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Full text of "Report on sale of goods"

REPORT 

ON 

SALE OF GOODS 



ONTARIO LAW REFORM COMMISSION 



VOLUME II 



fM 



Ministry of the 

Attorney 

General 



1979 



MR. JUSTICE OSLER 



REPORT 

ON 

SALE OF GOODS 



ONTARIO LAW REFORM COMMISSION 



VOLUME II 




Ontaf 



Ministry of the 1979 

Attorney 

General 



The Ontario Law Reform Commission was established by section 1 
of The Ontario Law Reform Commission Act to further the reform of the 
law, legal procedures and legal institutions. The Commissioners are: 

Derek Mendes da Costa, q.c, ll.b., ll.m., s.j.d., Chairman 

Honourable George A. Gale, c.c, q.c, ll.d. 

Honourable Richard A. Bell, p.c, q.c. 

W. Gibson Gray, q.c. 

Honourable James C. McRuer, o.c, ll.d., d.c.l. 

William R. Poole, q.c. 

M. Patricia Richardson, M.A., LL.B., is Counsel to the Commission. 
The Secretary of the Commission is Miss A. F. Chute, and its offices are 
located on the Sixteenth Floor at 1 8 King Street East, Toronto, Ontario, 
Canada. 



TABLE OF CONTENTS 

VOLUME I 

Page 

List of Frequently Cited Sources and Abbreviations xix 

Letter of Transmittal xxi 

PARTI 

INTRODUCTION 

Chapter 1 Origin of Project, Organization and 

Methodology 3 

Chapter 2 Evolution of Modern Sales Law 7 

L The Anglo-Canadian Position 7 

2. Post-1893 Developments 8 

3. The Quebec Position 11 

4. American Sales Lav^ 12 

(a) The Pre-Code Position 12 

(b) The Origins of the Uniform Commercial Code 13 

(c) The Structure of the Uniform Commercial Code 

and Some General Considerations 14 

(d) Article 2 16 

(e) Uniform Land Transactions Act 18 

5. International Developments 19 

(a) The Hague Conventions of 1964 19 

(b) UNCITRAL 21 

(c) UNIDROIT 22 

(d) The International Chamber of Commerce 22 

(e) United Nations Economic Commission for Europe .... 22 

Chapter 3 The Need for a Revised Sale of Goods Act: its 

Form and Related Questions 23 

1. The Lawyer's View 23 

2. Businessmen's Attitudes 25 

3. What Kind of Revised Act? 26 

4. Aids to Interpreting the Revised Act 29 

[iii] 



IV 



5. Retaining Uniformity With the Common Law Provinces 

6. Greater Harmonization Between the Laws of Ontario 
and Quebec 

7. Should Ontario Adopt a Commercial Code Along the 
American Model? 

8. A Law of Contract Amendment Act 

Recommendations 

PART II 

Chapter 4 Scope of the Sale of Goods Act and Definition 
OF Sale 

1 . Introduction 

2. The Character of the Parties to the Agreement 

3. The Character of the Agreement 

(a) Meaning of "General Property" 

(b) Sale Incidents in Conditional Sale Agreements 

(c) Sale of a Part Interest 

(d) Contracts of Sale and Contracts for Work and 
Materials 

(e) Agency Contracts for Sale, Consignment Contracts, 
and Contracts of Sale or Return 

(f ) Contracts of Bailment, Equipment Leases and 
Hire-Purchase Agreements 

4. The Meaning of "Goods" 

(a) "All Chattels Personal" 

(b) "Specially Manufactured Goods" 

(c) "Things in Action" 

(d) "Money" 

(e) "Unborn Young of Animals" 

(f) Goods and Land 

(i) Anglo-Canadian Position 

(ii) The Code Provisions 

(iii ) Conclusions 

(g) Recommended Definition of "Goods" 

5. The Price 



Page 

30 

30 

31 
32 

32 



37 
37 

38 

40 
40 
43 
44 

45 

48 

49 

53 

53 

54 

54 

55 

55 

57 
57 
60 
63 

64 
65 



Page 

6. Near Sales — Integration or Analogy? 65 

Recommendations 68 

PART III 

Chapter 5 Formation, Form and Assignment of Contract .. 75 

1. Introduction 75 

2. Capacity to Contract and Contracts for Necessaries 76 

3. Offer and Acceptance 76 

(a) UCC 2-206: Acceptance by Performance 76 

(b) The Battle of the Forms 81 

(c) Sales by Auction 86 

4. Consideration 90 

(a) Firm Offers 91 

(b) Contractual Modifications 96 

(i) The Existing Position 96 

(ii) Proposals for Change 99 

(c) Should the Effect of Seals be Abolished? 102 

5. Mistake 103 

(a) Res Extincta 103 

(b) Mistakes of Identity 106 

(c) Wider Proposals for Reform 106 

6. Formalities of Formation (Statute of Frauds 

Requirements ) 1 07 

(a) Introduction 107 

(b) Some Empirical Data 108 

(c) Abolition Versus Modification: UCC 2-201 110 

7. The Parol Evidence Rule 110 

(a) The Problem 110 

(b) Alternative Solutions 114 

(c) Conclusion 115 

(d) Consequential Issues 116 

8. Course of Performance and Construction of Agreement .. 117 

9. Assignment of Rights and Delegation of Performance .... 119 
(a) The Formalities of Assignment 120 



VI 

Page 

(b) The Scope of The Personal Property Security Act ... 121 

(c) The Status of 'No Assignment' Clauses 121 

(d) Modification of Contractual Rights after Assignment 124 

(e) Other Aspects of UCC 2-210 125 

10. Privity of Contract and Contracts for the Benefit of 

Third Parties 128 

Recommendations 128 



PART IV 

GENERAL OBLIGATIONS AND CONSTRUCTION 
OF THE CONTRACT 

Introduction 133 



Chapter 6 Definition of Express Warranty and 

Classification of Contractual Obligations 135 

A. Definition of Express Warranty 135 

1. Recapitulation 135 

2. Definitional Issues 137 

(a) Character of Representor 137 

(b) Types of Representation 138 

(c) Time of Representation 138 

(d) Deemed Adoption of Representation by Others . 138 

(e) The ReHance Factor 139 

(f) Negligence as a Material Factor 139 

(g) Language of Commendation 140 

(h) Measure of Damages for Breach of a Non- 
Promissory Warranty 140 

(i) Should the Expanded Definition of Warranty be 

Applied to other Types of Contract? 141 

(j) Conclusion: Draft Provision 141 

3. Other Issues 142 

B. Classification of Contractual Obligations 145 

Recommendations 150 



Vll 

Page 

Chapter 7 Freedom of Contract and Minimum Behavioural 
Standards: The Doctrines of Unconscionability 
AND Good Faith in Performance and 

Enforcement 153 

A. The Doctrine of UnconscionabiUty 153 

1. The General Issue 153 

2. Specific Questions 156 

(a) Should the Doctrine be Confined to Consumer 

Sales? 156 

(b) Should the Doctrine be Restricted to Cases 

of Procedural UnconscionabiHty? 157 

(c) Should There be a List of Criteria to Guide 

the Court in Its Determination of the Issue? 157 

(d) Should the Court be Able to Raise the Issue 

of Unconscionability of Its Own Accord? 159 

(e) What Types of Relief? 159 

(f) Disclaimer of Unconscionability Defences 160 

3. Legislative Proposal 160 

4. A Cautionary Note 162 

B . Good Faith in Performance and Enforcement 163 

1. Introduction 163 

2. Code Provisions 164 

3. Second Restatement on Contracts 166 

4. Conclusions 166 

5. Good Faith in Bargaining 169 

Recommendations 169 

Chapter 8 Course of Dealing and Usage of Trade, and 

Some Specific Constructional Issues 173 

1. Course of Dealing and Usage of Trade 173 

(a) Course of Dealing 173 

(b) Usage of Trade 174 

(i) Universal Acceptance 175 

(ii) Certainty 175 

(iii) Reasonableness 176 

(iv) Inconsistency 176 



Vlll 

Page 

(c) Conclusion 177 

2. Uncertainty of Terms 177 

(a) General Considerations 177 

(b) Uncertainty as to Price 178 

(c) Output, Requirements, and Exclusive Dealings 

Contracts 181 

(i) Output and Requirements Contracts 181 

(ii) Exclusive Dealings Contracts 184 

(d) Contracts of Indeterminate Duration 185 

(e) Options and Cooperation Respecting Performance .... 188 
Recommendations 190 

Chapter 9 The Seller's Implied Warranties (Conditions) 
OF Title, Description and Quality and The 

Effectiveness of Disclaimer Clauses 193 

1. Title, Quiet Possession, and Freedom from Encumbrances 193 

(a) The Implied Condition of Title: Section 13(a) 195 

(b) Implied Warranty of Quiet Possession 196 

(c) Implied Warranty of Freedom from Encumbrances . 197 

( d ) Implied Warranty of Absence of Infringements 198 

(e) Seller's Right to Cure Defective Title and Buyer's 
Right to Recover Payments on Rescission for 

Breach of Warranty of Title 199 

(f) Disclaimer of Title Obligations Implied by 

Section 13 199 

2. The Implied Condition of Description 201 

(a) Anomaly and Retention 202 

(b) Sales in Self-Service Stores 203 

(c) Seller's Liability for Description of Goods by 

Third Party 204 

3. The ImpHed Conditions of Quality and Fitness 206 

(a) General Considerations 206 

(b) The Imphed Condition of Merchantability 208 

(i) Sale "By Description" 208 

(ii) Character of Seller 209 

(iii) Sales by an Agent 209 

(iv) Meaning of "Merchantable Quality" 210 



IX 

Page 

(1) General Considerations 210 

(2) "Purpose or Purposes" 214 

(3) Used Goods 214 

(4) Durability 215 

(5) Spare Parts and Repair Facilities 216 

(6) Other Specifications of Merchantability .... 217 

(v) Effect of Buyer's Examination 218 

(vi) Conclusion: Draft Provision 219 

(c) The Implied Condition of Fitness 220 

4. Sale by Sample 222 

5. Implied Warranties in a Lease of Goods 223 

6. Cumulation and Conflict of Express and Implied 

Warranties 226 

7. Regulation of Disclaimer Clauses 227 

(a) A General Approach 227 

(b) Specific Issues 230 

(i) Construction of Terms that Limit or Negate 

Express Warranties 230 

(ii) Guidelines Concerning Exclusion or 
Modification of Implied Warranties: 

UCC 2-316 231 

(iii) Disclaimer Clauses Deemed Prima Facie 

Unconscionable 232 

(iv) Disclaimer Clauses in Non-Privity Cases 234 

(v) Deemed Adoption of Disclaimer Clauses 

by Retailer 235 

Recommendations 237 

Chapter 10 Express and Implied Warranties and The 

Doctrine of Privity 243 

1. The General Issue 243 

2. Our Own Position 247 

3 . Draft Provision and Consequential Issues 248 

(a) Types of Seller 250 

(b) Types of Subsequent Buyer and Members of 

Buyer's Household 250 

(c) Types of Product 250 

(d) Types of Warranties 251 

(e) Buyer's Remedies for Breach of Warranty 252 

(f) Types of Injury 252 

(g) Restrictions Binding on the Buyer 253 

(h) Other Consequential Issues 255 



X 

Page 
PART V 
TRANSFER OF PROPERTY (TITLE) IN GOODS 

Introduction 257 

Chapter 11 Transfer of Title and Its Incidents Between 

Seller and Buyer 259 

1. Defects in Existing Law 259 

2. The Code Approach 262 

(a) Special Property and Insurable Interest 263 

(b) Buyer's Right to Goods on Seller's Insolvency 265 

(c) Risk of Loss 265 

(i) General Observations 265 

(ii) Issues Arising out of Section 2-509 and 

Related Questions 269 

( 1 ) Shipment Contracts 269 

(2) Meaning of "Bailee" 271 

(3) UCC 2-509(3) 271 

(4) Duties as Bailee of Goods 272 

(5) Deterioration of Goods in Transit 273 

(d) Risk of Loss — Effect of Party's Breach 

(UCC 2-510) 273 

(i) Delivery of Non-Conforming Goods 274 

(ii) UCC 2-510(2) 274 

(iii) UCC 2-510(3) 275 

(iv) Conclusion 275 

(e) Action for the Price 275 

(f) Sales on Approval and Contracts of Sale or Return 276 

(g) Entitlement to Sue for Tort Damages 276 

(h) Residual Title Provision 278 

Recommendations 280 

VOLUME II 

Chapter 12 The 'Nemo Dat' Doctrine and Sale 

Transactions 283 

1. Introduction 283 

2. The Nemo Dat Doctrine: Removing Existing Anomalies 

and Uncertainties 285 

(a) Sales Under a Voidable Title 285 

(b) Seller or Buyer in Possession 288 

(i) Technical Questions 289 



XI 

Page 

(1) Status of Person in Possession 289 

(2) The Doctrine of Constructive Notice and 
the Effect of Registration of the Sale 
Agreement 290 

(3) Newtons of Wembley v. Williams 291 

(4) Brandon v. Leckie 293 

(5) The Meaning of "Sale, Pledge, or 

Other Disposition" 293 

(6) Sales on Approval and Contracts of Sale 

or Return 294 

(7) Documents of Title 295 

(ii) The Broader Questions of Principle 296 

(c) Entrusted Goods and Sales in Ordinary Course: 

The Factors Act, Section 2; The Conditional Sales 

Act, Section 2(3) (Now Repealed); and, The 

Personal Property Security Act, Section 30(1) 298 

(d) Registration Requirements, Grace Periods, and 
Temporarily Perfected Security Interests 301 

(e) The Bills of Sale Act 302 

(f) Some Tentative Conclusions 305 

3. Should Ontario Adopt a General Possession Vaut Titre 

Rule? 306 

(a) The Civil Law Position 306 

(b) Arguments For and Against the Adoption of the 
Possession Vaut Titre Rule in Ontario 307 

4. Rejection of Possession Vaut Titre; Affirmation of 

Nemo Dat 308 

(a) Sales Under a Voidable Title 309 

(b) Should Section 25 of The Sale of Goods Act 

be Repealed? 309 

(c) Should Owners of Goods be Subject to a Duty of 
Reasonable Care with Respect to Their Entrustment? 310 

(d) Entrustment of Goods to a Merchant, or Adoption 
of a General Market Overt Rule with Respect to 

Sales Made at Retail Premises 311 

(e) Residual Questions 313 

Recommendations 316 

Chapter 13 Documents of Title 319 

1 . The Need for Comprehensive Codification 319 

2. Definition of "Document of Title" 322 

3. Basic Issues in the Sales Context 324 

(a) The Passing of Property 324 



xu 

Page 

(b) Risk of Loss 325 

(c) Documents of Title and the Seller's Delivery 
Obligations 326 

(i) Goods Held by a Bailee That Are Not to be 

Shipped 326 

(ii) Goods Authorized or Required to be Shipped . 327 

(d) The Unpaid Seller's Right to Withhold and Stop 

Delivery 327 

(i) As Against the Buyer 327 

(ii) As Against Third Parties 328 

(e) Transfer of Title and Good Faith Buyers 328 

Recommendations 329 

Chapter 14 Delivery and Payment 331 

A. Delivery 331 

1. Introduction 331 

2. Time of Delivery 333 

3. Place and Form of Delivery 335 

(a) Sales Not Involving Shipment 335 

(i) Delivery at Seller's Place of Business or 

Residence 335 

(ii) Delivery of Goods in Possession of Another 336 

(b) Sales Involving Shipment 338 

(c) Character and Effect of Seller's Reservation of 

Right of Disposal 341 

4. The Use of Mercantile Terms 346 

(a) Which Model? 347 

(b) Impact of Containerization 348 

B. Buyer's Obligation to Pay 350 

1. Time of Payment 350 

2. Payment Before Inspection 352 

3. Sufficiency and Form of Payment 354 

4. Place of Payment 355 

5. Letters of Credit 355 

6. Rights of Financing Agency 358 

Recommendations 361 

Chapter 15 Frustration In Contracts of Sale 365 

1. Introduction 365 

2. The Sale of Goods Act, Section 8 365 

3. Uniform Sales Act, SQCiion ^ 369 



Xlll 

Page 

4. Code Provisions 369 

(a) UCC 2-613 370 

(b) UCC 2-614 373 

(c) UCC 2-615 374 

(d) UCC 2-615(c) and 2-616 379 

5. Effects of Frustration and The Frustrated Contracts 

Act 381 

Recommendations 382 

PART VI 

SELLER'S AND BUYER'S REMEDIES 
FOR BREACH OF CONTRACT 

Introduction 387 

Chapter 16 Seller's Remedies 389 

1. Index of Seller's Remedies and Characterization of 

Buyer's Breach 389 

2. Real Remedies 394 

(a) The Existing Law 395 

(i) The Relevance of Title 395 

(ii) Lien Right (Right of Retention) 396 

(1) Seller in Possession as Agent 397 

(2) Part Delivery 397 

(3) Effect of Judgment on Lien 398 

(4) Non-Possessory Lien Rights Where 

Buyer Insolvent; UCC 2-702 398 

(5) Should the Seller's Lien Right Cover 
Damages or Expenses as well as the 

Unpaid Price? 399 

(iii) Right of Stoppage In Transitu 400 

(iv) Right of Resale 401 

(v) Residual Questions 403 

(b) The Code Position 404 

(i) The Right to Withhold Delivery 404 

(ii) Stoppage /« Transitu 405 

(iii) Right of Resale 408 

(1) Buyer's Right to Cure 411 

(2) Notice of Resale 412 

(3) Buyer's Entitlement to Surplus Proceeds . 413 



XIV 

Page 

3. Personal Remedies 414 

(a) Action for the Price 415 

(b) Damages 418 

(c) Penalty Clauses and Forfeiture of Monies Paid 423 

(i) Penalty Clauses 423 

(ii) Forfeiture of Monies Paid 425 

4. Lessor's Remedies for Breach of Lease Agreement 426 

Recommendations 427 

Chapter 17 Buyer's Remedies 433 

A. Index of Buyer's Remedies and Characterization 

of Seller's Breaches 433 

B. Specific Performance and Other Forms of Specific 

Relief 436 

1. Section 50 of The Sale of Goods Act 436 

2. The Uniform Commercial Code Provisions 440 

3. Conclusions 443 

C. Rejection, Acceptance and Cure 444 

1. General Considerations 444 

(a) The Anglo-Canadian Position 444 

(i) Limitations on the Right to Reject 445 

( 1 ) Acceptance of the Whole or Part of 
a Non-Severable Consignment and 

Sale of Specific Goods: s. 12(3) 446 

(aa) Acceptance of Goods in a Non- 
Severable Contract 446 

(bb) Acceptance of Part of a Non- 
Severable Consignment 446 

(cc) Sale of Specific Goods 448 

(2) The De Minimis Rule 449 

(3) Some Miscellaneous Restrictions 

on the Right to Reject 449 

(ii) Acceptance of the Goods 450 

(b) The American Position 451 

(c) The ULIS and UNCITRAL Approaches 456 

(i) ULIS 456 

(ii) Draft UNCITRAL Convention 458 



XV 

Page 

(d) Conclusions with Respect to Rights of 

Rejection and Cure 459 

(i) Right of Rejection 459 

(ii) Seller's Right to Cure and Buyer's 

Right to Demand Cure 461 

(1) Seller's Right to Cure 461 

(aa) When Does the Right to 

Cure Arise? 463 

(bb) Nature of Non-Conformity 464 

(cc) Nature of "Cure" 464 

(dd) Status of Buyer's Obligations .... 465 

(2) Buyer's Right to Demand Cure 465 

2. Further Consideration of Examination, Acceptance 

and Revocation of Acceptance 467 

(a) Place of Examination 467 

(b) Acceptance of Goods 469 

(c) Revocation of Acceptance 472 

3. Some Consequential Problems Following the Exercise 
of Rejection Rights; and Buyer's Duty to Give Notice 

of Breach After Acceptance 475 

(a) Buyer's Powers and Obligations with 

Respect to Goods 475 

(b) Duty to State Grounds of Rejection and 
Comparison with Buyer's Duties to Give 

