if 
its occurrence is not a material part of the agreed exchange and 
the non-performing party would otherwise suffer serious 
prejudice. 

So far as the consequences of a frustrated contract are concerned, a 
modified version of the scheme for relief following frustration set out in 
the new Uniform Frustrated Contracts Act should be adopted in Ontario 
in place of the scheme set out in the existing Ontario Frustrated 
Contracts Act. The modifications recommended are the following: 

(a) A straightforward section providing for the equal apportion- 
ment of reliance expenditures should be included in substitution 
for the circuitous provisions in the Uniform Act. 

(b) The allocation of risk provisions should be properly coordi- 
nated with the general section in the Uniform Act enabling the 
Act's provisions to be varied or excluded by agreement of the 
parties. 

(c) The allocation of risk provisions should be extended to include 
circumstances indicating the parties' intention to vary or deny 
the availability of restitutionary claims for benefits conferred. 

(d) The allocation of risk provisions should be amended to permit 
the drawing of an inference that the risk of reliance losses has 
shifted to the non-performing party. 

(e) The list of criteria to determine whether the parties intended to 
vary the statutory allocation of reliance expenditures should be 
non-exhaustive and include the express terms of the agreement. 



290 



(f) The proposed legislation should permit recovery of benefits 
conferred on the mistaken assumption that the agreement was 
not frustrated. 

(g) The arbitration provision in the old Uniform Act should be 
retained in the proposed Ontario legislation. 

(h) The provision in the old Uniform Act relating to benefits 
conferred on third parties should also be included in the 
proposed Ontario legislation. 



SUMMARY OF RECOMMENDATIONS 



The Commission makes the following recommendations: 

CONSIDERATION 

1 . Section 16 of the Mercantile Law Amendment Act should be amended to 
make it clear that an agreement, whether executed or executory, by an 
obligee to accept part performance of an obligation in place of full 
performance, as well as an agreement to waive performance of an 
obligation, need no consideration to be binding. 

2. An agreement under the proposed revised section 16 of the Mercantile 
Law Amendment Act should be revocable by the obligee for breach, 
unless the breach of the obligation of part performance by the obligor is 
merely trivial or technical. 

3. A provision similar to section 4.8 of the proposed Sale of Goods Act 
should be enacted to provide as follows: 

(a) an agreement in good faith modifying a contract should not 
require consideration in order to be binding; 

(b) an agreement that excludes modification or rescission except by 
a signed writing should not be otherwise subject to modification 
or rescission but, except as between parties acting in the course 
of business, such a requirement on a form supplied by a party 
acting in the course of a business should be required to be 
signed separately by the other party; 

(c) an attempt at modification or rescission that does not satisfy the 
requirements of the preceding paragraph or that does not satisfy 
any statutory requirement of writing or corroboration should be 
capable of operating as a waiver or equitable estoppel; and 

(d) where paragraph (c) applies, a party who has waived 
compliance with an executory portion of a contract should be 
able to retract the waiver by reasonable notification received by 
the other party that strict performance will be required of any 
term waived unless it would be unjust in view of a material 
change in position in reliance on the waiver to allow the waiver 
to be retracted. In the case of an equitable estoppel, a similar 
principle should apply. 

4. A promise made in recognition of a benefit previously received by the 
promisor or by any third party from the promisee, should be enforceable 
to the extent necessary to prevent unjust enrichment. 

5. A promise made in recognition of a benefit previously received by the 
promisor or by any third party from the promisee, should not be 
enforceable where the promisee conferred the benefit as a gift or where 
for other reasons the promisor has not been unjustly enriched. 

[291] 



292 



6. Promises supported by past consideration, where enforceable, should be 
enforceable only to the extent that the value of the promise is not 
disproportionate to the benefit. 

7. An offer, made by a person in the course of a business, which expressly 
provides that it will be held open should not be revocable for lack of 
consideration during the time stated or, if no time is stated, for a 
reasonable time not to exceed three months. 

8. There should be no change in the law relating to firm offers not made in 
the course of business; that is, in order to be enforceable, a firm offer, 
when made by a non-merchant, should be supported by consideration or 
comply with the requisite formalities (See infra, Recommendation 13). 

9. A promise that the promisor would reasonably expect to induce action or 
forbearance on the part of a promisee or a third person and that does 
induce such action or forbearance should be binding if injustice can be 
avoided only by enforcing the promise. 

10. The remedy granted for breach of a promise inducing reliance should be 
limited as justice requires. 

11. No special rule should be adopted for the enforceability of charitable 
subscriptions or promises to make a marriage settlement. 

FORMAL CONTRACTS 

12. The seal should be denied all legal effect in the law of contracts. 

13. (1) A witnessed signed writing should take the place of the seal for the 

purposes of contract law. 

(2) A witnessed signed writing should be defined as a writing executed 
by the party to be bound in the presence of a witness and signed by 
the witness in the presence of the executing party. 

14. An action for breach of a promise contained in a witnessed signed 
writing should be governed by the same limitation period as that 
applicable to contracts generally, that is, six years from the date the 
cause of action arose. 

15. The Courts of Justice Act, 1984 should be amended to empower a court, 
in any action upon a gratuitous promise where it is determined that 
damages could be given for breach of such promise, to grant an 
injunction or order specific performance thereof if it considers it proper 
to do so, notwithstanding that the promise was gratuitous. 

THIRD PARTY BENEFICIARIES AND PRIVITY OF CONTRACT 

16. There should be enacted a legislative provision to the effect that 
contracts for the benefit of third parties should not be unenforceable for 
lack of consideration or want of privity. 



293 



CONTRACTUAL ASPECTS OF THE STATUTE OF FRAUDS 

17. The writing requirements in the Statute of Frauds dealing with the 
following should be repealed: 

(a) promises by executors and administrators to pay damages out 
of their own estates; 

(b) agreements governed by section 5; and 

(c) representations concerning another's credit worthiness. 

18. The writing requirement for contracts not to be performed within one 
year should be repealed. 

19. (1) The existing writing requirements for contracts relating to land 

should be repealed subject to a requirement that a contract 
concerning land is not enforceable on the evidence of the party 
alleging the contract unless such evidence is corroborated by some 
other material evidence. 

(2) A definition of land should not be included in any provision 
requiring corroboration by some other material evidence of any 
contract concerning land. 

(3) Any further legislation involving writing or other evidentiary 
requirements for agreements to lease should be harmonized with the 
proposed revised evidentiary requirements for land contracts. 

20. (1) A writing requirement for guarantees should only be imposed where 

a guarantee is given by a person otherwise than in the course of 
business to a person acting in the course of business. 

(2) A guarantee "given in the course of a business" should be defined 
as including a guarantee given by a shareholder, officer or director 
of a company who guarantees a debt or other obligation of the 
company. 

(3) Recommendations with respect to guarantees should apply also to 
contracts of indemnity. 

(4) The original language of section 4 — that is, "debt, default or 
miscarriage" — should be retained in any legislation dealing with 
writing requirements for guarantees. 

(5) A contract of guarantee or indemnity that is required to be in 
writing should be evidenced by some kind of writing signed by the 
person to be charged or by an agent. In addition, the writing should 
identify the parties and reasonably indicate that a guarantee or 
indemnity is being or has been given. 

(6) Part performance either by the party seeking to enforce the 
guarantee or indemnity or by the guarantor or indemnitor should not 
be admitted as a substitute for the writing. 



1 



294 



21. The provisions in the Statute of Frauds dealing with the creation, 
assignment and surrender of interests in land, including leases of land, 
and with the creation or declaration of trusts in land or assignment of 
trusts generally, should be reviewed in Ontario at an appropriate time. 

UNCONSCIONABILITY 

22. Legislation should be enacted expressly conferring on the courts power 
to grant relief from contracts and contractual provisions that are 
unconscionable. 

23. The proposed legislation should not distinguish between procedural and 
substantive unconscionability. 

24. The proposed legislation should include a non-exclusive list of 
decisional criteria to guide the courts in determining questions of 
unconscionability (See infra, Recommendation 25). 