Notice of Breach or Suit by Third Party 477 

(i) Duty to State Grounds of Rejection 478 

(ii) Comparison with Buyer's Duties to Give 
Notice of Breach After Acceptance, or to 
Give Notice of Suit by Third Party 479 

(c) Buyer's Lien Rights 482 

(d) To What Extent Do the Code Provisions 

Apply to Wrongfully Rejected Goods? 483 

D. The Buyer's Claim for Damages 484 

1. General Principles of Liability — Has the 

Pendulum Swung too Far? 484 

2. Damage Claims in Private Sales 489 

3. The Computation of Damages Under the Rules 
in Hadley v. Baxendale: Some Particular 

Problems 491 



XVI 



Page 

(a) The Foreseeability Test 491 

(b) Comparison with Article 2 Provisions 494 

(c) The Right to Cover 498 

(d) Sub-contracts, the Foreseeabihty Tests, 

and Mitigation Principles 499 

(e) Impecuniosity 502 

(f) Goods for Use: the "Rema" Problem 503 

E. Restitutionary Remedies 504 

Recommendations 509 

Chapter 18 Issues Common To Seller's and 

Buyer's Remedies 517 

1. Meaning of "Substantial Breach" 517 

(a) Terminology 517 

(b) Definition 518 

(c) Single or Multiple Tests? 519 

(d) Repudiation and Breach 520 

2. The Market Price Test 521 

(a) Measure of Damages: "Available Market" or 
"Commercially Reasonable Purchase or Disposition" 521 

(b) The Place for Determination of Commercially 
Reasonable Price 524 

(c) The Time for Determination of Commercially 
Reasonable Price 525 

(d) Conclusions 527 

3. Assurance of Performance 528 

4. Anticipatory Repudiation 532 

(a) Comparison of Anglo-Canadian and American 

Positions 532 

(b) Conclusions 535 

(i) Meaning of Repudiation 535 

(ii) Meaning of UCC 2-6 10(a) 536 

(iii) Effect of Urging Retraction: UCC 2-610(b) ... 537 
(iv) Avoidance of Unjustifiable Expenditures and 

Duty to Mitigate 538 

(v) Measurement of Damages 539 

5. Instalment Contracts 541 

(a) Meaning of "Instalment Contract" 541 

(b) Breach of Instalment Contract by Seller 547 

(i) Effect of Breach as to Instalment Upon the 

Balance of the Contract 547 



XVll 

Page 

(ii) Effect of Breach of the Whole Contract on 

Previously Accepted Instalments 549 

(iii) Breach with Respect to a Single Instalment .... 551 

(c) Breach of Instalment Contract by Buyer 552 

(d) Reinstatement of the Contract 553 

(e) Conclusion 554 

Recommendations 554 

PART VII 

Chapter 19 Miscellaneous Issues 561 

1. Applicability of Revised Act to Crown 561 

2. Limitation Period 562 

3. Conflict of Laws Provisions 564 

4. Transitional Provisions 564 

5. Conflicting Legislation 565 

Recommendations 567 

Conclusion 568 

VOLUME III 

Appendices 

1. DmtiBiWtoR&visQ The Sale of Goods Act / 

2. TheSaleof Goods Act, R.S.O. 1970, c. 421 67 

3. Selected Provisions of Article 1 of the Uniform 

Commercial Code 85 

4. Article 2 of the Uniform Commercal Code (as amended) .. 89 

5. United Nations Commission on International Trade Law 
(UNCITRAL), Draft Convention on the International 

Sale of Goods (1977) 137 

6. Resolution of the Council of the Ontario Branch of the 
Canadian Bar Association, September 29, 1969 155 

7. Report of the Sub-Committee on Article 2 of the Uniform 
Commercial Code to the Commercial Law Subsection, 

Ontario Branch, Canadian Bar Association 157 

8. List of Research Papers prepared in the Sale of Goods 

Project of the Ontario Law Reform Commission 171 

9. Francis A. Miniter, "Comparative Analysis of Shipping 
Terms in INCOTERMS 1953 and Supplement and in 
Article 2 of the Uniform Commercial Code'' 

(edited version) 173 

10. John D. McCamus, "The Frustrated Contracts Act: 

Proposals for Reform" 201 



List of Frequently Cited Sources and Abbreviations 



ATIYAH 



BENJAMIN 



C.M.A. STATISTICAL RESULTS 



P. S. Atiyah, The Sale of Goods 
(5th ed., 1975). 

Benjamin's Sale of Goods (1st ed., 
1974), (Gen. Editor: A. G. 
Guest). 

"The Canadian Manufacturers' 
Association Questionnaire and 
Statistical Results", Research 
Paper No. 1.1. 



DRAFT UNCITRAL CONVENTION Draft Convention on the Interna- 
tional Sale of Goods, as adopted 
by the United Nations Commis- 
sion on International Trade Law 
in June, 1977. 



DUESENBERG AND KING 



FRIDMAN 



N.S.W. WORKING PAPER 



NYLRC STUDY 



TREITEL 



ULIS 



WADDAMS 



R. W. Duesenberg and O. B. King, 
Sales and Bulk Transfers Under the 
Uniform Commercial Code 
(1966). 

G. H. L. Fridman, Sale of Goods 
in Canada (1973). 

Law Reform Commission, New 
South Wales, Working Paper on 
the Sale of Goods ( 1 975 ) . 

State of New York, Report of the 
Law Revision Commission for 
1955; Study of the Uniform 
Commercial Code (3 vols.)* 

G. H. Trcitel, The Law of Con- 
tract (4th ed., 1975). 

The Uniform Law on the Interna- 
tional Sale of Goods, as adopted 
at a Diplomatic Conference at 
The Hague in April, 1964. 

S. M. Waddams, The Law of 
Contracts (1911). 



* Page numbers in the Report appear in square and round brackets. 

[xix] 



XX 



WARRANTIES REPORT 



Ontario Law Reform Commission, 
Report on Consumer Warranties 
and Guarantees in the Sale of 
Goods (1912). 



WHITE & SUMMERS 



WILLISTON 



James F. White and Robert S. 
Summers, Handbook of the Law 
Under the Uniform Commercial 
Code (1912). 

Samuel Williston, The Law Gov- 
erning Sales of Goods at Common 
Law and under the Uniform Act 
(Rev. ed., 1948) (4 vols.). 



CHAPTER 12 



THE 'NEMO DAT' DOCTRINE 
AND SALE TRANSACTIONS 



1. Introduction 

It is necessary in every legal system to reconcile the conflict that arises 
when a seller purports to transfer title of goods that he does not own, or 
that are subject to an undisclosed security interest, to a person who buys 
them in good faith and without notice of the defect in title. The alternative 
means of resolving this conflict are usually stated in terms of a policy 
favouring security of ownership, as opposed to a policy that favours the 
safety of commercial transactions. Few, if indeed any, legal systems have 
committed themselves fully to the adoption of one or other solution. Be- 
tween these extremes there lies a range of compromise solutions that de- 
pend on the nature of the goods, the persons involved, and the type of 
transaction. 

Ontario law also reflects this diversity of approach. Section 22 of 
The Sale of Goods Act^ reaffirms the common law principle that a buyer 
acquires no better title to the goods than the seller had: to quote the 
familiar Latin expression, nemo dat quod non habet?- In the sales area, 
however, this principle is subject to a substantial number of exceptions, of 
which the following are the most important: 

1. conduct precluding the true owner of the goods from denying 
the seller's authority to sell;^ 

2. sale pursuant to any special common law or statutory power of 
sale, or a sale pursuant to court order;'* 

3. sale under a voidable title ;^ 

4. sale by a seller or buyer in possession;^ 



iR.S.O. 1970, c. 421. Section 22 provides as follows: 

22. Subject to this Act, where goods are sold by a person who is not the 
owner thereof and who does not sell them under the authority or with the 
consent of the owner, the buyer acquires no better title to the goods than 
the seller had, unless the owner of the goods is by his conduct precluded 
from denying the seller's authority to sell but nothing in this Act affects, 

(a) The Factors Act or any enactment enabling the apparent owner of 
goods to dispose of them as if he were the true owner thereof; or 

(b) the validity of any contract of sale under any special common law or 
statutory power of sale or under the order of a court of competent 
jurisdiction. 

^Hereafter referred to as the nemo dat rule, or principle, or doctrine. 

nhe Sale of Goods Act, R.S.O. 1970, c. 421, s. 22. 

^Ibid., s. 22(a) and (b). 

^Ibid., s. 24. 

(>lbid., s. 25. The provisions of The Bills of Sale Act, R.S.O. 1970, c. 44 as am., 
and their interaction with section 25(1) of The Sale of Goods Act, are con- 
sidered separately, infra this chapter, sec. 2(e). 

[283] 



284 

5. sale by a buyer in possession of a document of title, thus defeat- 
ing the unpaid seller's right of Hen or retention or stoppage in 
transitu ;'^ 

6. sale by a seller in possession in transactions subject to The Bills 
of Sale Act;^ 

7. sale by a mercantile agent in transactions subject to the provisions 
of The Factors Act\^ 

8. dealings in negotiable warehouse receipts ;^^ 

9. sales subject to an outstanding security interest in the following 
circumstances : 

(a) unperfected security interest;^^ 

(b) inventory held for sale;^^ 

(c) goods brought into Ontario from outside the Province ;^3 and, 

(d) sale of chattel paper in ordinary course of business.^"^ 

With the exception of British Columbia, none of the common law pro- 
vinces has adopted the doctrine of purchase in market overt}^ Even in 
British Columbia, the doctrine has remained dormant. The doctrine is 
expressly excluded by section 23 of the Ontario Sale of Goods Act. 

The above exceptions differ widely in their practical importance, 
their history, and their rationale. Many of them suffer from anomalies 
of one description or another, or have given rise to difficulties in applica- 
tion or interpretation. One possible approach, therefore, in the revised Sale 
of Goods Act would be to remove the anomalies and uncertainties, while 
leaving intact the basic nemo dat doctrine. The other, more radical, ap- 
proach would be to place much more emphasis on protection of the good 
faith purchaser, and to shift the burden of loss to the owner of the goods 



^The Sale of Goods Act, R.S.O. 1970, c. 421, s. 45. 
^Supra, footnote 6. 
9R.S.O. 1970, c. 156. 

lOj/i^ Warehouse Receipts Act, R.S.O. 1970, c. 489, s. 22. 

llj/ie Personal Property Security Act, R.S.O. 1970, c. 344 as am., s. 22(1) (b). 
^Vbid., s. 30(1). Compare, The Conditional Sales Act, R.S.O. 1970, c. 76 as am., 

s. 2(3). This Act has now been superseded by The Personal Property Security 

Act. 
^^The Personal Property Security Act, footnote 11 supra, s. 7; and compare. The 

Conditional Sales Act, footnote 12 supra, s. 12. 
^^The Personal Property Security Act, footnote 11 supra, s. 30(2). 
l5According to this doctrine, where goods are sold in market overt in accordance 

with the usage of the market, a buyer who buys in good faith and without notice 

of any defect or want of title on the part of the seller, acquires good title. A 

market overt is "an open, public and legally constituted market": see, Fridman, 

Sale of Goods in Canada (1973), at p. 141. 



285 

under one of the versions of the possession vaut titre principle,^^ which 
obtains in many civil law jurisdictions. These alternatives will be consid- 
ered separately in the ensuing discussion. 

2. The Nemo Dat Doctrine; Removing Existing Anomalies and 
Uncertainties 

We now turn our attention to the anomalies and difficulties associ- 
ated at present with the doctrine of nemo dat. It is clear that, if the pos- 
session vaut titre principle is rejected, some variation of the nemo dat 
rule will continue to apply. Accordingly, in the following discussion, we 
recommend changes that should be made to the existing law, should it be 
considered that the possession vaut titre principle is inappropriate for 
Ontario. 

(a) sales under a voidable title 

An important exception to the nemo dat rule is contained in section 
24 of the Ontario Sale of Goods Act. Section 24 provides as follows: 

24. When the seller of goods has a voidable title thereto but his 
title has not been avoided at the time of the sale, the buyer acquires 
a good title to the goods, if he buys them in good faith and without 
notice of the seller's defective title. 

Two principal difficulties have arisen under this exception. The first in- 
volves the notoriously difficult distinction between void and voidable sales; 
that is, those induced by a mistake going to the root of the contract (for 
example, a mistake as to the identity of the purchaser), and those induced 
by a mistake not going to the root of the contract. ^"^ The other arises from 
the decision of the English Court of Appeal in Car and Universal Finance 
Co. v. Caldwell.^^ 



i6So called after the provision in section 2279 of the French Civil Code. Article 
2279 provides as follows: 

En fait de meubles, la possession vaut titre. 

Neanmoins celui qui a perdu ou auquel il a ete vole une chose peut la 
revendiquer pendant trois ans, a compter du jour de la perte ou du vol 
contre celui dans les mains duquel il la trouve; sauf a celui-ci son recours 
contre celui duquel il la tient. 
(In matters of personalty, possession is equivalent to title. 

Nevertheless, one who has lost or from whom was stolen a thing, may 
claim it during three years, counting from the day of the loss or theft, 
against the one in whose hands he finds it, saving to that one his recourse 
against him from whom he holds it. 

See, The French Civil Code, translated by John H. Crabb (1977), Art. 
2279.) 
See, further, infra this chapter, sec. 3. 
l7For example, Cund\ v. Lindsay (1878), 3 App. Cas. 459 (H.L.) (void); Phillips 
V. Brooks Ltd., [1919] 2 K.B. 243 (voidable); Ingram v. Little, [1961] 1 Q.B. 
31 (C.A.) (void); Lewis v. Avcray, [1972] 1 Q.B. 198 (C.A.) (voidable); 
Elyatt V. Little, [1947] 1 D.L.R. 700 (Ont. H.C.J.) (voidable); Cuff-Waldron 
Mfg. Co. V. Heald, [1930] 3 D.L.R. 901 (Sask. C.A.) (void). See, further, 
Waddams, The Law of Contracts (1977), at pp. 178-85. 
18[1965] 1 Q.B. 525 (C.A.). 



286 

Under existing law, where a buyer of goods has a void title — for 
example, where the sale has been induced by a mistake as to the identity 
of the buyer — he cannot transfer good title to a third party purchaser. 
Where, however, the buyer has a voidable title — that is, where the sale 
has been induced by a mistake not going to the root of the contract — 
good title can be passed to a third party purchaser under section 24 of 
The Sale of Goods Act. The relevance of the distinction between void and 
voidable titles in this context has been questioned. The typical fact situa- 
tion in which it operates may be simply stated. A agrees to sell goods to 
B, a rogue who passes himself off to A as X, a well known party of some 
substance. B takes delivery of the goods and purports to resell them to C, 
an innocent purchaser for value. An action is commenced by A against C 
for damages for conversion. Should it make any difference to the result 
of this case if B, instead of passing himself off as X, simply passes himself 
off as a person of considerable wealth? As Devlin, L.J., trenchantly ob- 
served in a leading case,^^ why should "the question whether the defen- 
dant should or should not pay the plaintiff damages for conversion de- 
pend on voidness or voidability, and upon inferences to be drawn from a 
conversation in which the defendant took no part"? 

The English Law Reform Committee has recommended^® that the 
distinction between void and voidable titles should be abolished, and that 
in all cases the third party should obtain a good title, unless the owner 
avoided the transaction before the rogue resold the goods. This solution 
has also been adopted in UCC 2-403(1) which provides, inter alia, that 
when "goods have been delivered under a transaction of purchase the 
purchaser has [power to transfer a good title to a good faith purchaser for 
value] even though (a) the transferor was deceived as to the identity of 
the purchaser" .2^ While this formulation is adequate for the purpose for 
which it was designed, it is too narrow insofar as it does not extend to 
other types of common law mistake that affect the validity of the seller's 
title. As noted in an earlier chapter,^^ a research paper prepared for the 
Commission concluded^^ that operative mistakes involving the other con- 
tracting party that would make the contract void at common law should 
be treated as making the contract only voidable. Although we have recom- 
mended that the broader question be deferred for future consideration,^^ 
we support this recommendation^^ in the sales context, so far as it affects 
the rights of third parties. 

It should also be noted that the Law Reform Committee's recom- 
mendation and the Code rule only protect the third party if the owner has 
intended to transfer title. They will not assist the innocent purchaser where 

^^Ingram v. Little, footnote 17 supra, at p. 73. 

20Law Reform Committee, Twelfth Report (Transfer of Title to Chattels) (1966), 
(Cmnd. 2958), para. 15. 

21 See, further, Duesenberg and King, Sales and Bulk Transfers Under the Uni- 
form Commercial Code, Bender's Uniform Commercial Code Service, Vol. 3 A, 
pp. 10-39 et seq. 

'^'^Supra, ch. 5, sec. 5. 

23See, McCamus, "Mistake in Contracts for the Sale of Goods", Research Paper 
No. II. 8, at p. 79. 

245'Mpra, ch. 5, sec. 5, p. 107. 

25See, Draft Bill, s. 6.5(2) (e). 



287 

fraudulent possession of the goods was obtained by his seller under another 
form of transaction, such as a hire-purchase agreement, a leasing agree- 
ment, or a simple bailment.^^ 

As indicated, the second difficulty arises because of the decision of 
the English Court of Appeal in Car and Universal Finance Co. v. Cald- 
well.^'^ Under existing law,^^ a rogue who has a "voidable" title can trans- 
fer good title to a bona fide third party purchaser for value, unless the sale 
is avoided prior to the disposition of the goods to the third party. In the 
Caldwell case, the Court held that, where the fraudulent buyer has dis- 
appeared, a substitutional form of notice, such as notification of the police 
or Automobile Association, is sufficient to rescind the sale. The Law Re- 
form Committee^^ drew attention to the hardship that this decision may 
cause to third parties, and recommended that the rule should be changed 
to require notice of rescission to the rogue. It is not easy to see how this 
recommendation will relieve the hardship to the third party since, ex 
hypothesis he will not know of the rescission. The Committee thought the 
third party would be sufficiently protected in the great majority of cases, 
since it will usually be impractical for the original owner to communicate 
with the rogue. It seems curious that the third party's position should de- 
pend on the accessibihty of the rogue. 

It appears to us that the Committee failed to come to grips with a 
more fundamental question: namely, whether it should be necessary that 
rescission be accompanied by the recovery of possession, and whether, in 
the meantime, the buyer should retain his power to transfer good title. It 
may be useful in this context to refer to section 2(2) of The Factors Act, 
which provides that a disposition by a factor in possession of goods with 
the owner's consent is valid notwithstanding the termination of the consent, 
so long as the third party was not aware that consent had been terminated. 
This seems to us to be the correct approach. 

In our view, therefore, if the nemo dat doctrine is to be retained, the 
revised Sale of Goods Act should contain the following double-barrelled 
provision: namely, a provision stating that a purchaser shall be deemed to 
have a voidable title notwithstanding that the transferor was deceived as 
to the identity of the purchaser or the presence of some other mistake 
affecting the validity of the contract of sale; and, a further provision to 
the effect that a purported avoidance of such a contract shall not affect 

26Compare, Central Newbury Car Auctions v. Unity Finance, [1957] 1 Q.B. 371 
(C.A.), involving a proposed hire-finance agreement. Presumably, the textual 
proposition will also apply at common law to a conditional sale agreement. The 
Personal Property Security Act, R.S.O. 1970, c. 344 as am. ss. I(y) and 2(a), 
has apparently changed the position, since the seller will now only be deemed 
to retain a security interest. Even though the seller's interest may have been 
properly perfected, he may still wish to avoid the agreement in its entirety if he 
has been induced to enter into it as a result of the buyer's fraud. Hence, the 
proper characterization of the buyer's interest may be important if the buyer 
has disposed of the goods before the seller discovered the fraud. 