25. In determining whether a contract or part thereof is unconscionable in 
the circumstances relating to the contract at the time it was made, the 
court may have regard, among other factors, to evidence of: 

(a) the degree to which one party has taken advantage of the 
inability of the other party reasonably to protect his or her 
interests because of his or her physical or mental infirmity, 
illiteracy, inability to understand the language of an agreement, 
lack of education, lack of business knowledge or experience, 
financial distress, or because of the existence of a relationship 
of trust or dependence or similar factors; 

(b) the existence of terms in the contract that are not reasonably 
necessary for the protection of the interests of any party to the 
contract; 

(c) the degree to which the contract requires a party to waive rights 
to which he or she would otherwise be entitled; 

(d) gross disparity between the considerations given by the parties 
to the contract and the considerations that would normally be 
given by parties to a similar contract in similar circumstances; 

(e) knowledge by one party, when entering into the contract, that 
the other party will be substantially deprived of the benefit or 
benefits reasonably anticipated by that other party under the 
contract; 

(f) the degree to which the natural effect of the transaction, or any 
party's conduct prior to, or at the time of, the transaction, is to 
cause or aid in causing another party to misunderstand the true 
nature of the transaction and his or her rights and duties 
thereunder; 

(g) whether the complaining party had independent advice before 
or at the time of the transaction or should reasonably have acted 
to secure such advice for the protection of the party's interest; 






295 



(h) the bargaining strength of the parties relative to each other, 
taking into account the availability of reasonable alternative 
sources of supply or demand; 

(i) whether the party seeking relief knew or ought reasonably to 
have known of the existence and extent of the term or terms 
alleged to be unconscionable; 

(j) in the case of a provision that purports to exclude or limit a 
liability that would otherwise attach to the party seeking to rely 
on it, which party is better able to guard against loss or 
damages; 

(k) the setting, purpose and effect of the contract, and the manner 
in which it was formed, including whether the contract is on 
written standard terms of business; and 

(1) the conduct of the parties in relation to similar contracts or 
courses of dealing to which any of them has been a party. 

26. The proposed legislation should expressly authorize the court to raise 
the issue of unconscionability of its own motion. 

27. The proposed provisions on unconscionability should apply to all types 
of contracts. 

28. The term "contract" in the proposed provisions on unconscionability 
should be defined to include any enforceable promise. 

29. The proposed legislation should incorporate a provision, similar to 
section 5.2(1) of the proposed Sale of Goods Act, with the necessary 
modifications. Accordingly, the court should be able, in the case of an 
unconscionable contract to 

(a) refuse to enforce the contract or rescind it on such terms as may 
be just; 

(b) enforce the remainder of the contract without the 
unconscionable part; or 

(c) so limit the application of any unconscionable part or revise or 
alter the contract as to avoid any unconscionable result. 

30. The courts should be empowered, at the behest of the Attorney General 
or other prescribed Minister, to issue injunctions against conduct leading 
to unconscionability, either in the formation of or in the execution of 
contracts. 

31 . A provision, similar to section 5.2(5) of the proposed Sale of Goods Act, 
preventing a party from excluding liability or waiving rights under the 
provisions dealing with unconscionability, should be included in the 
proposed legislation. 



i 



296 



PENALTY CLAUSES AND RELIEF FROM FORFEITURE OF 
MONIES PAID 

32. The existing penalty doctrine to determine the validity of stipulated 
damages clauses should be replaced by a test of unconscionability, the 
criteria for which should be the same as those recommended in this 
Report for other types of contractual provisions alleged to be 
unconscionable. 

33. Relief from forfeiture of payments made under a contract should be 
based on the same test of unconscionability, and the existing distinction 
between the basis of relief for penalty clauses and relief from forfeiture 
clauses should be abolished. 

34. Section 111 of the Courts of Justice Act, 1984 should be retained. 



PAROL EVIDENCE RULE 

35. (1) Evidence of oral agreement to terms not included in, or inconsistent 

with, a written document should be admissible to prove the real 
bargain between the parties. 

(2) Conclusive effect should not be attached to merger and integration 
clauses. 

36. In order to give effect to the abovementioned recommendations, a 
provision similar to section 17 of the Uniform Sale of Goods Act, but 
applicable to all types of contracts, should be enacted. 



GOOD FAITH 

37. Legislation should give recognition to the doctrine of good faith in the 
performance and enforcement of contracts. 

38. The proposed statutory obligation of good faith should apply explicitly 
and generally to all contracts and contracting parties. 

39. The proposed statutory good faith provision should take the form of 
section 205 of the American Second Restatement of the Law of 
Contracts. 

40. Legislation should provide that contracting parties may not vary or 
disclaim the statutorily imposed good faith obligations, but that parties 
should be able, by agreement, to determine the standards by which the 
performance of such good faith obligations is to be measured if such 
standards are not manifestly unreasonable. 

MINORS' CONTRACTS 

41. Subject to the provisions recommended below and to the provisions of 
other legislation, minors' contracts should not, as a general rule be 
enforceable against them, but minors should have the right to enforce 
their contracts. 









297 



42. Legislation should provide that a contract may be affirmed by a minor 
who has attained the age of majority, and that after such affirmation the 
contract may be enforced against the minor. 

43. Legislation should provide that the mere receipt or retention of a benefit, 
after the age of majority, pursuant to a minor's contract, is not 
conclusive evidence of affirmation of the contract. 

44. Section 7 of the Statute of Frauds should be repealed. 

45. Legislation should provide that a party who contracts with a minor may, 
by notice in writing after the minor has attained the age of majority, 
require the minor to affirm or repudiate the contract within thirty days 
from receipt of the notice. Unless the minor repudiates the contract 
within the thirty day period, or within one year after attaining the age of 
majority, whichever period expires first, the contract may be enforced 
against the minor. 

46. The notice to affirm or repudiate a contract referred to in 
Recommendation 45 should refer to the consequences of a failure to 
respond to the notice. 

47. Legislation should provide that repudiation of a contract by a minor 
includes: 

(a) a refusal to perform the contract or a material term thereof; 

(b) the making of a claim for relief under a contract unenforceable 
against a minor; and 

(c) the giving of an oral or written notice of repudiation to the 
other party. 

48. Legislation should provide that, where a contract is unenforceable 
against a minor because of minority, an action for relief may be brought 
by the minor, before or after attaining majority, or by the other party to 
the contract after the minor has repudiated the contract. In any such 
action, the court should be empowered to grant to any party such relief 
as may be just. 

49. Legislation should provide that a contract may be enforced against a 
minor if the other party to the contract satisfies the court that the 
contract was in the best interests of the minor. 

50. The proposed legislation should apply to executed as well as executory 
contracts. 

51. Legislation should provide that a contract entered into by a minor is 
enforceable against the minor if it is approved by the court. A party to 
the contract should be able to apply for the approval of the court either 
before or after the contract is entered into. Approval should not be given 
unless the court is satisfied that the contract would be for the benefit of 
the minor. 



298 



52. Legislation should provide that, on application by a minor, the court 
may grant to the minor capacity to enter into contracts generally, or into 
any description of contract, subject to such terms and conditions as the 
court thinks fit. The court should not make such an order unless satisfied 
it would be for the benefit of the minor. 

53. Legislation should provide that, subject to the provisions of any other 
legislation, a disposition of property or a grant of a security or other 
interest therein made pursuant to a contract that is unenforceable against 
a minor is effective to transfer the property or interest unless and until 
the court orders otherwise. 

54. Legislation should further provide that, subject to the provisions of any 
other legislation, a subsequent disposition of property or a grant of a 
security or other interest therein to a bona fide transferee or grantee for 
value is not invalid for the reason only that the transferor or grantor 
acquired the property under a contract that was unenforceable against a 
minor. 

55. Legislation should provide that, subject to the provisions of any other 
legislation, a minor may appoint an agent, by power of attorney or 
otherwise, to enter into any contract or make any disposition of property 
or grant any security or other interest. Any contract, disposition or grant 
by such agent should have no greater validity or effect as against the 
minor than it would have had if participated in or effected by the minor 
without an agent. 

56. Legislation should further provide that a person may, by an agent under 
the age of majority, make any contract, dispose of any property or grant 
any security or other interest that a person may make, dispose of or 
grant by an agent who has attained the age of majority. 

57. Legislation should provide that a guarantor of an obligation of a minor is 
bound by the guarantee as if the minor were an adult. If the obligation is 
enforceable against the minor, the guarantor should be entitled to be 
indemnified by the minor to the same extent as if the minor were an 
adult. If the obligation is not enforceable against the minor, the court 
should be empowered to grant the guarantor such relief against the 
minor as is just. 