^"^Supra, footnote 18. The result in this case was criticized by the Law Reform 
Committee, footnote 20 supra, para. 16. Compare, Anderson v. Ryan, [1967] 
I.R. 34 (H.C.J. ). 

^^The Sale of Goods Act, section 24. 

'^^Supra, footnote 20, para. 16. 



288 

the position of a third party who has purchased the goods in good faith, 
unless the goods are recovered by the owner before they are dehvered to 
the third party by the person in possession of the goods. ^o 

UCC 2-403(1) also deals with other situations in which a buyer, 
who may not himself have good title, acquires power to transfer a good 
title to a good faith purchaser. Subsection (l)(a) covers the situation 
where the transferor was deceived as to the identity of the purchaser. The 
other, related, situations in which the buyer can transfer good title are as 
follows: namely, where 

(b) the delivery [of the goods to the buyer] was in exchange for a 
check which is later dishonored, or 

(c) it was agreed that the transaction was to be a 'cash sale', or 

(d) the delivery was procured through fraud punishable as larcenous 
under the criminal law.^^ 

These provisions continue and expand the policy of our proposal, set out 
above. If the nemo dat doctrine is to be retained, similar provisions, with 
appropriate adjustments in language, should be incorporated in the revised 
Ontario Act.^^ 

(b) SELLER OR BUYER IN POSSESSION 

Subsections (1) and (2) of section 25 of the Ontario Sale of Goods 
Act also constitute important exceptions to the nemo dat doctrine. Section 
25 provides as follows: 

25.(1) Where a person having sold goods continues or is in pos- 
session of the goods or of the documents of title to the goods, the 
delivery or transfer by that person, or by a mercantile agent acting for 
him, of the goods or documents of title under a sale, pledge or other 
disposition thereof to a person receiving the goods or documents of 
title in good faith and without notice of the previous sale, has the 
same effect as if the person making the delivery or transfer were 
expressly authorized by the owner of the goods to make the delivery 
or transfer. 

(2) Where a person having bought or agreed to buy goods ob- 
tains, with the consent of the seller, possession of the goods or the 
documents of title to the goods, the delivery or transfer by that per- 
son, or by a mercantile agent acting for him, of the goods or docu- 
ments of title, under a sale, pledge or other disposition thereof to a 
person receiving the goods or documents of title in good faith and 
without notice of any lien or other right of the original seller in re- 
spect of the goods, has the same effect as if the person making the 



30See, Draft Bill, ss. 6.5(2) (a) and (e), 6.8. 

3lThe common law treatment of these situations is discussed, inter alia, in Duesen- 
berg and King, footnote 21 supra, pp. 10-13 et seq.; and in Gilmore, 'The Com- 
mercial Doctrine of Good Faith Purchase" (1954), 63 Yale L.J. 1057. 

32See, Draft Bill, s. 6.5(2). 



289 

delivery or transfer were a mercantile agent in possession of the 
goods or documents of title with the consent of the owner. 

(3) Subject to subsection 5, subsection 2 does not apply to 
goods the possession of which has been obtained by a buyer under a 
security agreement whereby the seller retains a security interest with- 
in the meaning of The Personal Property Security Act, and the rights 
of the parties shall be determined by that Act. 

(4) In this section, 'mercantile agent' means a mercantile agent 
having, in the customary course of his business as such agent, au- 
thority either to sell goods or to consign goods for the purpose of 
sale, or to buy goods, or to raise money on the security of goods. 

(5) Subsection 3 comes into force on a day to be named by the 
Lieutenant Governor by his proclamation. 

Subsections (1) and (2) were copied almost verbatim from subsections 
(1) and (2) of section 25 of the U.K. Sale of Goods Act, 1893,^^ which 
in turn essentially reproduced sections 8 and 9 of the U.K. Factors Act}^ 
Thus, the Ontario provisions have a respectably long history. Nevertheless, 
they raise some basic questions of principle that do not appear to have 
been adequately explored in the literature or in the case law. Apart from 
the question of principle, the language of the two subsections has given rise 
to a substantial number of constructional problems. Other difficulties have 
also manifested themselves. We deal first with the technical questions. 

(i) Technical Questions 

(1) Status of Person in Possession 

Before the decision of the Privy Council in Pacific Motor Auctions 
Pty. Ltd. V. Motor Credits (Hire Finance) Ltd.,^^ the preponderant case 
law^^ favoured the view that section 25 only applied to cases where the 
seller or buyer was in possession of the goods in his capacity as seller or 
buyer, and not in some other capacity such as hirer under a hire-purchase 
agreement. The Privy Council has now held that a change in the capacity 
of a seller in possession of goods does not preclude a bona fide purchaser 

33The differences are as follows: (a) section 25(1) of the Ontario Act substitutes 
"to make the delivery or transfer" for "to make the same" in the last line of the 
U.K. subsection, and "a sale" for "any sale"; (b), in both subsections (1) and 
(2), the U.K. Act uses "the same" instead of repeating "the goods or documents 
of title". Section 25(3) of the Ontario Act has no counterpart in the U.K. Act, 
since the U.K. has no public registration system for conditional sale agreements. 
The definition of "mercantile agent" in the Ontario Act, section 25(4), is 
copied from section l(l)(c) of The Factors Act, R.S.O. 1970, c. 156. 

3452 & 53 Vict., c. 45 (U.K.). These provisions do not appear in the Ontario 
Factors Act. 

35 [1965] A.C. 867 (P.O.), followed in Worcester Works Finance Ltd. v. Cooden 
Enf^ineerinR Co. Ltd., [1972] 1 Q.B. 210 (C.A.). 

36For example, Eastern Distributors Ltd. v. Goldring, [1957] 2 Q.B. 600 (C.A.); 
Staffs Motor Guarantee, Ltd. v. British Wagon Co. Ltd., [1934] 2 K.B. 305; and 
compare, Schafhauser v. Shaffer & National Finance Co., [1943] 3 D.L.R. 656 
(Sask. C.A.), a decision under the Saskatchewan Factors Act, R.S.S. 1940, 
c. 282. Contrast, Vowles v. Island Finances Ltd., [1940] 4 D.L.R. 357 
(B.C.C.A.). 



290 

from asserting good title to the goods, unless there has been some interrup- 
tion in the continuity of the seller's possession. While we welcome the 
policy of the decision, it may well be asked why a break in the continuity 
of possession should make all the difference. So far as third parties are con- 
cerned, the outward appearances surely remain the same, whether or not 
there has been an earlier interruption in the continuity of physical pos- 
session. It seems to us, therefore, that in approaching the problem anew 
one should focus attention on the character of the person holding posses- 
sion. A change in the capacity in which a seller holds goods, or an inter- 
ruption in physical possession, should not be decisive. ^"^ 

(2) The Doctrine of Constructive Notice and the Effect 
of Registration of the Sale Agreement 

It is not entirely clear, under existing law, whether a purchaser of 
goods from a seller or buyer in possession is bound by the contents of a 
public register containing entries concerning the ownership of, or any 
security interest in or claim to, the goods. 

In Joseph v. Lyons,'^^ the English Court of Appeal decided that the 
equitable doctrine of constructive notice should not be extended to com- 
mercial transactions, and that it did not apply to documents registered in 
fulfillment of the requirements under the U.K. Bills of Sale legislation. The 
decision is usually treated as a particularized application of the broader 
principle that doctrines of constructive notice should not be imported into 
mercantile transactions.^^ The rationale of the Joseph v. Lyons decision 
has been followed in Canada,"^^ and applied in circumstances not involving 
a conflict between competing legal and equitable interests, as was true in 
that case. On the other hand, this rationale was distinguished by the Sas- 
katchewan Court of Appeal in Kozak v. Ford Motor Credit Corp.^^ The 
grounds of distinction may lack persuasiveness. It is, however, difficult to 
fault the Court's general conclusion that to refuse to apply the doctrine of 
constructive notice to the contents of a document whose registration is 
designed to eliminate secret liens, is inconsistent with the object of regis- 
tration statutes. 

Section 25(3) of the Ontario Sale of Goods Act, which was added in 
1967,'^2 but which has not yet been proclaimed in force, states that sub- 
section (2) shall not apply where the buyer is in possession pursuant to a 



37See, Draft Bill, s. 6.6(2) (a). 

38(1884), 15 Q.B.D. 280 (C.A.). 

39See, for example, Manchester Trust v. Furness, [1895] 2 Q.B. 539 (C.A.), and 

the cases cited infra, footnote 40. 
40For example, Traders Finance Corp. Ltd. v. Dawson Implements Ltd. (1958), 

15 D.L.R. (2d) 515 (B.C.S.C); Century Credit Corp. v. Richard, [1962] O.R. 

815, (1962) 34 D.L.R. (2d) 291 (C.A.); General Motors Acceptance Corp. v. 

Hubbard (1978), 21 N.B.R. (2d) 49 (N.B.S.C, App. Div.), aff'g 18 N.B.R. 

(2d) 248 (Q.B.). See, also, LaForest, "Filing under the Conditional Sales Act: 

is it Notice to Subsequent Purchasers?" (1958), 36 Can. Bar Rev. 387. 
41(1971), 18 D.L.R. (3d) 735 (Sask. C.A.). 
42S.O. 1967, c. 89, s. 1. 



291 

security agreement governed by The Personal Property Security Act^^ 
We support this approach, although it appears to us that the wording of 
the subsection is too restrictive. It does not, for example, cover registra- 
tion of an absolute bill of sale under The Bills of Sale Act. Assuming, 
therefore, that it is decided to retain the nemo dat principle and to repro- 
duce the substance of section 25 in the revised Sale of Goods Act, the 
equivalent version of section 25(3) should be suitably enlarged. 

(3) Newtons of Wembley v. Williams^^ 

Section 25(1) of The Sale of Goods Act deals with the effect of a 
seller being in possession of goods after title has passed to the buyer; 
section 25(2) applies to the converse situation of a buyer who obtains 
possession of goods before title has been transferred.'^^ The two subsections 
are not identically worded but, until Newtons of Wembley v. Williams,^^ 
it was generally assumed'^'' that their practical effect was the same. In that 
case, this assumption was shown to be erroneous. It was held that the rider 
at the end of subsection (2), (that is, that a disposition by the buyer in 
possession "has the same effect as if the person making the delivery or 
transfer were a mercantile agent in possession of the goods or documents 
of title with the consent of the owner") cannot be ignored. "Mercantile 
agent" is defined in identical terms in both section 25(4) of The Sale of 
Goods Act, and The Factors ActA^ The latter Act also prescribes, in sec- 
tion 2(1), the powers of such an agent as to disposition of goods. As a 
result of the wording of section 25(2), the third party must show not only 
that the buyer in possession sold the goods, but also that, if the buyer in 
possession had been a factor, the sale would have been a sale in the ordin- 
ary course of the factor's business. As the Williams decision illustrates, this 
rendering of the provision leads to at least two important consequences. 
First, it requires the court to ascribe a hypothetical status, that of a mer- 
cantile agent, to the buyer, and to judge his wrongful disposition by an 
equally hypothetical standard. Secondly, and of equal importance, since 



43Section 53(1) of The Personal Property Security Act provides, however, that 
registration of a financing statement constitutes notice of the security interest to 
which it relates to all persons claiming any interest in such collateral during the 
period of 3 years following such registration. See, also, section 68 of that Act, 
which provides that, where there is a conflict between The Personal Property 
Security Act and the provisions of any other Act, other than The Consumer 
Protection Act, the provisions of The Personal Property Security Act shall pre- 
vail. The practical result, therefore, appears to be that section 25(3) of The 
Sale of Goods Act is not essential to protect the interest of a conditional seller 
out of possession and to exclude the operation of section 25(2). 

44[1965] 1 Q.B. 560 (C.A.), noted in (1965), 43 Can. Bar Rev. 639. See, also, 
Kozak V. Ford Motor Credit Corp., footnote 41 supra; and contrast. General 
Motors Acceptance Corp. v. Hubbard, footnote 40 supra, at pp. 66-68. 

45The language of section 25(2) is not confined to such cases but, as commen- 
tators have frequently noted, it is difficuh to envisage situations in which a third 
party dealing with a buyer who has acquired title from the seller will have to 
invoke s. 25(2) in order to protect his acquisition of the goods. 

46[1965] 1 Q.B. 560 (C.A.). 

47And apparently so held in Jefjcott v. Andrew Motors Ltd., [1960] N.Z.L.R. 721. 
See, also, Langmead v. Thyer Rubber Co. Limited, [1947] S.A.S.R. 29, per 
Reed, J., at p. 39. These judgments were not referred to in the Williams case. 

48R.S.O. 1970, c. 156, s. 1(c). 



292 

the rider inferentially incorporates section 2(2) of The Factors Act,"^^ the 
buyer is deemed to remain in possession of the goods or documents of 
title with the owner's consent, even though possession had been obtained 
by fraudulent means and the owner/seller had purported to rescind the 
sale. 

As writers have noted, ^^ this aspect of the decision reverses the 
normal rule concerning the avoidance of voidable transactions, and neu- 
tralizes the effect of Car and Universal Finance Co. v. Caldwell^^ in an 
important range of transactions. The English Law Reform Committee^^ 
also criticized this anomaly and recommended its removal. We do not 
share these misgivings. While we readily support the proposition that 
subsections (1) and (2) should read alike, as has been indicated earlier 
the rationale of section 2(2) of The Factors Act is, in our view, based 
on sounder foundations than the Law Reform Committee's approach to 
the rule in the Caldwell case. We would not, therefore, be inclined to 
deviate from the decision in Newtons of Wembley v. Williams on this 
ground alone. 

In our opinion, the valid criticism of section 25(2), as construed 
in the Williams case, is that it introduces into section 25 a double standard 
for judging the effects of a wrongful disposition by a seller or buyer in 
possession. In our view, there is no sound functional or conceptual reason 
for this distinction. It is not clear why it was introduced in the first place. 
Arguably, the draftsman may have intended to confine subsection (2) to 
sales made by a buyer in the ordinary course of his business. However, 
even if that had been the intention, it is not easy to explain why a person 
buying goods from a seller in possession should be treated more favour- 
ably than if his seller were a buyer in possession. We are, therefore, of 
the view that the distinction should be abolished in any revised version 
of section 25. ^^ 

Before leaving this subject, another important discrepancy between 
section 25(1) and (2) should be noted. Subsection (2) requires the 
buyer to be in possession with the "consent" of the seller. There is no 
such requirement in subsection ( 1 ) with respect to a seller in possession. 
In Worcester Works Finance Ltd. v. Cooden Engineering Co. Ltd.^^ it 
was held, inter alia, that the distinction was a material one, and that the 
omission in section 25(1) could not have been accidental. As the decision 



49Section 2(2) provides as follows: 

Where a mercantile agent has, with the consent of the owner, been in pos- 
session of goods or of documents of title to goods, a sale, pledge or other 
disposition that would have been valid if the consent had continued, is valid 
notwithstanding the termination of the consent if the person taking under 
the disposition acts in good faith and has not at the time thereof notice that 
the consent has been terminated. 

50For example, Fridman, Sale of Goods in Canada (1973), pp. 131-32; Benjamin's 
Sale of Goods (1974), paras. 484-85. 

^^Supra, footnote 18. 

^'^Supra, footnote 20, para. 24. 

53See, Draft Bill, s. 6.6(1) and (2). 

54[1972] 1 Q.B. 210 (C.A.). Compare, Bender v. National Acceptance Corpora- 
tion Ltd. (1928), 63 O.L.R. 215 (C.A.). 



293 

itself shows, this interpretation can lead to some surprising results, and 
raises an important question involving the rationale of subsection (1). 
It is one thing to say that a person who entrusts goods to another, or who 
acquiesces in the retention of possession of goods by another, should 
assume the risk of his bailee's dishonesty. It is quite another to burden 
the bailor with the loss of his chattels if he had no reason to anticipate 
the risk. Such a result would go even beyond the possession vaut litre rule 
adopted in many civil law jurisdictions. It seems to us important that any 
revised version of section 25(1) should make it clear that consent by a 
bailor/buyer to the possession of a bailee/seller is an essential prerequisite 
to the bailee/seller's power to transfer a better title than he himself has. 

(4) Brandon v. Leckie^^ 

The concluding words of section 25(2) provide that a "sale, pledge 
or other disposition" by the buyer in possession has the same effect as if 
he were a mercantile agent in possession of the goods "with the consent 
of the owner'\^^ The issue raised in Brandon v. Leckie^'' was whether the 
word "owner" should be read literally, so that a buyer in possession would 
be empowered to transfer not only such rights as his immediate seller 
possessed in the goods, but also the rights of the "owner" where the im- 
mediate seller himself lacked title. Moore, J., held, in our view correctly, 
that the words "seller" and "owner" in section 25(2) should be read 
interchangeably, and that the concluding words did not have the dramatic 
effect originally contemplated by Atiyah.^^ But Atiyah and other authors 
are surely right in drawing attention to the unfortunate wording, which 
was presumably transposed from the somewhat different context of section 
2 of The Factors Act. It should be noted that the word "owner" also 
appears in section 25(1). The use of this word creates an analogous 
problem in the interpretation of subsection (1). Assuming the retention 
of the nemo dat rule, the ambiguity caused by such terminology in sec- 
tion 25(1) and (2) should be avoided to the extent possible in the re- 
vised Act. 

(5) The Meaning of "Sale, Pledge, or Other Disposition" 

The words "sale, pledge or other disposition" appear in both sub- 
sections (1) and (2) of section 25 of The Sale of Goods Act. "Sale" has 
a well settled meaning; "pledge" is more equivocal and could be con- 
strued as referring to any type of consensual security interest, ^^ or as 
being restricted to a common law pledge in the strict sense. It seems rea- 
sonable to assume that the draftsman intended the wider meaning. If it 
were decided to continue to extend the protection of the section to third 
parties claiming a security interest in the goods, ^^ it would be necessary to 



55(1972), 29 D.L.R. (3d) 633 (Alta. S.C, Tr. Div.). 

56Italics added. 

^iSiipia, footnote 55. See the Comments by Zysblat (1974), 9 U.B.C. L. Rev. 186, 

and Powles, "Stolen Goods and The Sale of Goods Act 1893, Section 25(2)" 

(1974), 37 Mod. L. Rev. 213. 
58 Atiyah, The Sale of Goods (5th ed., 1975), at pp. 212-13. 
59As is true of the definition of "pledge" in s. 1 (d) of The Factors Act. 
60On this point see, further, infra, this ch., sec. 4(e). 



294 

clarify the meaning of the word "pledge" in any revised version of section 

25. 

The main difficulty arises with respect to the meaning of the phrase 
"or other disposition". Two constructions were advanced in the Worcester 
Works Finance case.^^ Megaw, L.J., thought that, to fall within the 
section, a disposition must involve "some transfer of an interest in pro- 
perty", as contrasted with a mere transfer of possession. ^^ Lord Denning, 
M.R., preferred a wider construction, and held that "disposition" extends 
"to all acts by which a new interest (legal or equitable) in the property 
is effectually created". ^^ Presumably, he, too, would exclude a mere pos- 
sessory interest. 

Apart from the question of interpretation, section 25 raises a more 
fundamental question of policy: namely, whether it should seek to protect 
all persons dealing in good faith with a seller or buyer in possession, re- 
gardless of the character of the subsequent transaction. Alternatively 
should the protection of the section be confined to specified types of third 
parties. As will be explained hereafter ,^4 for the purposes of the revised 
Sale of Goods Act, we prefer the narrower approach. 