58. For the purposes of Recommendation 57, "guarantor" should include a 
person who enters into a guarantee or indemnity or otherwise undertakes 
to be responsible for the failure of a minor to carry out a contractual 
obligation. 

59. Subject to Recommendation 60, legislation should provide for the 
imposition of liability in tort on minors, regardless of whether the tort is 
connected with a contract and regardless of whether the cause of action 
in tort is in substance a cause of action in contract, except where the 
contract would provide a defence to an individual who had attained 
majority. 

60. A minor's liability for damages resulting from a false representation as 
to age should be subject to the following limitations: 






299 



(a) where the false representation has induced the making of a 
contract, a minor's liability in damages for the false 
representation should only arise where the person to whom the 
representation was made had reasonable grounds to believe that 
the representation was true; and 

(b) a minor's liability in damages for false representations as to age 
should not arise by reason only of the fact that the minor has 
signed or otherwise adopted a document relevant to the 
transaction that contains a statement that the minor has attained 
the age of majority or otherwise has contractual capacity, that 
was prepared and tendered by the person to whom the 
representation was made or with whom the contract was made, 
and that was preprinted and used by such person in like 
transactions. 



CONTRACTS THAT INFRINGE PUBLIC POLICY 

61. The existing common law doctrines with respect to illegal contracts 
should be retained, but the court should be given power to relieve 
against the consequences of illegality. Accordingly, legislation should 
be enacted to provide that, where a contract or any term thereof is 
unenforceable by reason of public policy (including the effect of any 
statutory provision) the court may grant such relief by way of restitution 
and compensation for loss or otherwise as it thinks just and as is not 
inconsistent with the policy underlying the unenforceability of the 
contract. 

62. Where any provision of any contract constitutes an unreasonable 
restraint of trade, the court should have the power to 

(a) delete the provision and give effect to the contract as so 
amended; 

(b) so reduce the scope of the provision that at the time the contract 
was entered into the provision as so reduced would have been 
reasonable, and give effect to the contract as so modified; or 

(c) where the deletion or reduction of scope of the provision would 
so alter the bargain between the parties that it would be 
unreasonable to allow the contract to stand, decline to enforce 
the contract. 

63. The court should also be able to reduce the scope of a provision under 
Recommendation 62(b) notwithstanding that the reduction of scope 
cannot be effected by the deletion of words from the provision. 

64. The court should not exercise its powers under Recommendation 62(a) 
or (b) unless the party seeking to enforce the provision has acted in good 
faith and in accordance with reasonable standards of fair dealing. 






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MISREPRESENTATION 

65. Subject to Recommendation 66, a representee should be able to rescind a 
contract that has been induced by misrepresentation even though the 
contract has been wholly or partly performed and even though, in the 
case of a contract for the sale of an interest in land, the interest has been 
conveyed to the representee. 

66. (1) The courts should have power to deny rescission for 

misrepresentation or to declare it ineffective, awarding damages in 
lieu thereof. 

(2) In exercising the power referred to in Recommendation 66(1), the 
courts should take into consideration, inter alia, 

(a) undue hardship to the representor or to third parties; 

(b) difficulty in reversing performance or long lapse of time after 
performance; 

(c) whether a money award would give adequate compensation to 
the representee; 

(d) the nature and scope of the representation; 

(e) the conduct of the representor; and 

(f) whether or not the representor was negligent in making the 
representation. 

67. (1) Whether or not a contract is rescinded, the court should have power 

to allow just compensation by way of restitution, or for losses 
incurred in reliance on the representation. 

(2) In deciding whether to award compensation, the court should take 
into account such factors as whether the representation was made in 
the course of a business, whether the representor had personal 
knowledge of the matters represented by him or her, and whether he 
or she used reasonable care in making the representation. 

68. Legislation should make it clear that a misrepresentation includes a 
misrepresentation of law. 

69. With the exception of Recommendation 65, which should apply to all 
misrepresentations including fraudulent misrepresentations, the 
foregoing recommendations should apply to innocent misrepre- 
sentations, including negligent misrepresentations. 

WAIVER OF CONDITIONS 

70. Legislation should provide that, unless a contrary intention appears, a 
party to a contract may waive a provision inserted into the contract 
solely for his or her own benefit. 