Section 25 is also unsatisfactory from another point of view. It is 
not clear whether the disposition must be made for valuable consideration. 
Assuming the retention of the nemo dat principle, this question, too, 
should be clarified in any revised version of the section. ^^ 

(6) Sales on Approval and Contracts of Sale or Return 

Section 19, Rule 4, provides presumptive rules that determine when 
the property in goods is deemed to pass to a buyer under a sale on 
approval or under a contract of sale or return. However, these rules are 
only presumptive. It is possible for the careful draftsman not only to 
avoid them but, indeed, to provide that no contract of sale shall come 
into effect without the seller's prior consent or payment of the price.^^ 
Apparently, the effect of a provision of the latter type is also to deny 
a third party dealing in good faith with the bailee in possession of the 
goods the protection of section 25(2). The reason is that, in such a case, 
the bailee would not be a "buyer" within the meaning of the Act.^"^ This 
is obviously an unsatisfactory position and raises anew some fundamental 
questions concerning the scope and rationale of section 25. These ques- 
tions are dealt with below. ^^ 



61 [1972] 1 Q.B. 210 (C,A.). 

^Vbid., at p. 220. 

^Vbid., at p. 218. 

^'^Infra, this ch., sec. 4(e). 

65See, Draft Bill, s. 6.6(1). 

66See, for example, Pitrie v. Racey (1963), 37 D.L.R. (2d) 495 (B.C.S.C.); and 

Weiner v. Gill, [1906] 2 K.B. 574 (C.A.). 
^''Benjamin's Sale of Goods (1974), para. 529; Edwards v. Vaughan (1910), 26 

T.L.R. 545 (C.A.). 
^^Infra, this ch., sec. 4(b). 



295 

(7) Documents of Title 

Both limbs of section 25 apply to documents of title, as well as to 
goods entrusted to the seller or buyer under a contract of sale. The term 
"document of title" is broadly defined in section 1(1 )(e) of The Sale of 
Goods Act.^*^ On the face of it, the assimilation of documents of title to 
goods seems logical. After all, the definitional premise is that the docu- 
ment is used in the ordinary course of business as proof of the possession 
or control of the goods. It is, therefore, reasonable for the third party to 
treat a transfer of the document to him as equivalent to a transfer of 
possession of the goods. However, there are important difficulties. 

The first difficulty, as is explained in a later chapter,'^^ is that the 
term "document of title" and the cognate term "warehouse receipt" are 
not consistently defined in The Sale of Goods Act, The Warehouse 
Receipts Act,'^^ The Mercantile Law Amendment ActP^ and The Personal 
Property Security ActP^ This could lead to significantly different results 
depending on which definition is being invoked. The second difficulty is 
that The Sale of Goods Act fails to draw a distinction between negotiable 
and non-negotiable documents of title. The Warehouse Receipts Act and 
The Personal Property Security Act both treat the distinction as funda- 
mental, and apply a separate regime of rules to the two types of docu- 
ment. In particular, transfer of a non-negotiable document of title under 
these statutes does not effect constructive delivery of the goods represented 
by the document until the bailee of the goods has been notified of the 
transfer."^"^ The practical importance of this requirement is vital. In the 
case of warehouse receipts governed by The Warehouse Receipts Act it 
means, for example, that the goods may still be subject to levy by the 
transferor's creditors. "^^ In the case of The Personal Property Security Act, 
it leaves the secured party with an unperfected security interest. The 
question that arises, therefore, is whether greater effect should be given 
to the transfer of a non-negotiable document of title for the purposes of 
section 25 than is afforded under the provisions of the other two Acts. 

The definition of document of title was adopted in the Ontario Sale 
of Goods Act long before the enactment of The Warehouse Receipts Act 
and The Personal Property Security Act. Nineteenth century English com- 



69Section l(l)(e) provides as follows: 

'document of title' includes a bill of lading and warehouse receipt as defined 
by The Mercantile Law Amendment Act, any warrant or order for the 
delivery of goods and any other document used in the ordinary course of 
business as proof of the possession or control of goods or authorizing or 
purporting to authorize, either by endorsement or delivery, the possessor of 
the document to transfer or receive goods thereby represented. 

Compare, the definition in section 1.1(1)11 of the Draft Bill. 

70/A//rfl, ch. 13. 

71R.S.O. 1970, c. 489. 

72R.S.O. 1970, c. 272. 

73R.S.O. 1970, c. 344 as am. 

747//t' Warehouse Receipts Act, ss. 20-21; The Personal Property Security Act, 
s. 28(1). 

75This inference arises from s. 15 of the Act, particularly if read in conjunction 
with the provisions of The Bills of Sale Act, R.S.O. 1970, c. 44. Compare, UCC 
7-504(2) where the position is stated more clearly. 



296 

mercial law possessed no systematic theory of documents of title and, 
with the partial exception of bills of lading, did not attach any incidents 
of negotiability to a document of title. Even in the case of bills of lading, 
the incidents were very modest. Ontario law has travelled some distance 
since then and, by indirection or otherwise, we have in substantial part 
adopted the American approach, which draws a critical distinction be- 
tween negotiable and non-negotiable documents of title. 

It may be that the same approach should govern the status of docu- 
ments of title in the revised Sale of Goods Act. We recommend in a later 
chapter'^6 that the law of documents of title in Ontario should be compre- 
hensively examined with a view to its systematic codification, and that 
Article 7 of the Uniform Commercial Code should be studied in order to 
determine its suitability for adoption in Ontario. This proposed codifica- 
tion would govern all aspects of documents of title, and would supersede 
The Warehouse Receipts Act, and the relevant provisions in The Mer- 
cantile Law Amendment Act and other enactments, including the provi- 
sions in section 25 of The Sale of Goods Act relating to documents of 
title. If a new documents of title law is adopted, then it should also control 
the effect of an unauthorized disposition by a person in possession of a 
document of title. "^"^ Pending this comprehensive review of the Ontario law 
of documents of title, it seems prudent to retain the reference to docu- 
ments of title in any revised version of section 25 of The Sale of Goods 
Act, without distinguishing between negotiable and non-negotiable docu- 
ments of title. "^^ 



(ii) The Broader Questions of Principle 

All the preceding issues, important though they are, are secondary 
to two broader questions of principle concerning the scope and rationale 
of section 25. The first question is whether section 25 should continue 
to apply to both private sales and sales by a merchant. The second ques- 
tion asks whether section 25 should apply in respect of bailees other than 
sellers and buyers in possession. These questions must now be considered. 

As to the first question, section 25 does not distinguish between the 
different types of seller and buyer; subject to the qualification introduced 
by Newtons of Wembley v. Williams,''^ it is well settled that the third party 
obtains a good title without regard to whether the person in possession of 
the goods is a merchant or is acting in a private capacity. It is difficult 
to reconcile this generous rule with the common law's general adherence 
to the nemo dat principle. Moreover, it may be thought that the rule does 
not rest on any consistent basis of commercial policy. 



76/«/ra, ch. 13. 

77This is the approach adopted in the Uniform Commercial Code. UCC 2-403 
does not refer to the effect of an entrustment of a document of title, except 
by cross reference to Article 7. The effect of such an entrustment must be 
sought in Articles 7 and 9. See, particularly, UCC 7-205, 7-503, and 9-309. 

78See, Draft Bill, s. 6.2. 

"^^Supra, footnote 44. 



297 

It will be recalled that section 25 of the Ontario Sale of Goods Act 
is based on section 25 of the U.K. Sale of Goods Act, 1893, which, in 
turn, was based on sections 8 and 9 of the U.K. Factors Act. The pre- 
decessor of section 8 of the U.K. Factors Act was adopted in 1877, fol- 
lowing the decision in Johnson v. Credit Lyonnais Co.^^ That case held 
that the then Factors Act did not apply to a seller who was left in pos- 
session of a document of title. But the draftsman, in adopting section 8, 
appears to have overlooked the fact that the pledgee in the Johnson case 
was primarily prejudiced because the seller in possession was also a mer- 
chant. It may also be argued that the broad ambit of sections 8 and 9 
of the U.K. Factors Act departs from the earlier principle of ostensible 
authority that underlies the common law cases^^ preceding the Factors Act 
and the "trader's" provisions mentioned below. 

Our second question concerns an equally significant feature of section 
25. It is confined to one category of bailee: namely, buyers and sellers in 
possession. The section does not embrace other categories of bailment, 
such as goods held under various types of equipment leases or other forms 
of near sale, whose commercial importance may now be as great as, or 
perhaps even greater than, goods entrusted under the more conventional 
types of agreement. This anomaly can be explained in various ways. 
First, the obvious point may be made that, since we are dealing with a 
sales act, its primary concern is with sales transactions. The second ex- 
planation is the historical one: near sales transactions were much less 
important in 1893 than they are today. Again, it may be argued that a 
seller or buyer who entrusts his goods to the other party to a contract 
of sale ought to appreciate that he runs a greater risk, and that he creates 
a greater appearance of false ownership, than does a simple bailor.^^ 
However, this reasoning is equally applicable where possession is passed 
to a lessee who holds goods under a long term lease. Finally, rather than 
extend exceptions to the nemo dat rule, it may be said that the well estab- 
lished tradition in Ontario is to impose registration requirements where 
there is a substantial danger that third parties may be prejudiced by the 
existence of undisclosed property interests. But this argument proves too 
much; and militates just as much against the retention of section 25 in its 
present form, as it does in favour of its extension to other forms of 
bailment. 

On both of these questions we have, therefore, reached the conclusion 



80(1877), 3 C.P.D. 32 (C.A.), at pp. 36-7, and 40. The history of the section is 
traced in Pacific Motor Auctions Pty. Ltd. v. Motor Credits (Hire Finance) Ltd.y 
[1965] A.C. 867 (P.C), at p. 882. 

8>For example, Pickering v. Busk (1812), 15 East 38 (K.B.), at p. 43; Meggy v. 
The Imperial Discount Co. (1878), 3 Q.B.D. 711 (C.A.), per Bramwell, L.J., 
at p. 717; Weiner v. Harris, [1910] 1 K.B. 285 (C.A.), per Farwell, L.J., at 
p. 295; Weiner v. Gill, [1905] 2 K.B. 172, aff'd on other grounds, [1906] 2 
K.B. 574 (C.A.), at p. 581; Brett v. Foorsen (1907), 7 W.L.R. 13 (Man.); 
Commercial Securities Ltd. v. Johnson, [1931] 1 D.L.R. 861 (B.C.C.A.). See, 
further, Ziegel, "The Legal Problems of Wholesale Financing of Durable Goods 
in Canada" (1963), 41 Can. Bar Rev. 54, at pp. 79-83. 

82Compare, the dissenting judgment of Denning, M.R., in Central Newbury Car 
Auctions Ltd. v. Unity Finance Ltd., [1957] 1 Q.B. 371 (C.A.). 



298 

that whatever historical reasons may explain the present scope of section 
25, the position needs to be reviewed. The possible alternatives will be can- 
vassed in later sections of this chapter. 

(c) entrusted goods and sales in ordinary course: the 

factors act, section 2; the conditional sales act, section 
2(3) (now repealed); and, the personal property 
security act, section 30(1) 

These three statutory provisions deserve to be considered together. 
Basically, they express the same commercial policy of protecting pur- 
chasers in ordinary course who buy goods from a person in whose hands 
the goods constitute part of inventory. They are also linked by a common 
case law lineage, ^^ although the common root is sometimes overlooked. 

Nevertheless, some important differences remain between the three 
statutory provisions. Equally important, they leave untouched a significant 
area of mercantile sales. Section 2 of The Factors Act, as the name of the 
statute implies, is restricted to goods, including documents of title to goods, 
entrusted to a mercantile agent who sells in the ordinary course of his 
business as a mercantile agent. The case law shows^"^ that the goods must 
be consigned to the merchant in his capacity as factor, and not in some 
other capacity. The courts have also developed some fairly strict criteria 
as to what constitutes a sale in ordinary course. Section 2(3), the trader's 
section, in the now repealed Conditional Sales Act only applied to a 
merchant who received the goods under a wholesale conditional sale 
agreement and received them, moreover, for purposes of resale. Thus, 
the section did not cover wholesale chattel mortgage agreements or, it 
would seem, goods received under a wholesale conditional sale for demon- 
stration purposes and not for resale. ^^ It was, moreover, unclear whether 
section 2(3) applied to raw materials intended for processing or fabrica- 
tion before ultimate sale. The Conditional Sales Act has now been re- 
pealed, and replaced by The Personal Property Security Act. Section 
30(1) of The Personal Property Security Act^^ eliminates all these restric- 
tions, since it applies to any form of inventory that is subject to a security 
interest given by the debtor. But the security interest must be given by 



83See, Ziegel, 'The Legal Problems of Wholesale Financing of Durable Goods in 
Canada" (1963), 41 Can. Bar Rev. 54, at pp. 78-79, citing, inter alia, Walker v. 
Clay (1880), 49 L.J.C.P. 560; Taylor v. McKeand (1880), 5 C.P.D. 358; Payne 
V. Fern (1881), 6 Q.B.D. 620; and Dedrick v. Ashdown (1888), 15 S.C.R. 227. 
84For example. Staffs. Motor Guarantee Ltd. v. British Wagon Co. Ltd., [1934] 
2 K.B. 305; Eastern Distribution, Ltd. v. Goldring, [1957] 2 Q.B. 600 (C.A.); 
Edwards v. Vaughan (1910), 26 T.L.R. 545 (C.A.); Buller & Co. Ltd. v. T. J. 
Brooks Ltd. (1930), 142 L.T. 576 (K.B.); Astley Industrial Trust Ltd. v. 
Miller, [1968] 2 All E.R. 36 (C.A.); Traders Group Ltd. v. Gouthro (1969), 
9 D.L.R. (3d) 387 (N.S.S.C). 
85Dulmage v. Bankers' Financial Corp., [1923] 1 D.L.R. 1185 (Ont. C.A.), aff'g 

(1921), 67 D.L.R. 594 (Ont. H.C.J. ). 
86Section 30(1) reads as follows: 

A purchaser of goods from a seller who sells the goods in the ordinary 
course of business takes them free from any security interest therein given 
by his seller even though it is perfected and the purchaser actually knows 
of it. 



299 

the debtor, and not by an antecedent person in the chain of title in whose 
hands the goods did not constitute inventory. The concept of entrustment 
or ostensible authority, therefore, underlies section 30(1), as it underlies 
the two other provisions, although all of them fall short of embracing a 
general market overt principle. 

We believe that the concept of entrustment to a merchant is a viable 
and coherent exception to the nemo dat principle. The streamlined restate- 
ment of the essential features of this exception in UCC 2-403(2) and (3) 
commends itself to us. These subsections read as follows: 

2-403.(2) Any entrusting of possession of goods to a merchant who 
deals in goods of that kind gives him power to transfer all rights of 
the entruster to a buyer in ordinary course of business. 

(3) 'Entrusting' includes any delivery and any acquiescence in 
retention of possession regardless of any condition expressed between 
the parties to the delivery or acquiescence and regardless of whether 
the procurement of the entrusting or the possessor's disposition of 
the goods have been such as to be larcenous under the criminal law. 

These provisions have a number of important features that deserve to 
be noted. ^"^ In the first place, the definition of "entrusting" in subsection 
(3) covers an acquiescence of retention of possession, as well as delivery 
of goods to a merchant who did not previously possess them. This term, 
therefore, embraces the two types of situation now covered in section 
25(1) and (2) of The Sale of Goods Act.^^ Secondly, by virtue of UCC 
2-403(2), it is not a necessary requirement that the goods should have 
been entrusted to the bailee in his capacity as a merchant. What is im- 
portant is that the bailee should occupy the position of merchant, and that 
he should purport to dispose of the goods entrusted to him in the ordinary 
course of his business. 

This reading does not emerge clearly from the literal wording of 
UCC 2-403(2). It is, however, the meaning ascribed to it by influential 
commentators, ^9 and is supported in part by Comment 2 to the section. ^^ 
It will, therefore, be seen that the adoption in Ontario of this provision 
could considerably enlarge the existing statutory exceptions to the nemo 
dat rule, and could also change the basis upon which protection is af- 



87For more detailed discussions, see, NYLRC Study, ch. 5, footnote 52, supra, 
pp. (458)-(460); Duesenberg and King, footnote 21 supra, pp. 10-51 et scq. 

88The Uniform Sales Act, s. 25, contained a provision equivalent to s. 25(1) of 
the U.K. Act, but no provision comparable to s. 25(2). Article 2 of the Code 
has neither, but makes do with the entrustment provision in UCC 2-403(2). The 
rights of creditors of a seller, left in possession of goods that he has sold, are 
governed by UCC 2-402 ( 1 ). 

89See, NYLRC Study, ch. 5 footnote 52, supra; and Duesenberg and King, foot- 
note 21 supra. 

^There appears to be a paucity of cases directly on point. See, however, Litch- 
field V. Dueitt (1971), 245 So. 2d. 190 (Miss. Sup. Ct.); Linwood Harvestore, 
Inc. V. Cannon (1967), 235 A 2d 377 (Pa. Sup. Ci.);Adkins v. Damron (1959), 
324 S.W. (2d) 489 ((Ky. Ct. App.), contrasting the positions under the Uniform 
Sales Act and the Code); and, compare Gallagher v. Unenrolled Motor Vessel 
River Queen (1973), 475 F. 2d 117 (5th Cir.). 



300 

forded to the buyer in ordinary course. Although we are not unanimous 
on the point,^^ a majority of us beheves that the extension can be justified. 
Assuming the retention of the nemo dat doctrine, we would so recommend. 
So far as the person buying the goods from the merchant in good faith is 
concerned, he is not aware of the circumstances under which the goods 
were entrusted to his seller. In our view, it is harsh that, as under existing 
law, he should be penalized for his ignorance. The entruster, on the other 
hand, is generally likely to know whether or not the bailee to whom he 
entrusts his goods is also engaged in the business of selling goods of that 
kind. He ought, therefore, to realize that he is running a calculated risk 
that the bailee-merchant will dishonestly dispose of the goods; although, 
in the great majority of cases, the risk will be very small. This is, we 
think, the type of case in which a simple rule is preferable to one that 
strives for perfect equity. An alternative solution, as we suggest again later, 
is to impose a bonding requirement on professional bailees. A revised 
Sale of Goods Act, is not, however, the proper home for such a require- 
ment. 

Another noteworthy feature of the Code provisions is that the pro- 
tection is limited to a "buyer in ordinary course of business". This ex- 
pression is extensively defined in UCC 1-201 (9). ^^ ^ (joes not cover 
the creation of a security interest or, read literally, any disposition falling 
short of a full transfer of title. UCC 2-403(2) and (3), therefore, depart 
significantly from the range of transactions protected by The Factors Act 
and section 25 of The Sale of Goods Act, which speak of "sale, pledge 
or other disposition". On the other hand, UCC 2-403(2) and (3) are 
consistent with the trader's provision in the now repealed Conditional 
Sales Act, and section 30(1) of The Personal Property Security Act. The 
exclusion of security transactions can, as we explain later, be justified. 
The same cannot, however, readily be said of other forms of disposition, 
such as leasing agreements, that are made in ordinary course but do not 
involve a transfer of title. Transactions of this nature are, surely, also 
entitled to protection. Should the nemo dat doctrine be retained, we would 
recommend that the protection of the provision in the revised Act com- 
parable to UCC 2-403(2) be extended to lessees in the ordinary course 
of business. ^^ 

If the revised Act were to contain a provision comparable to UCC 
2-403, consideration would have to be given to the future of The Factors 



9iOne of the Commissioners, the Honourable J. C. McRuer, dissents from this 
recommendation. His view is that such a provision would give a thief power to 
pass a good title to personal property. For example, if A left an article which 
to him was priceless, such as an antique clock or a work of art, with a merchant 
who dealt in clocks or works of art, to be cleaned or repaired, and an employee, 
either fraudulently or negligently, sold the article to a purchaser who took in 
good faith, the owner would have no recourse to recover the article. However, 
if the owner were given a right in such a case to recover the article by paying 
the purchase price paid by the holder, with a right to claim over against the 
merchant, equal justice would be done. In Mr. McRuer's view, section 6.7 of 
the Draft Bill should be deleted, and section 6.9 amended accordingly. 

92We have followed the Code definition in s. 1.1(1)5 of the Draft Bill. 
93See, Draft Bill, s. 6.7(1). 



301 

Act. There may be a substantial overlap between the two Acts, and 
The Factors Act may not be worth retaining. We have not examined 
The Factors Act in detail, and therefore are not in a position to offer a 
recommendation. If it is decided to repeal the Act, care should be taken 
to ensure that those of its features that will be helpful in complementing 
the new sales provisions are incorporated in the revised Act. We believe 
this to be particularly true of section 2(2) of The Factors Act, which deals 
with the effect of revocation by the owner of consent to possession by the 
mercantile agent. 

(d) REGISTRATION REQUIREMENTS, GRACE PERIODS, AND 
TEMPORARILY PERFECTED SECURITY INTERESTS 

The registration statutes,^"^ now largely superseded in Ontario by 
The Personal Property Security Act, are important for a number of 
reasons. First, they suggest an equitable means of reconciling the con- 
flicting interests of owners and innocent purchasers. Secondly, they raise 
the question whether registration requirements should be enlarged to 
embrace a range of transactions wider than secured transactions and 
absolute assignments of accounts caught by The Personal Property Security 
Act.^^ Thirdly, in terms of policy and drafting techniques, the registration 
statutes raise the question whether grace periods^^ and periods of tem- 
porary perfection should be permitted to prejudice the rights of innocent 
purchasers. We do not pursue the last two questions. They are currently 
being reviewed by the Advisory Committee on The Personal Property 
Security Act as part of its general review of the Act. 

As to the first question, we have earlier made reference to section 
25(3) of The Sale of Goods Act. This subsection, which has not yet been 
proclaimed in force, provides that subsection (2) of section 25 dealing 
with the protection of third parties who purchase goods from buyers in 
possession, does not apply where the buyer is in possession pursuant to 
a security agreement governed by The Personal Property Security Act. We 
have previously recommended that, should the nemo dat doctrine be 
retained, the revised Act should incorporate an expanded version of sec- 
tion 25(3). We would, however, draw attention to an important, and 
perhaps largely unavoidable, weakness in the registration mechanism of 
The Personal Property Security Act. This weakness, we might add, was 



94Namely, The Assignment of Book Debts Act, R.S.O. 1970, c. 33; The Bills of 
Sale and Chattel Mortgages Act, R.S.O. 1970, c. 45; The Bills of Sale Act, 
R.S.O. 1970, c. 44; The Conditional Sales Act, R.S.O. 1970, c. 76; and, The 
Corporation Securities Registration Act, R.S.O. 1970, c. 88. 

95Section 2. 

96That is, the period allowed a secured party to perfect his security interest before 
it can be successfully challenged. The earlier registration Acts gave rise to a 
substantial conflict of interpretation which, to some extent, may still subsist. 
See, for example, Hulbert v. Peterson (1905), 36 S.C.R. 324, followed, inter 
alia, in Reick v. Neeh, [1948] O.R. 459 (C.A.); Klimove v. General Motors 
Acceptance Corp. (1955), 14 W.W.R. (N.S.) 463 (Alta. S.C, App. Div.); and. 
Re Union Acceptance Corp. Ltd. (1955), 14 W.W.R. (N.S.) 703 (Alta. S.C, 
Tr. Div.). (The Hulbert case was distinguished in Re Traders Finance Corp. 
(1954), 12 W.W.R. (N.S.) 546 (Alta. Dist. Ct.)); and Industrial Acceptance 
Corp. Ltd. V. Munro and Parker, [1950] O.R. 130 (H.C.J.) . 



302 

also shared by its predecessors. With one exception relating to motor 
vehicles classified as consumer goods,^'' the financing statement is regis- 
tered, not against the collateral, but under the name of the debtor. If, 
therefore, the collateral has passed through a succession of hands, it is 
quite possible that a search against its present owner will fail to disclose 
a security interest granted by a previous owner. The problem is particu- 
larly acute in the case of non-consumer motor vehicles. 

As long ago as 1955, a Select Committee of the Ontario Legislature 
recommended the adoption of a certificate of title law for motor vehicles, 
and actually drafted a bill.^^ The project did not proceed and, we under- 
stand, is not likely to be revived. Happily, a compromise solution has been 
found under The Personal Property Security Act in the case of security 
interests in those motor vehicles classified as consumer goods. In such 
cases, the financing statement must describe the vehicle and must also 
provide its serial number.^^ Moreover, since 1977, it has been possible 
to search for security interests against such a vehicle by providing its 
description. Although these developments represent a marked improve- 
ment, there is still an important gap. The mandatory requirements do not 
apply to non-consumer vehicles. ^^^ It is, therefore, entirely possible that a 
search against a vehicle currently used for consumer purposes may not 
disclose a valid security interest because the vehicle was previously used 
for non-consumer purposes. We appreciate the difficulty of imposing 
description requirements for all vehicles serving as collateral under the 
Act,^oi and we know that there is an awareness of this problem. We urge, 
however, that the search for an acceptable solution be continued. ^^^ 



(e) THE BILLS OF SALE ACT 



103 



When The Personal Property Security Act was proclaimed in April 
1976, The Bills of Sale and Chattel Mortgages Act was repealed, and 
The Bills of Sale Act took its place. This Act provides, ^^"^ inter alia, that 
every sale of goods, not accompanied by an immediate delivery and fol- 



97See, O. Reg. 879/75, s. 3 (2) (a). 

98See, Select Committee on Central Registration of Documents of Title and Pledge 
Respecting Chattels and Certificates of Title of Ownership of Motor Vehicles, 
Report to the Ontario Legislature (Queen's Printer, 1955 and 1956). For 
further details see, Goode & Zeigel, Hire-Purchase and Conditional Sale: A 
Comparative Survey of Commonwealth and American Law (1965), pp. 166- 
68. 

^^Supra, footnote 97. 

lOOA secured party may, however, voluntarily provide such information on the 
financing statement, and it will then be recorded in the system: see, footnote 97 
supra, s. 3(2) (b). 

lOiThe difficulty arises principally in inventory financing arrangements and in 
equipment financing agreements with an after-acquired property clause. In both 
of these cases, the inventory of vehicles serving as collateral will fluctuate 
widely from time to time and cannot be identified at the time of the agreement. 

I02if the problem is sufficiently serious, one possibility would be to extend the 
scope of the assurance fund. Another would be to provide special protection 
for consumer buyers of such vehicles. These are, however, only suggestions, and 
should not be construed as recommendations on our part. 

103R.S.O. 1970, c. 44, as am. 

i04See, section 3. 



303 

lowed by an actual and continued change of possession of the goods sold, 
is void as against creditors of the seller and subsequent buyers and mort- 
gagees in good faith, unless the sale is evidenced by a bill of sale that is 
registered in accordance with the requirements of the Act. The question 
that requires consideration is whether this Act is still needed, or whether 
it has outlived its usefulness. 

Hostility towards secret bills of sale not accompanied by possession 
of the goods goes back to Lord Coke's day.^^^ Creditors saw them as 
transactions contrived to deny creditors their just claims and to conceal 
the grantor's precarious financial position. ^^^ Many American state courts 
treated secret bills of sale as conclusively or presumptively fraudulent. 
Many more common law jurisdictions adopted legislation requiring the 
registration of absolute and conditional bills of sale, on pain of avoidance 
if they were not registered. Ontario adopted a registration requirement 
for conditional bills of sale (that is, chattel mortgages) as early as 1849, 
and extended this requirement to absolute bills in 1850.^^"^ Until its repeal 
in 1976, The Bills of Sale and Chattel Mortgages Act covered both 
chattel mortgages and absolute sales. The Personal Property Security Act 
was only intended, with minor exceptions, to apply to security interests 
in personal property and fixtures. Hence, absolute sales, whether or not 
the seller remains in possession of the goods, are outside the Act and 
continue to be governed by The Bills of Sale Act. 

The question whether The Bills of Sale Act should be repealed is not 
a new one. It was considered by the Advisory Committee on The Personal 
Property Security Act before The Bills of Sale Act was proclaimed. The 
Committee advised against its proclamation. ^^^ However, an ad hoc Com- 
mittee of the Commercial Law Subsection of the Ontario Branch of the 
Canadian Bar Association, whose views were also solicited, reached the 
opposite conclusion. 1^^ In the result, the Act was proclaimed. The reasons 
advanced by the ad hoc Committee of the Bar Association were unusual. 
It wished to retain the Act, not so much for the protection of creditors 
and other third parties dealing with the seller in possession, but to protect 
the buyer out of possession against the effect of section 25(1) of The 
Sale of Goods Act. The Committee apparently made the possibly unwar- 
ranted assumption that registration of a bill of sale would constitute con- 



i05See, Twyne's Case (1613), 3 Coke 80b, 76 E.R. 809 (K.B.). 

i06Compare, Cookson v. Swire (1884), 9 A.C. 653 (H.L.), at pp. 664-65. 

107(1850), 13 & 14 Vict., c. 62 (Can.). The two Acts were consolidated in 1857 
by An Act to Amend the Statutes of this Province Respecting Mortgages and 
Sales of Property, and to Consolidate the Same (1857), 20 Vict., c. 3 (Can.). 
There are, and apparently have been from the beginning, important differences 
between the Ontario legislation and the U.K. Bills of Sale Acts. In particular 
the U.K. Acts do not apply to oral sales or to sales made in the ordinary 
course of business: see, (1878), 41 & 42 Vict., c. 31 (U.K.), s. 4; (1882), 45 & 
46 Vict., c. 43, s. 9. 

i08So far as we are aware, the Committee's opinion was not made public. 

^^^Report of ad hoc Committee of Commercial Law Subsection of Canadian Bar 
Association (Unpublished, March 11, 1977). 



304 

structive notice of the buyer's title. We sympathize with the Committee's 
concerns, but feel that these concerns can be met much more simply than 
by retention of the cumbersome machinery of The Bills of Sale Act. 

The inquiries of our Research Team have shown that the registration 
requirements of The Bills of Sale Act are widely ignored. In the summer 
of 1976, for example, only about 110 bills of sale were being registered 
monthly in Toronto, although the number of sales technically subject to 
the Act must have been much larger. The number of searches was equally 
modest: about 15 a week compared with a daily figure of 250 Personal 
Property Security Act searches channeled through the Toronto registry. 
It seems reasonable to conclude, therefore, that The Bills of Sale Act has 
lost most of its practical significance. This impression is confirmed by 
several trustees in bankruptcy with whom the Research Team has discus- 
sed the question. Commercial transactions have changed significantly since 
the last century, and it is no longer unusual for a seller to remain in pos- 
session of the goods for at least a short period before they are delivered 
to the buyer. The Research Team's inquiries have revealed no opposition 
among trustees in bankruptcy or lenders to repeal of The Bills of Sale Act. 
In our view the Act may safely be repealed, and we so recommend. 

This recommendation still leaves at large the concern of the ad hoc 
Canadian Bar Association Committee. We believe this concern to be 
legitimate. We have earher approved the approach adopted in section 
25(3) of the existing Sale of Goods Act, which enables conditional sellers 
to protect themselves against the effects of section 25(2) of The Sale of 
Goods Act by perfecting their security interest pursuant to The Personal 
Property Security Act. There is no good reason, in our view, why similar 
protection should be denied to buyers out of possession. Admittedly, this 
will impose an obHgation on third parties dealing with the seller in pos- 
session to search the personal property security register for outstanding 
interests; but they would have to do this in any event with respect to 
existing security interests. 

Assuming retention of the nemo dat doctrine, therefore, and assum- 
ing, also, repeal of The Bills of Sale Act, we recommend^^^ that the pro- 
visions of the section in the revised Act comparable to section 25 of the 
existing Act should not apply to security interests governed by The Per- 
sonal Property Security Act.^^^ Nor should this section apply where, prior 
to the disposition by a seller or buyer in possession, a notice in the 
prescribed form has been registered under The Personal Property Security 



iioSee, Draft Bill, s. 6.6(3) (a). 

iiir/je Personal Property Security Act would clearly apply where the buyer is in 
possession of the goods pursuant to a security agreement, typically a conditional 
sale agreement. Theoretically, the Act could also apply where a seller purports 
to give a security interest in goods being manufactured by him, before title is 
deemed to pass, to a buyer who wishes to obtain some security for advance 
payment. To cover this type of situation, however rare it is likely to be in 
practice, section 6.6(3) (a) of our Draft Bill refers to a security interest created 
in favour of a buyer or seller. On the problems of the buyer out of possession 
who makes advance payment, see, further, infra, ch. 17. 



305 

Act.^^^ It should be clearly understood, however, that, pursuant to our 
recommendation concerning entrustment of goods to a merchant, filing 
of such a notice will not assist the buyer out of possession, where the seller 
re-sells the goods in the ordinary course of his business. ^^^ 

(f) SOME TENTATIVE CONCLUSIONS 

It may be useful at this point to abstract some general principles 
from the congeries of exceptions to the nemo dat rule in Ontario law 
discussed in the preceding pages. The following conclusions appear to 
be warranted. 

( 1 ) None of the exceptions purports to protect the purchaser of lost 
or stolen goods. 

(2) There is a clear trend in favour of a limited market overt prin- 
ciple: that is, where goods are sold in ordinary course by a 
person to whom they have been entrusted by their rightful owner, 
or where such goods are subject to a security interest created by 
the seller. 

(3) Principles of neghgence or the absence of due care appear so far 
to have played no role in the resolution of ownership conflicts 
arising solely from the entrustment of goods. 

(4) The only exceptions that support the adoption of a general pos- 
session vaut titre principle are those represented by section 25(1) 
and (2) of The Sale of Goods Act. But there is little evidence 
that the U.K. Parliament, in enacting section 25 of the Sale of 
Goods Act, 1893, consciously leaned towards the civihan model. 
Even if there were such evidence, it would be difficult to justify 
restricting the principle to goods left in the possession of a buyer 
or seller. 

(5) Through the generous use of registration requirements, Ontario 
law has evinced a clear policy of favouring a middle ground. 
The middle ground is, at least in theory, designed to provide 
third parties with reasonable means of protection, without ex- 
posing owners and secured parties to the hazards of the insol- 
vency or dishonesty of the persons to whom they entrust their 
goods. The question left unanswered concerns the policy that 
should be adopted in those cases where a registration require- 
ment is not practicable. 



ii2See, Draft Bill, s. 6.6(3) (b). It will be observed that section 6.6(3) (b) pro- 
vides for the filing of a notice under The Personal Property Security Act 
without distinguishing between a buyer or seller out of possession. We have 
thought it desirable to extend this facility to both buyers and sellers out of 
possession because, in view of our recommendations, there may be circum- 
stances in which the buyer in possession will not be a debtor within the mean- 
ing of The Personal Property Security Act, and that Act will not apply. This 
will be true, for example, where the buyer is merely a "prospective" buyer, who 
holds goods on approval or whose offer to buy is subject to acceptance or the 
fulfilment of some other condition. 

ii3See the opening words of our Draft Bill, s. 6.7(1), "Notwithstanding section 
6.6 . . .". 



306 

We proceed now to discuss the basic changes that should be made in the 
above framework, either by extending, or by narrowing, the existing ex- 
ceptions to the nemo dat rule. 

3. Should Ontario Adopt a General Possession Vaut Titre Rule? 

(a) the civil law position^^^ 

When reform of the law is contemplated, one obvious alternative 
is to strive for greater simplicity in the current position. This could be 
accomplished by replacing the nemo dat principle, and its exceptions, by 
the principle found in many civil law jurisdictions that a person in pos- 
session of goods can confer a better title to them than he himself has. 
This is the principle that is enshrined in Article 2279 of the Napoleonic 
Civil Code,^^^ and that has been adopted by a large number of civil law 
countries. The most significant difference between these jurisdictions is in 
the extent to which they apply the principle to lost or stolen goods. In 
French law,^^^ the owner is generally entitled to recover lost or stolen 
goods, except where the goods have been purchased by a third party at a 
fair or market, at a public sale, or from a merchant dealing in goods of 
that description. In such a case, the owner can only reclaim the goods 
upon reimbursing the good faith purchaser the price paid by him for the 
goods. The possession vaut titre principle is also the basis of a draft uni- 
form law on the protection of the bona fide purchaser of corporeal mov- 
ables in international transactions, adopted by UNIDROIT in 1974.^1"^ 

On the other hand, the scope of the possession vaut titre principle has 
been substantially reduced in the Quebec Civil Code. The principle only 
applies in the case of goods bought in good faith at a fair or market, at a 
public sale, or from a trader deaHng in similar articles, and "in commer- 
cial matters generally". ^^^ In other cases, the possession of goods merely 
creates a rebuttable presumption of title. ^^^ The Quebec provisions follow 
French law with respect to the owner's right to recover lost or stolen 
goods. ^20 These aspects of the Civil Code have been intensively examined 
by the Civil Code Revision Office and its committees, ^^i and they may 
therefore be changed when a new Civil Code is adopted in Quebec. 



114A brief description of the civil law position appears in Sauveplanne, "La 
Protection de I'Acquereur de Bonne Foi d'Objets Mobiliers Corporels" in 
UNIDROIT, Unification of Law Yearbook 1961 (1962), pp. 43 et seq. See 
also Franklin, "Security of Acquisition and of Transaction: La Possession Vaut 
Titre and Bona Fide Purchase" (1932), 6 Tul. L. Rev. 589. 

iisjhat is, "en fait de meubles, possession vaut titre". See, supra, footnote 16. 

ll6Code Civil, Arts. 2279-2280. 

^^iReport by the Secretariat of UNIDROIT on the 3rd Session (July, 1974), 
Study XLV, Doc. 56. We are indebted to M. Michel Hetu of the Federal 
Department of Justice for providing us with a copy of this and other UNI- 
DROIT documents relating to the project. 

ii8Que. C. Civ., art. 2268, para. 3; and compare, art. 1488. 

119/^/W., art. 2268, para. 1. 

120//,/^., art. 1489, and art. 2268, para. 4. 

121 For example. Civil Code Revision Office, Report on Sale (1975), Report No. 
XXXI, pp. 37, 69. Substantial changes appear to be envisaged in the revised 
Civil Code: see, Civil Code Revision Office, Report on the Quebec Civil Code 
(1977), Vol. I, pp. 392, 561, and Vol. II, pp. 696, 915-16. 



307 

(b) ARGUMENTS FOR AND AGAINST THE ADOPTION OF THE 
POSSESSION VAUT TITRE RULE IN ONTARIO 

As previously noted, existing provisions of The Factors Act and 
The Personal Property Security Act, as well as a substantial body of case 
law, already favour a specialized aspect of the possession vaut titre rule 
(that is, a limited market overt principle) where goods are entrusted to a 
person who disposes of them in the ordinary course of his business. So 
too, we have seen that UCC 2-403(2) has adopted and restated the 
entrustment rule, but in somewhat broader language. It should also be 
noted that the English Law Reform Committee^^^ favoured the abolition 
of the market overt rule, which is part of English law, and its replacement 
by a new provision protecting good faith purchasers of goods bought in 
ordinary course at retail premises. This recommendation is not restricted 
to goods entrusted by the owner to a merchant, but it will, of course, in- 
clude such situations. 