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MISTAKE AND FRUSTRATION IN THE LAW OF CONTRACT 

71. In view of the substantial uncertainty in the existing law with respect to 
the availability of relief for mistakes in assumption and the scope of the 
relief where relief is available at all, the following remedial legislation 
should be adopted: 

(a) The distinction between common law and equitable approaches 
to contractual mistake should be abolished. 

(b) Relief should be available where, at the time of the making of 
the contract, 

(i) there is a mistake common to both parties, or 

(ii) one of the parties is operating under a mistake known 
to the other party, or where the other party had reason 
to know of the mistake or where his or her fault caused 
the mistake, 

and, in either event, the mistake is as to a basic assumption on 
which the contract was made and has a material effect on the 
agreed exchange of performance. 

(c) Relief should not be available where the adversely affected 
party may be deemed to have assumed the risk of the mistake. 

(d) Where relief is available, a court should be able to grant such 
relief as may be just, including one or more of the following 
types of relief: 

(i) a declaration that the contract is valid and subsisting in 
whole or in part or for any particular purpose; 

(ii) cancellation of the contract; 

(iii) variation of the contract; 

(iv) restitution for benefits conferred under the contract; 
and 

(v) indemnification in whole or in part for expenses 
incurred by one or more of the parties in relation to the 
contract, and such expenses may be divided equally 
among the parties or otherwise as the court may deem 
just, 

but no such order should prejudice the rights of a third party 
acquired from or under any party to the contract in good faith, 
for valuable consideration, and without notice of the mistake. 

(e) In determining whether or not to grant relief, the court should 
be permitted to take into consideration the following factors: 

(i) the conduct of the party seeking relief; 



302 



(ii) the extent to which the other party to the contract has 
changed his or her position in reliance on the contract; 
and 

(iii) the fault of the party seeking relief in failing to know 
or discover the facts before making the contract, 

but none of these factors should necessarily be a bar to relief. 

(f) A party should be deemed to bear the risk of a mistake where, 

(i) the risk is allocated to him or her by agreement of the 
parties, expressly or impliedly; 

(ii) that party is aware, at the time of the formation of the 
contract, that he or she has only limited knowledge 
with respect to the facts to which the mistake relates 
but treats that limited knowledge as sufficient; or 

(iii) having regard to all the circumstances it is reasonable 
that that party should do so. 

(g) For the purposes of the above recommendations, mistake 
should include a mistake of law. 

(h) The court should not be precluded from giving, or required to 
give, relief in the case of a mistake of one party where the 
mistake was not known to the other party to the contract and he 
or she had no reason to know of the mistake. 

72. In order to clarify the existing law and in particular to enlarge the 
remedies available to the parties where there is a mistake in 
understanding, remedial legislation along the following lines should be 
adopted: 

(a) The legislation should apply where the parties believe 
themselves to have entered into a binding contract but where 
such a contract is defective because of a misunderstanding 
between the parties as to the terms of the contract. 

(b) Where, apart from the proposed legislation, a contracting party 
would be entitled to relief by reason of the matters mentioned 
in the preceding paragraph, the contract should be deemed to 
be voidable and not void and a court should be empowered to 
grant such relief as may be just. The types of relief the court 
should be empowered to grant should be the same as those 
mentioned in Recommendation 71(d) concerning mistakes in 
assumption. 

(c) Any such court order should not affect rights acquired by a 
third party in good faith, for valuable consideration, and 
without notice of the defect in the contract. 



303 



(d) The court should not be precluded from giving, or required to 
give, relief in the case of a mistake of one party where the 
mistake was not known to the other party to the contract and he 
or she had no reason to know of the mistake. 

73. The approach to the treatment of frustration doctrines recommended in 
our Report on Sale of Goods should be adopted with respect to the 
general law of contract. 

74. More particularly, legislative provisions along the following lines 
should be adopted in Ontario: 

(a) Where, after a contract is made, a party's performance is made 
impracticable without his or her fault by the occurrence of an 
event the non-occurrence of which was a basic assumption on 
which the contract was made, his or her duty to render that 
performance should be discharged unless the language of the 
contract or the circumstances surrounding its conclusion 
indicate the contrary. 