The essential issue, therefore, is whether the mercantile rule should 
be extended to cover all forms of entrustment of goods, whether to a 
merchant or any other kind of person. The Law Reform Committee was 
opposed to such an extension because of the hardship it would cause to 
bailors who might not appreciate the risks they were running in entrusting 
their goods to a non-merchant bailee. To quote the Committee i^^^ 

... it would have repercussions on a large variety of transactions 
of daily occurrence, such as the sending of goods to the laundry 
or the deposit of luggage in a station cloakroom, and we think it 
would generally be regarded as unsatisfactory if in cases of this kind 
the interests of the true owner were to be subordinated to those of 
the purchaser from the bailee. 

We have reached the same conclusion as the Committee, but on some- 
what broader grounds. 

In the first place, we are not satisfied that a persuasive case has been 
advanced for making the entruster of goods to a non-merchant an insurer 
of the bailee's honesty, assuming that the owner has exercised reasonable 
care in the entrustment of his goods. The position is not the same as in the 
entrustment of goods to a merchant. The merchant is invested with an 
ostensible authority to deal with the goods, and it has generally been as- 
sumed that it would seriously impede the security of transactions to expect 
a buyer in ordinary course to investigate the origin of the goods and the 
merchant's authority to deal with them. These considerations do not apply 
in the case of entrustment of goods to non-merchants. There is no holding 
out by the owner, and commerce is not impeded. Admittedly, the third 
party may suffer a loss, but the loss derives from the fact that he thought 
he was dealing with an honest seller. At best the equities are even, and 
the loss should be divided equally between the owner and the third party, 
excluding, once again, any issue of negligence. However, apportionment 



1225'wpra, footnote 20, paras. 30-35. 
l23//,/j., para. 29. 



308 

principles have so far found little support in title cases v/here both parties 
are equally innocent. 

Secondly, we have found no significant support in favour of a general 
adoption of the civil law principle; nor do we know enough about its 
practical operation in those jurisdictions that have adopted this principle. 
Finally, there is no evidence that conversions by simple bailees constitute 
a significant problem. ^^"^ Other than in a business context, it is not cus- 
tomary to entrust valuable goods to complete strangers. If the bailee has a 
fixed place of business — a warehouseman, for example, or a drycleaner 
— he has little to gain by becoming dishonest. He can be caught too 
easily. Moreover, the goods are frequently of a used character, and have 
no ready market. To the extent that there is a serious risk that a profes- 
sional bailee will dishonestly dispose of the goods, a preferable route would 
be to protect both the owner and the third party by imposing licensing 
or bonding requirements, or both. 

There is one possible qualification to the above observations. This 
quaHfication concerns goods, particularly motor vehicles, entrusted under 
a conditional sale or other form of security agreement to a buyer who 
wrongfully disposes of the goods, within or outside the province of original 
purchase, without disclosing the outstanding security interest. Such trans- 
actions are covered by the registration requirements of The Personal 
Property Security Act}'^^ It may be that third parties are not always suf- 
ficiently aware of the need to search for liens and that, as previously 
discussed, the registration mechanism may need improvement. In any 
event, we do not think this particular problem provides sufficient justifica- 
tion for any general reversal of the nemo dat doctrine. Rather, it should 
be resolved within the context of The Personal Property Security Act. 

4. Rejection of Possession Vaut Titre; Affirmation of Nemo Dat 

Having rejected a general possession vaut titre rule, we are of the 
view that the basic nemo dat doctrine should be affirmed. The existing 
exceptions to the nemo dat doctrine found in sections 22, 24, and 25 of 
The Sale of Goods Act should be retained, subject to the expansion of 
one of the exceptions in section 22, and subject, also, to the removal of 
anomalies and technical difficulties set out in detail in section 2 of this 
chapter. Moreover, as we have indicated, a new exception along the lines 
of UCC 2-403(2) and (3) should be created in the case of entrustment 
of goods to a merchant who deals in goods of the kind entrusted. 

We discuss these conclusions and some of the issues raised in section 
2 of this chapter at greater length below. In addition, our detailed recom- 



i24We are aware, of course, that there is a high incidence of theft (in the common 
law sense, as opposed to the definition in section 283 of the Canadian Criminal 
Code) of goods of many kinds. For example, the Metropolitan Toronto Police 
Annual Statistical Report (1973), indicates that in 1973, 6714 automobiles and 
trucks, 359 motorcycles and snow vehicles, and 8219 bicycles were stolen in 
Toronto. But this has no bearing on the allocation of risk arising from the 
entrustment of goods, and raises an entirely different issue. 

i25See, R.S.O. 1970, c. 344 as am., ss. 6, 7. 



309 

mendations are set out in our summary of recommendations at the end 
of this chapter. 

(a) SALES UNDER A VOIDABLE TITLE 

We are of the view that the exception to the nemo dat doctrine con- 
tained in section 24 of the existing Sale of Goods Act should be carried 
forward into the revised Act. In section 2(a) of this chapter we discussed 
the problems relating to this exception. Having decided that the nemo 
dat doctrine should be retained, we adopt the recommendations previously 
made with respect to the abolition of the distinction between void and 
voidable titles and with respect to the avoidance of the contract of sale 
by the owner of the goods. ^^^ 

(b) SHOULD SECTION 25 OF THE SALE OF GOODS ACT BE REPEALED? 

If one rejects the general adoption of a possession vaut titre principle 
where goods are entrusted to or retained by a non-merchant, it may 
appear anomalous to retain section 25 of The Sale of Goods Act, which 
deals with goods held by a seller or buyer and which, essentially, reflects 
the possession vaut titre principle. Nevertheless, after careful considera- 
tion, we have decided to recommend that the revised Act should contain 
a provision comparable to section 25 of the existing Act. Such a pro- 
vision would, of course, incorporate the recommendations of a technical 
nature that have been made in section 2(b) of this chapter. 

Our reasons for recommending the incorporation in the revised Act 
of a provision comparable to section 25 are several. Section 25 has been 
part of our law for over fifty years. The protection of good faith purchasers 
from a seller in possession goes back even farther, and has been a feature 
of Ontario's Bills of Sale legislation for over a hundred years. Moreover, 
in accordance with our earlier proposals, the seller or buyer out of 
possession, as the case may be, will be able to protect himself by filing 
under The Personal Property Security Act. Further, there is a widely per- 
ceived difference between entrusting goods to a simple bailee, and entrust- 
ing them to a person who was their owner or is expected to become their 
owner under the terms of the entrustment. 

We recognize, however, that if compromise and tradition dictate the 
retention of section 25, the restriction of section 25(2) to a buyer in 
possession, in the strict sense of the term, should be relaxed in favour of 
prospective buyers; that is, those persons who, under the terms of the 
agreement, have an option, or have offered, to buy the goods. We so 
recommend. ^2"^ For this purpose, "prospective buyer" should be defined 
in the following way: (a) as a person who receives the goods under a 
sale on approval or contract of sale or return, ^^8 qj- y^\^\^ ^^ option to 
purchase;^^^ and, (b) as a person whose offer to buy the goods has been 



i26See, Draft Bill, ss. 6.5 and 6.8. 
l27See, Draft Bill, s. 6.6(1), (2) and (4). 

l28For the existing position, see supra, this chapter, section 2(b)(6). 
l29Compare, The Conditional Sales Act (now repealed), ss. 1(d), 2(2), which 
also applied to bailments with an option to purchase. 



310 

accepted, subject to the approval of a third person or the fulfillment of 
some other condition.' ^^ These extensions appear to be so closely related 
to a contract of sale that they ought reasonably to be embraced by the 
underlying policy of section 25. 

(C) SHOULD OWNERS OF GOODS BE SUBJECT TO A DUTY OF 

REASONABLE CARE WITH RESPECT TO THEIR ENTRUSTMENT? 

We have rejected the adoption of a general possession vaut litre 
principle. This rejection does not, however, answer the question whether, 
where a third party cannot rely on one of the exceptions to the nemo dat 
rule, an owner should be precluded from asserting his title where he has 
been negligent in the entrustment of his goods. In Ingram v. Little }^^ 
Devhn, L.J., suggested such an approach, 1^2 although it is not clear whether 
he would restrict the duty of care to sales procured by fraudulent means. 
Assuming the principle itself to be worthy of serious consideration, how- 
ever, there does not appear to be any justification for restricting the duty 
to these types of entrustment and purchase. 

We believe an owner of goods ought to be under a duty of reason- 
able care in respect of their entrustment. '^^ Conduct precluding an owner 
from asserting his title is already recognized in section 22 of The Sale of 
Goods Act, although, until now, this provision has been construed very 
narrowly by the courts. '^4 Again, a duty of care has been accepted by 
the courts, in at least some circumstances, with respect to the execution 
of negotiable instruments. ^^^ This duty was extended, albeit very cau- 
tiously, to the entrustment of other types of instrument in Mercantile Credit 
Co. Ltd. V. HamblinP^ and was given strong approval by the House of 
Lx)rds in Saunders v. Anglia Building Society^^'^ with respect to a plea of 
non est factum. We see no good reason why, in the modern milieu, the 
duty should be restricted to the execution and transfer of documents. 
Nor do we believe that the imposition of a duty of care would impose 
unreasonable burdens on owners and purchasers of goods. We are not of 
the view that breach of such a duty should result in an owner being held 
liable in damages for failing to exercise reasonable care.^^s j^ j^ surely a 



130 As illustrated, in the context of a hire-purchase agreement, by Central Newbury 
Car Auctions Ltd. v. Unity Finance Ltd., [1957] 1 Q.B. 371 (C.A.). 

131[1961] 1 Q.B. 31 (C.A.). 

132//,/^., at p. 73. 

I330ne of the members of the Commission, the Honourable G. A. Gale, would 
go further and would impose upon an owner of goods a duty of reasonable 
care in respect of their security. 

l34See, for example, Central Newbury Car Auctions Ltd. v. Unity Finance Ltd., 
footnote 130 supra; and, compare People's Bank of Halifax v. Estey (1904), 
34 S.C.R. 429. See, further, Fridman, Sale of Goods in Canada (1973), pp. 
117-22; and, Benjamin's Sale of Goods (1974), paras. 464-73. 

l35See, for example, Foster v. Mackinnon (1869), L.R. 4 C.P. 704; Young v. 
Grote (1827), 4 Ring. 253, 130 E.R. 764 (C.P.); London Joint Stock Bank Ltd. 
V. Macmillan, [1918] A.C. 777 (H.L.); Wilson and Meeson (a Firm) v. Picker- 
ing, [1946] K.B. 422 (C.A.), at p. 425. 

136[1965] 2 Q.B. 242 (CA.); Benjamin's Sale of Goods (1974), paras. 470-71. 

137[1971] A.C. 1004 (H.L.). 

l38Compare, Saunders v. Anglia Building Society, footnote 137 supra, per Lord 
Wilberforce at p. 1026. 



311 

much less radical proposition to preclude an owner from recovering a 
chattel, or its value, in the hands of an innocent purchaser, when he has 
been responsible for his own loss. Of course, the law should be even- 
handed. The purchaser, as well as the owner, should be subject to a duty 
of care, but with this difference: the onus of showing his own care and 
good faith and of proving the owner's negligence should rest on the pur- 
chaser. Members of the Commission are equally divided'^^ on the question 
whether, where both the owner and the purchaser have failed to exercise 
reasonable care, the court should be empowered to allocate the loss 
between them, and to make such other order with respect to the goods 
as is fair in the circumstances. Accordingly, although the Draft Bill con- 
tains a provision^"^^ permitting the court to allocate the loss, we make no 
recommendation concerning the desirability of its adoption in the revised 
Act. 

What causes us concern is the potential encouragement to litigation, 
and the difficult factual and legal issues that may require resolution, where 
goods have passed through a succession of hands. It was these appre- 
hensions that persuaded the Law Reform Committee^'^i to reject Devlin, 
L.J.'s suggestion. While not wishing to ignore these difficulties, it may be 
that the Committee has unduly magnified them. Complex litigation in- 
volving questions of title is not unknown under the existing rules, and it 
seems unlikely that a defendant who has acquired converted goods will 
embark lightly upon an expensive defence unless he has a strong case. The 
double onus of proof that he will be called upon to discharge, coupled 
with the court's traditionally favoured disposition towards dispossessed 
owners, will act as additional deterrents. 

Accordingly we recommend that the exception to the nemo dat doc- 
trine now recognized in section 22 of The Sale of Goods Act in the case 
of conduct by the owner of goods precluding him from denying the 
authority of the person in possession to sell the goods, should be broadened 
to include cases where the owner has failed to exercise reasonable care 
in the entrustment of the goods, ^"^^ ^nd the buyer has exercised reasonable 
care in buying the goods and has acted in good faith. ^"^^ 

(d) ENTRUSTMENT OF GOODS TO A MERCHANT, OR ADOPTION OF A 
GENERAL MARKET OVERT RULE WITH RESPECT TO SALES MADE 
AT RETAIL PREMISES 

We have previously expressed our support for a mercantile principle 
of possession vaut litre couched in language along the lines of UCC 2-403 
(2). 144 jt would involve some extension of the existing law, but not, we 
think, a very serious one. 



i39The Honourable G. A. Gale, Mr. W. Gibson Gray, and the Honourable J. C. 

McRuer are opposed to such a provision. 
i40See, Draft Bill, s. 6.4(3). 
1415'Mpra, footnote 20, paras. 9 et seq. 
l42See, supra, footnote 133. 
i43See, Draft Bill, s. 6.4(2). 
^^Supra, this chapter, sec. 2(c). 



312 

The English Law Reform Committee apparently accepted the same 
principle as part of its wider proposal concerning sales at retail premises, 
but with one important restriction. A majority of the Committee recom- 
mendedi45 that section 22(1) of the U.K. Sale of Goods Act^"^^ should 
be replaced by a provision to the effect that a person who buys goods by 
retail at trade premises or by public auction acquires a good title, provided 
he buys in good faith and without notice of any defect or want of title 
on the part of the apparent owner. The Committee recommended that 
"trade premises" should be defined^'^'^ as "premises open to the public at 
which goods of the same or a similar description to those sold are 
normally offered for sale by retail in the course of business carried on at 
those premises". It would therefore appear that a wide range of commer- 
cial transactions would be excluded from the Committee's recommenda- 
tion. The Committee offered no reason for excluding such transactions, 
other than the common law concept of "market overt". In our view, the 
proposal of the Committee restricting protection to those who purchase 
at retail premises would create a new set of anomalies. We do not, there- 
fore, favour this approach. Accordingly, we recommend^"^^ that the revised 
Act contain an additional exception to the nemo dat rule, along the lines 
of UCC 2-403(2) and (3), in the case of entrustment of goods to a 
merchant. Our Draft Bill so provides. ^"^^ In light of this recommendation 
it will be necessary, as mentioned earlier,^^^ to review The Factors Act with 
a view to determining the desirability of its retention. We so recommend. 

A second aspect of the recommendation of the English Law Reform 
Committee concerns the sale of lost or stolen goods. As will have been 
noted, UCC 2-403(2) is based on a concept of entrustment, not on a 
principle of market overt, and therefore does not apply where the goods 
sold by the merchant are stolen from, or lost by, the owner. On the other 
hand, the recommendation of the Law Reform Committee to extend 
the concept of market overt to sales at retail premises would include the 
sale of lost or stolen goods. The civil law jurisdictions that have adopted 
the possession vaut titre principle are divided on this issue. ^^^ Apparently 
only Italy fully protects the bona fide purchaser against the owner's claim. 
France and Quebec and other Civil Code systems that follow the Na- 



^^^ Supra, footnote 20, para. 33. 
i46Section 22 reads as follows: 

(1) Where goods are sold in market overt, according to the usage of the 
market, the buyer acquires a good title to the goods, provided he buys 
them in good faith and without notice of any defect or want of title 
on the part of the seller. 

(2) Repealed. 

(3) The provisions of this section do not apply to Scotland. 

As previously noted, the doctrine of market overt does not obtain in Ontario. 

^'^'^Supra, footnote 20, p. 14, para. 33. 

i48As indicated, the Honourable J. C. McRuer dissents from this recommendation. 
See, supra, this ch., footnote 91. 

l49See, Draft Bill, s. 6.7. 

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

isiDiscussion of these divisions may be found in Sauveplanne, footnote 114 
supra; Committee of Governmental Experts to Examine the Draft on the Pro- 
tection of the Bona Fide Purchaser; Report by the Secretariat of UNIDROIT 
on the 3rd Session (July, 1974), Study XLV, Doc. 56. 



313 

poleonic model entitle the owner to recover the goods in the hands of a 
bona fide purchaser; but the owner is obhged to reimburse the purchaser 
the price he paid for the goods, if the purchaser bought the goods from a 
merchant acting in ordinary course, or in a similar commercial context. 
The status of stolen goods attracted intensive discussion among the Com- 
mittee of Experts considering the draft Uniform International Law on the 
Protection of the Bona Fide Purchaser. '^^ xhe original draft made no 
exception to the possession vaut titre principle for stolen goods. The June 
1974 version reversed the position; a majority of the delegates were appre- 
hensive that an unquaHfied principle might encourage trafficking in stolen 
goods, particularly works of art. As a result. Article II of the final text 
provides that the "transferee of stolen movables cannot invoke his good 
faith". 

Given the divided voices within the civilian world, it is a little sur- 
prising that the English Law Reform Committee should have voted in 
favour of extending its modernized market overt concept to stolen goods. ^^^ 
It seems to us to be difficult to justify the proposal, and it is open to a 
large number of objections. ^^"^ Ontario has never adopted the market overt 
principle, even in its restricted common law form, and it would be anoma- 
lous if the Province were now to embrace it on a much more extended 
basis. We do not, therefore, recommend adoption of the Committee's 
proposal. 

(e) RESIDUAL QUESTIONS 

We consider three such questions. The first question deals with 
recovery of goods by their owner upon reimbursement of the purchaser. 
The second question is concerned with the categories of person who 
should be protected by the entrustment provision in the revised Act and 
the provision comparable to section 25. The third question concerns the 
effect of revocation of consent by the owner of goods to possession of 
the goods by a buyer or seller in possession or by a merchant to whom 
the goods have been entrusted. 

The first question may be phrased in this way. Assume that an 
owner has been deprived of title to his goods because of one of the ex- 
ceptions to the nemo dat rule. Should he be entitled to recover the goods 
upon reimbursing the third party the price or other consideration given 
for the goods? As has been noted, ^^^ such a principle is recognized in 



l52Committee of Governmental Experts, supra, at pp. 16 et seq. 

i53Lord Donovan strongly dissented from the majority recommendation on the 
ground that it would encourage trafficking in stolen goods: see, supra, footnote 
20, at pp. 18-19. 

l54rs[o convincing need has been shown for such a broad rule. Further, it is pos- 
sible that such a rule might encourage receipt of stolen goods. Moreover, while 
appropriate to an era when merchants moved about the country, the rule is 
questionable now that merchants have permanent places of business. See Hahlo, 
Memorandum for Civil Code Revision Office, Quebec, (21 July 1972), at pp. 
13-15 and 26-29. (We are indebted to Professor P.-A. Crepeau, Chairman of the 
Office, for giving us access to the memorandum and for permitting us to refer 
to it.) 

^^^Supra, text to footnotes 114-116. 



314 

French and Quebec law in the case of lost or stolen goods acquired in 
a commercial sale. Several members of the Research Team have argued 
in favour of incorporating a similar principle in the revised Ontario Act, 
but on an enlarged basis. The argument put to us has been that an owner 
may have a particular attachment to an article, and that the third party 
will not ordinarily be prejudiced by being required to surrender the goods, 
so long as his reliance interests are protected. 

Once again, what may appear to be a simple proposition is consider- 
ably complicated by several factors. First, the goods may have passed 
through a number of hands. Secondly, the goods may have been altered 
or improved since leaving the owner's hands. While we have concluded 
that a right of recovery should be recognized, and so recommend, ^^^ we 
are of the view that, in light of the above-mentioned factors, the right 
of recovery should be subject to the following qualifications. ^^"^ The right 
of recovery should not apply where the owner originally entrusted the 
goods to a merchant who sold them in the ordinary course of his business. 
It should only apply where the court considers it fair to make such an 
order. Further, the terms of the order should be in the court's discretion, 
but in making such an order no account should be taken of any expecta- 
tion losses suffered by the third person in whose hands the goods are 
located. 

The second question that needs to be considered concerns the cate- 
gories of person who should be protected by the proposed provisions. 
Here, too, there is much room for differences of opinion. As previously 
noted, ^^^ section 25 of The Sale of Goods Act extends to a "sale, pledge 
or other disposition" of the goods by the buyer or seller in possession. 
The Code adopts a different position. A person with a voidable title has 
power to transfer a good title to a "good faith purchaser for value". The 
words "purchaser", "purchase" and "value" are widely defined in UCC 
1-201,^59 and include a taking by sale, pledge or lien and "any other 
voluntary transaction creating an interest in property". ^^^ A merchant, on 
the other hand, to whom goods have been entrusted within the meaning 
of UCC 2-403(2), can only transfer a better title than he himself has to 
"a buyer in ordinary course of business". This expression is also defined 
in the Code,^^^ and appears to mean precisely what it says. The provision 
does not embrace a pledgee or other type of lienholder.^^^ j^g supporting 
theory is, presumably, grounded on either of the following premises: 
namely, that commerce will not be impeded if lenders are required to 



i56See, Draft Bill, s. 6.9. 

i57Mr. McRuer's views are expressed in footnote 91, supra. 

^^^Supra, this chapter, section 2(b)(5). 

i59See, UCC 1-201 (32), (33) and (44). 

i^OThis accords with the common law position, and follows from the premise 
that the transferor has title, albeit a voidable title. 

16IUCC 1-201(9). 

l62Note carefully, however, that UCC 2-403(2), unlike section 25 of The Sale 
of Goods Act or section 2 of The Factors Act, does not include dealings in 
documents of title. These are governed by Article 7 which, in the case of due 
negotiation of a negotiable document of title, confers very broad protection on 
the holder: see UCC 7-502. 



315 

assume the risk of a merchant-borrower exceeding his actual authority; 
or, that lenders are in as good a position as are entrusters, or perhaps even 
better, to protect themselves against a dishonest merchant. 

We are attracted by this distinction and recommend that the persons 
to be protected in the revised Act, both for the purpose of the provision 
similar to section 25, and for the purpose of the entrustment provision, 
should be confined to buyers or lessees of the goods from the person in 
possession of them.^^^ We would include lessees, both because of the 
importance and frequency of leasing transactions in the economy of On- 
tario, and because, in our view, a lessee deserves protection as much as 
a buyer. We recognize that lenders can be misled as much as buyers or 
lessees by a false appearance of ownership. But, in our view, this is not 
sufficient justification for extending to them the protection of the recom- 
mended exceptions to the nemo dat rule. There would have to be some 
evidence that economic efficiency, or superior ability to absorb this type 
of loss, militates in favour of shifting the burden to the owner of the 
goods. In our opinion, this aspect of the nemo dat doctrine requires further 
investigation. We would, however, emphasize that the aforegoing restric- 
tions should not apply to lenders and other persons who are holders 
of negotiable documents of title. They should be as fully protected as any 
other transferee for value. 

The third question deals with the situation where an owner of goods 
revokes his consent to possession of the goods by a seller or buyer in 
possession or by a merchant to whom the goods have been entrusted. We 
have earlier recommended that a purported avoidance of a voidable con- 
tract of sale should not affect the position of a third party who purchases 
the goods in good faith from a person in possession, unless the goods are 
recovered by the owner before they have been delivered by the person in 
possession to the third party. We have also indicated our support for the 
equivalent principle enshrined in section 2(2) of The Factors Act and 
applied by the English Court of Appeal in Newtons of Wembley v. Pf^//- 
liams}^"^ We are of the view that this principle should be equally applicable 
to cases where goods have been entrusted to a merchant, or are held by a 
buyer or seller in possession. Accordingly, we recommend that, unless the 
goods are recovered by the owner before they have been delivered by the 
person in possession to the third party, the provisions of our recommended 
entrustment section and of the section in the revised Act comparable to 
section 25 of the existing Act should apply, even though the owner of the 
goods has revoked his consent to their possession by the merchant or 
seller or buyer, as the case may be.^^^ 



J63lf the distinction is adopted in the revised Act, then further thought needs to 
be given to whether it should also be extended to those claiming the goods from 
a person with a voidable title to them. While legal theory is opposed to drawing 
a distinction in such a case between different types of transferees for value, 
functionally it is difficult to justify treating such persons more favourably than 
those acquiring an interest from a seller, buyer or merchant to whom the 
goods have been entrusted in the Code sense. 

'64[1965] 1 Q.B. 560 (C.A.). 

i65See, Draft Bill, s. 6.8(b). 



316 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Sale of Goods Act should not adopt a general pos- 
session vaut titre principle. Rather, the basic nemo dat doctrine 
should be affirmed. 

2. The exceptions to the nemo dat doctrine contained in sections 
22, 24 and 25 of the existing Sale of Goods Act should be re- 
tained in the revised Act, subject to the amendments and modifi- 
cations set out below. 

'3. The nemo dat rule should not apply in the circumstances set out 
in section 22 of the existing Act. However, the exception to the 
rule now recognized in the case of conduct by the owner pre- 
cluding him from denying the authority of the person in posses- 
sion to sell the goods should be broadened to include cases where 
the owner has failed to exercise reasonable care in the entrust- 
ment of the goods and the buyer has exercised reasonable care 
in buying the goods and has acted in good faith. 

4. As under section 24 of the existing Act, a seller who has a void- 
able title to goods should be able to pass good title to a person 
who buys in good faith and without notice of the seller's defective 
title. For purposes of this exception to the nemo dat rule, the 
distinction between void and voidable titles should be abolished. 
The revised Act should, accordingly, contain a provision stating 
that a purchaser of goods shall be deemed to have a voidable 
title notwithstanding that the transferor of the goods was deceived 
as to the identity of the purchaser or the presence of some other 
mistake affecting the validity of the contract of sale, and also in 
circumstances similar to those set out in UCC 2-403(1) (b), (c) 
and (d). 

5. The revised Act should provide that, where the seller has or is 
deemed to have a voidable title, a purported avoidance of the 
contract by the owner of the goods shall have no effect on a third 
party, unless the goods are recovered by the owner before they 
are delivered to the third party by the person in possession of the 
goods. 

6. Subject to the following amendments, the revised Act should con- 
tain a provision comparable to section 25 of the existing Sale of 
Goods Act, which recognizes an exception to the nemo dat rule 
in the case of a transfer of goods, or of a document of title, by 
buyers and sellers in possession: 

(a) The power of a seller in possession to transfer a better title 
to goods than he himself has should apply whether he is, or 
continues, in possession of the goods in his capacity as seller, 
or otherwise. 



*One of the Commissioners, the Honourable G. A. Gale, would extend this 
recommendation. See, footnote 133, supra. 



317 

(b) The power of a buyer or seller in possession to transfer a 
better title than he himself has shall not apply where a 
security interest governed by The Personal Property Security 
Act has been created in the seller or buyer out of possession, 
or where, prior to the disposition to the third party, a notice 
in the prescribed form has been filed under The Personal 
Property Security Act. 

(c) The power of a buyer or seller in possession to pass a better 
title to a third person than he himself has shall be contingent 
upon his originally being in possession of the goods, or of a 
document of title thereto, with the consent of the other party 
to the transaction; and in all other respects, the conditions 
governing the dispositive powers of buyers and sellers in 
possession should be the same. 

(d) The protection of the provision in the revised Act compar- 
able to section 25 should be confined to a buyer or lessee 
who receives the goods in good faith and for value from the 
person in possession. 

(e) The scope of the provision in the revised Act comparable to 
section 25 should be enlarged to cover a prospective buyer, 
as well as an actual buyer, in possession of the goods. A 
prospective buyer should be defined to mean a person who 
receives goods under a sale on approval or contract of sale or 
return or with an option to purchase, and a person whose 
offer to buy the goods has been accepted subject to the 
approval of a third person or the fulfilment of some other 
condition. 

7. The revised Act should not incorporate a general market overt 
rule with respect to sales, including sales of lost or stolen goods, 
made at retail premises. 

The revised Act should contain a further exception to the nemo 
dat doctrine, along the lines of UCC 2-403(2), in the case of 
goods entrusted to a merchant who deals in goods of the kind 
entrusted. Any entrusting of possession of goods to a merchant 
who deals in goods of that kind should give him power to transfer 
all rights of the entruster to a buyer or lessee in the ordinary 
course of business. "Entrusting" should be defined in the revised 
Act as in UCC 2-403(3). 

9. In light of recommendation No. 8, supra, The Factors Act 
should be reviewed with a view to determining the desirability of 
its retention. 

10. The ability of a buyer or seller in possession, or of a merchant 
to whom goods have been entrusted, to pass better title than he 
himself has should apply even though the owner has revoked his 



**i 



**The Honourable J. C. McRuer dissents from the recommendation. See, footnote 
91, supra. 



318 

consent to possession of the goods by the other party, unless the 
goods are recovered by the owner before they have been delivered 
to the third party. 

***11. Except in the case of entrustment of goods to a merchant who 
deals in goods of that kind, the court should be able, where it 
considers it fair, to order that the owner of goods may recover 
the goods from the person in possession upon repaying to the 
person in possession the price paid by the person in possession 
for the goods, together with such reliance losses as the person in 
possession would otherwise suffer and as the court may order to 
be paid. 

12. The Bills of Sale Act should be repealed. 



***The Honourable J. C. McRuer dissents in part from this recommendation. See, 
footnote 91, supra. 



CHAPTER 13 



DOCUMENTS OF TITLE 



1. The Need For Comprehensive Codification 

A document of title, as commonly understood in the sales context, 
is a writing, generally issued by a person in the business of warehousing 
or transporting goods, purporting to cover goods in his possession, and 
entitling the holder of the writing to deal with the goods. ^ There are two 
kinds of documents of title: (1) a bill of lading, being an acknowledgment 
by a carrier that the goods have been received for carriage; and (2) a 
warehouse receipt, being an acknowledgment by a bailee that goods have 
been received for storage. Documents of title are comparable to bills of 
exchange, notes and cheques in that, in the ordinary course of commerce, 
the rights represented by the document can be transferred by transferring 
possession of the document itself, with any necessary endorsement. They 
are also similar in that a bill, note or cheque represents the right to receive 
payment, while a document of title represents the right to receive posses- 
sion of goods. However, the comparison is not exact. The incidents at- 
tached to bills, notes and cheques are clearly established as a result of 
comprehensive federal legislation, while the incidents attached to docu- 
ments of title are less clear. Moreover, both at common law and under the 
relevant statutes, there are important differences in these incidents. 

We have not undertaken an exhaustive examination of the law relat- 
ing to documents of title, but their role cannot be ignored. They are 
mentioned in several sections of the existing Sale of Goods Act^ and affect 
some basic issues of sales law. These issues include the effect of documents 
of title on the following: (1) the passing of title and risk between seller 
and buyer; (2) the seller's delivery obligations; (3) the seller's remedies; 
and, (4) the operation of the nemo dat rule and the statutory protection 
given to innocent third parties. In examining these issues we have encount- 
ered two basic difficulties with the existing law. The first difficulty is the 
lack of codification of the law relating to documents of title in Ontario. 
The second difficulty concerns the nature of the legislative changes that 
have been made to the common law. 

As to the first diflficulty, there is, as stated, no modern comprehen- 
sive codification of the law relating to documents of title in Ontario.^ Nor 
are documents of title governed by a clear body of common law. We are 
told by Falconbridge that, by the late nineteenth century, bills of lading 
were instruments well known to commerce and that, by the custom of 



IFor a general discussion of this topic, see, Marvin Baer, "Documents of Title", 

Research Paper No. IV. 3. 

2See, ss. ](l)(e), 20(2), 20(3), 25(1), 25(2), 28(3), 37(2), and 45. 
3Many aspects of the law relating to warehouse receipts, however, are covered 

by The Warehouse Receipts Act, R.S.O. 1970, c. 489. 

[319] 



320 

merchants, peculiar incidents were attached to them. Peculiar incidents 
were not, on the other hand, attached by custom to warehouse receipts.'* 
There are few modern Canadian cases dealing with the law relating to 
documents of title, and some of the older cases are inconsistent with the 
assumptions underlying modern usage of these documents. ^ 

This point can be illustrated by examining a distinction commonly 
made in modern commercial practice. Borrowing ideas and nomenclature 
from other branches of negotiable instrument law, and perhaps relying 
upon American precedents, it is common in practice to distinguish between 
negotiable and non-negotiable documents of title. This distinction may 
center, according to trade usage, on one or more of a number of things. 
First, it may go to the issue of whether the document is transferable at all. 
Secondly, the distinction may relate to the form of the transfer; that is, 
whether the bailee must acknowledge or attorn to the transferee before the 
transferee has any right under the document. Thirdly, the distinction 
between negotiable and non-negotiable documents of title may determine 
whether the document is intended to be assignable free from the equities 
existing between the original parties; that is, whether the bailee can raise 
any claim or defense that he had against the original holder against a sub- 
sequent holder of the document. Fourthly, the distinction may be rele- 
vant in determining whether a transferee of an apparently regular docu- 
ment, who takes in good faith for value and without notice of a defect in 
the title of his transferor, or of the want of title of his transferor, takes free 
from that defect or want of title. 

In contexts other than documents of title, it is primarily the fourth 
meaning that is the essence of negotiability.^ Yet at common law, accord- 
ing to Falconbridge,'^ 

A bill of lading, and a fortiori any other document of title to goods, 
is not negotiable in the same sense as a bill of exchange may be 
negotiable, and therefore the mere honest possession of a bill of 
lading endorsed in blank, or in which the goods are made deliverable 
to the bearer, is not such a title to the goods as the like possession of 
a bill of exchange would be to the money promised to be paid by 
the acceptor. The endorsement of a bill of lading gives no better 
right to the goods than the endorser himself had .... 

By The Warehouse Receipts Act,^ negotiable warehouse receipts are 
given incidents of negotiability similar to those attached to bills and notes. 



4Falconbridge, Banking and Bills of Exchange (7th ed., 1969), 215. 

5For example, according to some older Canadian cases the transfer of a ware- 
house receipt did not pass to the transferee the property in the goods. See, 
Bank of British North America v. Clarkson (1869), 19 U.C.C.P. 182, 188. 

6Falconbridge, footnote 4 supra, at p. 409. 

'J Ibid., at p. 203. 

8R.S.O. 1970, c. 489, ss. 22, 23, 26. 



321 

However, there is no federal or provincial legislation that does the same 
for bills of lading.^ 

Since the documents themselves seldom set out what is meant by 
"negotiable" or "non-negotiable", the parties are left, in the event of a 
dispute, to establish the meaning of these terms by trade usage. This they 
must do against a background of common law rules, which have developed 
little since the last century and which seem flatly to contradict the parties' 
assumptions. 

The second basic difficulty with the existing law governing documents 
of title is the nature of the legislative changes that have been made to the 
common law. There are references to documents of title scattered through- 
out several Ontario statutes, including The Sale of Goods Act, The Factors 
Act,'^^ The Personal Property Security Act,^^ The Mercantile Law Amend- 
ment Act^^ and The Warehouse Receipts Act.^^ In addition, there is fed- 
eral legislation covering some aspects of bills of lading, such as the Bills 
of Lading Act^^ and the regulations made pursuant to the Railway ActA^ 
The provincial legislation is marked by significant inconsistencies, much 
duplication and numerous gaps. The inconsistencies include such a basic 
matter as the lack of a uniform definition of documents of title. ^^ Further, 
these inconsistencies extend to the radically different treatment accorded to 
warehouse receipts and bills of lading: the former are covered by fairly 
comprehensive legislation, while the latter are governed by the common 
law. The duplication in provincial legislation centers on the overlapping 
protection given to innocent holders of documents of title. ^"^ They are 
protected by provisions in four acts: namely. The Sale of Goods Act, The 
Factors Act, The Mercantile Law Amendment Act and The Warehouse 
Receipts Act. These acts do not, however, adopt any consistent theory as 
to the circumstances in which innocent holders should be protected from 
defects of title. The gaps in provincial legislation relate primarily to bills 
of lading, rather than to warehouse receipts. They include such basic 
matters as the formal requirements of a document of title, the obligations 
of a bailee who holds goods under a document of title, the extent of the 



9See, however, General Order No. T-5 of the Revised General Orders of the 
Board of Transport Commissioners for Canada, 1965, S.O.R. 72-625, made 
pursuant to the Railway Act, R.S.C. 1970, c. R-2. General Order No. T-5 dis- 
tinguishes between "straight" and "order" bills of lading. In addition. General 
Order No, T-6 approves the use of the Uniform Bill of Lading in use in the 
United States for shipments between Canada and the United States. General 
Order No. T-5 has not been construed as extending the incidents of negotiabil- 
ity at common law in the case of order bills of lading, or as conferring upon 
them true negotiability. See, C.P.R. v. Hickman Grain Co., [1928] S.C.R. 170, 
[1928] 1 D.L.R. 1069 (S.C.C), especially at [1928] S.C.R. 175, [1928] 1 
D.L.R. 1071; and [1927] 1 D.L.R. 851 (Man. C.A.), at pp. 862-63. 

lOR.S.O. 1970, c. 156. 

iiR.S.O. 1970, c. 344 as am. 

12R.S.O. 1970, c. 272. 

13R.S.O. 1970, c. 489. 

14R.S.C. 1970, c. B-6. 

^^Supra, footnote 9. 

i6See, Baer, footnote 1 supra, at pp. 1-4. 

^Vbid., at pp. 21-32. 



322 

bailee's lien, and the form and effect of negotiation or transfer of these 
instruments. 

These shortcomings in existing Ontario law appear to us to be un- 
acceptable. We accordingly recommend a comprehensive examination of 
the law relating to documents of title with a view to its systematic codifi- 
cation. A model for such a systematic treatment of documents of title 
already exists in Article 7 of the Uniform Commercial Code, and we 
recommend the examination of Article 7 with a view to determining its 
suitability for adoption in Ontario. 

In the meantime, we do not think it possible or wise to omit all refer- 
ences to documents of title in the revised Sale of Goods Act. The provi- 
sions necessary to take into account the existence of a document of title 
are discussed or referred to in appropriate chapters of this Report. In these 
chapters we do not focus on documents of title, although the basic issues 
of sales law affected by the existence of a document of title are compre- 
hended by the recommendations made therein. These basic issues are dis- 
cussed more fully below. The purpose of the following discussion is not, 
however, to put forward additional recommendations. Rather, it is intended 
to confirm the recommendations made in other contexts as they relate to 
documents of title, in order to enable the reader to obtain a more global 
view of the impact of documents of title on sales law. 

While recognizing the need for more comprehensive reform, our 
basic approach in dealing with documents of title under the revised Act 
has been to preserve the existing law that, in relation to several matters, 
documents can take the place of or represent goods. ^^ In some cases we 
have, however, distinguished between negotiable and non-negotiable docu- 
ments, even though this is a distinction that has no clear meaning at com- 
mon law, and even though Ontario lacks a comprehensive statutory treat- 
ment of this distinction. We have done this because the distinction is 
widely used in commercial practice, and is also found in The Personal 
Property Security Act. In the absence of comprehensive legislation, such 
as Article 7 of the Uniform Commercial Code, the full range of incidents 
associated with negotiable and non-negotiable documents will have to be 
established by trade usage. Finally, some recommended changes are simply 
consequential amendments which result from our earlier recommendations 
to separate the issues of risk of loss from the passing of property. 

Before turning to our discussion of the basic issues in the sales con- 
text affected by the existence of a document of title, we deal with the 
definition of "document of title" recommended for adoption in the revised 
Act. 