(b) Where, after a contract is made, a party's principal purpose is 
substantially frustrated without his or her fault by the 
occurrence of an event the non-occurrence of which was a basic 
assumption on which the contract was made, his or her 
remaining duties to render performance should be discharged 
unless the language of the contract or the circumstances 
surrounding its conclusion indicate the contrary. 

(c) Where impracticability of performance or frustration of 
purpose is only temporary, it should suspend the obligor's duty 
to perform while the impracticability or frustration exists but 
should not discharge his or her duty or prevent it from arising 
unless his or her performance after the impracticability or 
frustration has ceased would be materially more burdensome 
than if there had been no impracticability or frustration. 

(d) Where only a part of an obligor's performance is impracticable 
or only a part of the principal purpose of an obligor's 
agreement is frustrated, his or her duty to perform the 
remaining part of the agreement should be unaffected if the 
other party so elects and it is not unduly burdensome to require 
partial performance by the obligor. 

(e) Where, pursuant to the recommendations made in paragraphs 
74(c) and (d) above, an obligor is required to continue with 
performance after the impracticability or frustration has ceased 
or to render the remaining performance where only a part of 
the contract has been made impracticable or has been 
frustrated, the court should be permitted to make such 
consequential adjustments in the terms of the parties' contract 
as may be necessary to avoid injustice. 



304 



(f) (i) In the cases described in paragraphs 74(a) to 74(d), the 

failure of a party to render or to offer performance 
should affect the other party's duties in the same 
manner as if the frustrating event were a breach of 
contract. 

(ii) The recommendation contained in the preceding 
subparagraph should not apply if the other party 
assumed the risk that he or she would have to perform 
despite such a failure. 

(g) If a party is unable to comply with a condition in a contract or 
the condition can otherwise not be met because of 
impracticability, the non-occurrence of the condition should be 
excused if its occurrence is not a material part of the agreed 
exchange and the non-performing party would otherwise suffer 
serious prejudice. 

75. So far as the consequences of a frustrated contract are concerned, a 
modified version of the scheme for relief following frustration set out in 
the new Uniform Frustrated Contracts Act should be adopted in Ontario 
in place of the scheme set out in the existing Ontario Frustrated 
Contracts Act. The modifications recommended are the following: 

(a) A straightforward section providing for the equal 
apportionment of reliance expenditures should be included in 
substitution for the circuitous provisions in the Uniform Act. 

(b) The allocation of risk provisions should be properly 
coordinated with the general section in the Uniform Act 
enabling the Act's provisions to be varied or excluded by 
agreement of the parties. 

(c) The allocation of risk provisions should be extended to include 
circumstances indicating the parties' intention to vary or deny 
the availability of restitutionary claims for benefits conferred. 

(d) The allocation of risk provisions should be amended to permit 
the drawing of an inference that the risk of reliance losses has 
shifted to the non-performing party. 

(e) The list of criteria to determine whether the parties intended to 
vary the statutory allocation of reliance expenditures should be 
non-exhaustive and include the express terms of the agreement. 

(f) The proposed legislation should permit recovery of benefits 
conferred on the mistaken assumption that the agreement was 
not frustrated. 

(g) The arbitration provision in the old Uniform Act should be 
retained in the proposed Ontario legislation. 

(h) The provision in the old Uniform Act relating to benefits 
conferred on third parties should also be included in the 
proposed Ontario legislation. 



CONCLUSION 



In this Project we have been concerned to identify areas of the law of 
contract in need of reform, whether because of undue complexity, uncertainty 
or substantive unfairness; to canvass the options for reform; and to recommend 
particular legislative reforms. Our goal has been to arrive at a set of 
recommendations that would, if implemented, contribute to greater justice 
among individuals. 

We have been assisted in this task by many persons, whose contributions 
we have gratefully acknowledged in the Introduction to this Report. We wish, 
however, to reiterate our thanks to the joint Project Directors, Professors S.M. 
Waddams and J.S. Ziegel, both of the Faculty of Law, University of Toronto, 
for their scholarship, patience, and assistance at all stages of the Project. 



All of which is respectfully submitted, 




~~y^ 



James R. Breithaupt 
Chairman 



H. Allan Leal 
Vice Chairman 

Earl A. Cherniak 




J. Robert S. Prichard 



Margaret A. Ross 



January 15, 1987 



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