2. Definition of "Document of Title" 

Section l(l)(e) of The Sale of Goods Act defines document of title 
as follows: 



i^For example, in accordance with recommendations made in chapters 11 and 
12, respectively, property and risk may pass with the transfer of a document, 
and the receipt of a document by an innocent third party may be the equival- 
ent of the receipt of the goods. 



323 

'document of title' includes a bill of lading and warehouse receipt as 
defined by The Mercantile Law Amendment Act, any warrant or 
order for the delivery of goods and any other document used in the 
ordinary course of business as proof of the possession or control of 
goods or authorizing or purporting to authorize, either by endorse- 
ment or delivery, the possessor of the document to transfer or re- 
ceive goods thereby represented; 

A modernized, but substantially similar, definition appears in section 
l(i) of The Personal Property Security Act, and reads as follows: 

'document of title' means any writing that purports to be issued by 
or addressed to a bailee and purports to cover such goods in the 
bailee's possession as are identified or fungible portions of an identi- 
fied mass, and that in the ordinary course of business is treated as 
establishing that the person in possession of it is entitled to receive, 
hold and dispose of the document and the goods it covers; 

This definition is essentially based on UCC 1-201(15), and differs from 
the definition in The Sale of Goods Act in two important respects: (a) 
it omits any reference to the definition of warehouse receipts in The Mer- 
cantile Law Amendment Act; and, (b) it emphasizes the fact, not men- 
tioned in The Sale of Goods Act definition, that the writing must be issued 
by or addressed to a bailee of the goods. It is our view that consistency 
with the definition in The Personal Property Security Act is desirable. 
Subject to a minor amendment mentioned below, we recommend adoption 
of this definition in the revised Sale of Goods Act. Apart from the benefits 
of consistency, we have several other reasons for our recommendation. 
First, the reference in section l(l)(e) of the present Act to the definition 
of warehouse receipts in The Mercantile Law Amendment Act is no longer 
helpful, given the substantially obsolete character of the provisions in 
question in the latter Act. Secondly, there is a close relationship in prac- 
tice between sales transactions and secured transactions, and both The 
Personal Property Security Act and many of the provisions in the proposed 
revised Act have common roots in the Uniform Commercial Code. Thirdly, 
a new definition will provide the foundation for a document of title law, if 
such a law should be adopted in the future. 

We recommend one small amendment to the definition in The Per- 
sonal Property Security Act: namely, the insertion of the words "with any 
necessary endorsement" after the words "the person in possession . . . is". 
The purpose of the amendment is to avoid any implication that the defini- 
tion is restricted to a bearer document. As a result, our recommended 
definition reads as follows :^^ 

'document of title' means a writing that, 
(i) purports to be issued by or addressed to a bailee, 
(ii) purports to cover goods in the bailee's possession that are 

identified or fungible portions of an identified mass, and 
(iii) in the ordinary course of business is treated as establishing that 



i9See, Draft Bill, s. 1.1(1)11, 



324 

the person in possession of the document of title is, with any 
necessary endorsement, entitled to receive, hold and dispose of 
it and the goods it covers; 

3. Basic Issues In The Sales Context 

(a) the passing of property 

We have discussed in chapter 11 the relevance of title or property 
to the rights and obligations of parties to a contract of sale. In that chapter, 
we also dealt with residual title rules for situations not specifically covered 
in the revised Act. It is in this latter context that we discuss the effect of a 
transfer of a document of title on the passing of property in the goods. 

In discussing when the property in goods covered by a document of 
title passes at common law between seller and buyer, it is necessary to 
distinguish between contracts that require or authorize the seller to send 
the goods to the buyer, and contracts that provide for delivery without 
movement of the goods. In the former case, the relevant document will 
be a bill of lading; in the latter case, the relevant document will be a 
warehouse receipt. 

It is often said that a document of title such as a bill of lading is 
universally recognized as a symbol for the goods, and that an endorse- 
ment and delivery of the bill of lading operates as a symbolic delivery of 
the goods. However, at common law, the endorsement of a bill of lading 
did not, of itself, transfer the property in the goods in the same way that 
the endorsement and delivery of a bill of exchange transfers the property 
in the subject matter of the bill of exchange. An endorsement and delivery 
of a bill of lading only transferred such title as was intended to be trans- 
ferred.20 Subsequent statutes, including The Sale of Goods Act, did not 
change this common law rule. However, the courts, in applying section 19, 
Rule 5(ii) and section 20 of The Sale of Goods Act to contracts using 
trade terms that contemplate the creation of bills of lading, often associated 
the passing of property with the endorsement and delivery of a bill of 
lading.21 In this context, however, the courts have occasionally departed 
from their usual tendency to treat property in goods as an indivisible con- 
cept, and have discovered an intention to reserve some interest to the 
seller while at the same time passing general property to the buyer.22 

On the other hand, in relation to warehouse receipts, the position is 



2<iLickbarrow v. Mason (1787), 2 T.R. 63, 100 E.R. 35 (K.B.); Sewell v. Bur- 
dick (1884), 10 App. Cas. 74 (H.L.)- See, also, Scrutton on Charterparties 
(17th ed., 1966), at p. 168; and Falconbridge, Banking and Bills of Exchange 
(7th ed., 1969), at p. 199. 

2lSee, generally, Sassoon, C.I.F. and F.O.B. Contracts (2nd ed., 1975); and 
Crawford, "Performance Obligations: Delivery and Payment", Research Paper 
No. III.6, at pp. 42-46, 52-53. 

22See, for example, Mirabita v. Imperial Ottoman Bank (1878), 3 Ex. D. 165 
(C.A.), per Bramwell, L.J., at pp. 169-70; and Jenkyns v. Brown (1849), 14 
Q.B. 496. In Canada, see Bergert v. Parry (1922), 70 D.L.R. 233 (Alta. S.C., 
App. Div.); and Jerome v. Clements Motor Sales Ltd., [1958] O.R. 738, 
(1959), 15 D.L.R. (2d) 689 (C.A.). See, also, infra, ch. 14, sec. A.3(c). 



325 

different. The common law has been significantly changed by The Ware- 
house Receipts Act. Sections 21 and 22 of that Act pass title to the goods 
by the transfer or due negotiation of the warehouse receipt. 

The provisions of UCC 2-401(2) and (3), which deal with the 
residual rules governing transfer of title, reach much the same result as 
the existing Ontario law. Under the Code provisions, a distinction is made 
between contracts that require or authorize the seller to send the goods to 
the buyer, and contracts that provide for delivery without movement of 
the goods. In the first case, property passes when the seller has fulfilled his 
obligations as to shipment under the contract, even though a document 
of title is to be delivered at a different time or place. This rule is similar to 
the rule adopted in those Anglo-Canadian cases that recognizes that the 
issuance of a document in the seller's name only evidences an intention to 
reserve a security interest or special property, and does not prevent the 
passing of the general property in the goods. ^3 In the second case, where 
there is to be delivery without movement of the goods, the Code, like 
The Warehouse Receipts Act, provides that title passes at the time and 
place of the delivery of the document. 

In a previous chapter, we recommend the adoption, with modifica- 
tions, of provisions similar to UCC 2-401(2) and (3).^"^ In our view, 
these Code provisions, as they relate to documents of title, should be ad- 
opted in the revised Act in preference to the existing provisions of section 
19, Rule 5(ii), of The Sale of Goods Act. The Code provisions are more 
comprehensive and the reference to documents of title more explicit. 

(b) RISK OF LOSS 

Ontario legislation contains no special provisions relating to risk of 
loss of goods covered by a document of title. Hence, the normal rule 
applies that risk passes with property. While the Code has relinquished 
the simple rule that risk attends title, the provisions of UCC 2-509 cover- 
ing the risk of loss in the absence of breach, at least where goods are 
covered by documents of title, closely parallel those of UCC 2-401 cover- 
ing the passing of title. Once again, there is a significant difference between 
the Code and existing Ontario law. This difference resides in the effect of 
the reservation of a right of disposal by the seller by having the document 
of title issued in his name or to his order. Under Ontario law, in the ab- 
sence of contrary agreement between the parties (including any applicable 
mercantile terms) the reservation of a right of disposal will, by virtue of 
section 20(1) of The Sale of Goods Act, prevent the transfer of title to 
the buyer and also, therefore, the passing of risk. In the Code, on the 
other hand, the seller's reservation of title does not affect the rules on the 
transfer of risk and, moreover, UCC 2-505 makes it clear that the seller's 
reservation is only in the nature of a security interest. 

We have previously recommended^^ that a provision similar to UCC 



"^^Supra, ch. 11, Recommendations 13, 14. 
'2-^Supra, ch. 11, Recommendations 3 to 7. 



326 

2-509 dealing with transfer of risk of loss be adopted in the revised Act, 
subject to certain amendments and clarifications. In our view, the provi- 
sions of UCC 2-509 as they relate to documents of title should also be 
included in the revised Act. Our Draft Bill so provides. ^6 

(c) DOCUMENTS OF TITLE AND THE SELLER'S DELIVERY 
OBLIGATIONS^^ 

The existing Sale of Goods Act says little about the effect of the is- 
suance of a document of title on the seller's obligation to deliver the goods. 
Two provisions of the Act merit reference. Cases in which a document of 
title has been issued are specifically excluded from the operation of sec- 
tion 28(3), which controls the time of delivery where goods are held by 
a bailee that are not to be shipped. Section 31(1) of The Sale of Goods 
Act, which deals with the effect of delivery to a carrier where the seller is 
authorized or required to send the goods to the buyer, does not specifi- 
cally exclude from its operation cases where documents of title have been 
issued. The courts have, however, arrived at this result by emphasizing that 
section 31 is only a prima facie rule. We turn now to consider the situa- 
tions contemplated by these provisions. 

(i) Goods Held by a Bailee That Are Not to be Shipped 

As noted, cases in which a document of title has been issued are 
expressly excluded from the operation of section 28(3) of The Sale of 
Goods Act. As a result, what constitutes an effective tender of delivery 
where goods are covered by a document of title is left to be resolved by the 
common law and other statutes. In Ontario, sections 21 and 22 of The 
Warehouse Receipts Act provide that a transferee of a warehouse receipt 
receives "the benefit of the obligation of the warehouseman to hold pos- 
session of the goods for him . . .". A similar, but more elaborate, rule is 
found in UCC 2-503 (4 ).28 This provision contains additional qualifica- 
tions that clarify the circumstances in which failure by the bailee to honour 
a document of title will defeat the seller's tender. We think that the pro- 



26See, Draft Bill, s. 7.8. 

27The seller's delivery obligations are discussed more fully in chapter 14 of the 

Report. 
28Section 2-503(4) provides as follows: 

(4) Where goods are in the possession of a bailee and are to be delivered 
without being moved 

(a) tender requires that the seller either tender a negotiable document 
of title covering such goods or procure acknowledgment by the 
bailee of the buyer's right to possession of the goods; but 

(b) tender to the buyer of a non-negotiable document of title or of a 
written direction to the bailee to deliver is sufficient tender unless 
the buyer seasonably objects, and receipt by the bailee of notific- 
ation of the buyer's rights fixes those rights as against the bailee 
and all third persons; but risk of loss of the goods and of any failure 
by the bailee to honor the non-negotiable document of title or to 
obey the direction remains on the seller until the buyer has had a 
reasonable time to present the document or direction, and a refusal 
by the bailee to honor the document or to obey the direction de- 
feats the tender. 



327 

visions of UCC 2-503(4) as they relate to documents of title would be 
useful additions to our revised Act, and recommend their adoption in lieu 
of the provisions of section 28(3) of the existing Act. Our Draft Bill con- 
tains a provision giving effect to this recommendation. ^^ 

(ii) Goods Authorized or Required to be Shipped 

The prima facie rule found in section 31(1) of the Ontario Sale of 
Goods Act, that delivery to the carrier is delivery to the buyer, may be 
displaced where the seller reserves a right of disposal in the goods. ^^ 
Section 20(2) provides that, where the goods are shipped and by the bill 
of lading the goods are deliverable to the order of the seller or his agent, 
the seller is prima facie deemed to reserve the right of disposal. In this 
way a bill of lading may determine whether there has been delivery of the 
goods and, arguably, locate the place of the buyer's right of inspection, 
since delivery and the right of inspection are usually treated as cotermin- 
ous events. In contrast, the Code has specific provisions for inspection in 
section 2-513, which are functionally oriented and divorced from ques- 
tions of delivery. In addition, as indicated, section 2-505 has recognized 
that the reservation of a right of disposal has the limited purpose of giving 
the seller a security interest, and has no bearing on other issues. Finally, 
sections 2-503(2) and (3) and 2-504 set out more fully the seller's 
general duty of tender and delivery in shipment and destination contracts, 
including those involving documents of title. These provisions are exam- 
ined in greater detail in chapter 14. We also explain elsewhere, in a more 
general context, the advantages of the Code's separate provision for in- 
spection, and its limitation of the seller's right of disposal to a security 
interest.31 The rationale that supports these provisions is equally applic- 
able where documents of title are involved. Accordingly, we recommend 
that the revised Act should incorporate provisions similar to UCC 2-503 
(2) and (3) and UCC 2-504 with respect to the role of documents of title 
affecting the seller's delivery obligations in shipment and destination con- 
tracts. As under the Uniform Commercial Code, the revised Act should 
incorporate separate rules, unconnected with questions of delivery, with 
respect to the effect of the reservation of a right of disposal and the place 
of inspection of goods after delivery.32 

(d) THE UNPAID seller's RIGHT TO WITHHOLD AND STOP DELIVERY^^ 

(i) As Against the Buyer 
The existing Sale of Goods Act recognizes, in section 38, the unpaid 



29See, Draft Bill, s. 7.2(4). 

30Fridman, Sale of Goods in Canada (1973), at p. 256, n. 27; Greig, Sale of 
Goods (1974), at pp. 113-14 (Greig draws a distinction between f.o.b. and 
c.i.f. contracts). Williston on Sales (Rev. ed., 1948), sees. 468a-469, appears 
to adopt conflicting positions. The lack of consistency among authors and in 
the decisions probably arises from the attempt to force a single concept, "pos- 
session", to serve too many disparate purposes. 

3iSee, chapters 14 and 17. 

32See, Draft Bill, ss. 7.2, 7.3, 7.4 and 7.12. 

33This matter is discussed in greater detail in chapter 16. 



328 

seller's right of lien over goods while they are in his possession, and his 
right to stop delivery of goods in transit where the buyer becomes insolvent. 
While The Sale of Goods Act contains detailed provisions^ stipulating 
when the unpaid seller's lien and right to stop in transit are lost, there is no 
comprehensive provision applicable where the goods are covered by a 
document of title. This matter is covered more comprehensively, at least 
so far as the right to stop delivery is concerned, in UCC 2-705(2),35 and 
is impHedly covered by the provisions in UCC 2-503 and 2-504 with res- 
pect to loss of the right of lien or retention. UCC 2-705(2) recognizes the 
modern commercial assumptions behind the use of negotiable documents 
of title, and is compatible with other Ontario legislation. ^^ We recommend 
the adoption in the revised Act of an equivalent provision, so far as it 
relates to documents of title. ^'^ 

(ii) As Against Third Parties 

Section 45 of the Ontario Sale of Goods Act states that the unpaid 
seller's right of lien or retention or stoppage in transit is not affected by any 
sale or other disposition of the goods that the buyer may have made. How- 
ever, this section contains an express exception in the case of good faith 
transferees of documents of title. The protection given transferees of docu- 
ments of title by this section is duplicated in a number of other Ontario 
Acts. 3^ In light of the immediately preceding recommendation, such third 
parties will also be protected by the limitation on the right to withhold and 
stop delivery found in the provision of the revised Act equivalent to UCC 
2-705 (2). 39 Moreover, protection may be afforded by the more general 
qualifications to the nemo dat principle recommended in chapter 12."^ The 
exception, then, to section 45 will be adequately covered in the revised Act. 
So far as the main proposition in section 45 is concerned — that is, that 
the unpaid seller's right of lien or retention or stoppage is not affected by 
the buyer's dealing with the property — it appears to be tautologous, since 
it simply reaffirms the rights given by section 38. Accordingly, we are of 
the view that section 45 can be safely omitted from the revised Act, and 
we so recommend. 

(e) TRANSFER OF TITLE AND GOOD FAITH BUYERS 

At common law, the negotiation of a document of title gave the 
holder no better right to the goods than that possessed by his transferor. 
The common law rule has been modified in Ontario by several statutory 
provisions. "^1 These provisions are confusing and overlapping, and consti- 

34Sections 41, 42, 43. 

35See, further, chapter 16, sec. 2(b) (ii). 

36See, for example, The Factors Act, s. 2; The Sale of Goods Act, s. 25(1) and 

(2); The Warehouse Receipts Act, s. 27; and, The Personal Property Security 

Act, s. 31(l)(b). 
37See, Draft Bill, s. 9.8(2). 
^^The Factors Act, s. 2; The Mercantile Law Amendment Act, ss. 8, 14; The 

Personal Property Security Act, s. 31(1) (b); The Sale of Goods Act, ss. 25(1) 

and (2), and 45; The Warehouse Receipts Act, ss. 21, 22, 27. 
39See, Draft Bill, s. 9.8(2). See, also, s. 9.8(9). 
40See, Draft Bill, ss. 6.6 to 6.8. 
^^ Supra, footnote 38. 



329 

tute one of the reasons why we have recommended that Article 7 be 
examined for possible adoption in Ontario. In the meantime, as has been 
stated, we believe that holders of documents of title should continue to 
enjoy whatever protection they now enjoy under the law. We have pre- 
viously discussed sections 25(1) and (2) of The Sale of Goods Act. These 
provisions protect transferees of documents of title in the same way as they 
protect transferees of goods. We recommend that the same protection be 
built into the new Act; that is, to the extent that innocent transferees of 
goods are protected, so should be the innocent transferees of documents of 
title.'^^ At the same time, we recommend that they continue to enjoy what- 
ever other protection is given to them by other statutes.'^^ 

RECOMMENDATIONS 

The Commission makes the following recommendations : 

1 . The Ontario law of documents of title should be comprehensively 
examined with a view to its systematic codification. 

2. Article 7 of the Uniform Commercial Code would appear to pro- 
vide an appropriate model for the systematic treatment of docu- 
ments of title, and should be examined with a view to determining 
its suitability for adoption in Ontario. 

3. Pending the conclusion of such a review, it is neither possible nor 
wise to omit all references to documents of title in the revised Sale 
of Goods Act; rather, the revised Act should incorporate provi- 
sions relating to documents of title in accordance with recom- 
mendations 4-11, infra. 

4. Subject to a minor amendment, a definition of "document of title" 
similar to the definition of the term contained in section l(i) of 
The Personal Property Security Act should be substituted in the 
revised Act for the definition contained in section l(l)(e) of the 
existing Sale of Goods Act. 

5. With respect to the residual rules governing the transfer of title, 
the provisions of UCC 2-401(2) and (3), as they relate to docu- 
ments of title, should be adopted in the revised Act in preference 
to the provisions of section 19, Rule 5 (ii), of the existing Sale 
of Goods Act. 

6. The provisions of UCC 2-509 governing the transfer of risk of 
loss in the absence of breach should be included in the revised 
Act, so far as they relate to documents of title. 

7. With respect to the seller's delivery obligations where goods are 
held by a bailee and delivery is to be effected without shipment, 
the provisions of UCC 2-503(4) relating to documents of title 
should be adopted in the revised Act in lieu of the provisions of 
section 28(3) of the existing Sale of Goods Act. 



42See, Draft Bill, s. 6.2. 
43See, Draft Bill, s. 3.4(2). 



330 

8. The revised Act should incorporate provisions similar to UCC 
2-503(2) and (3) and UCC 2-504 with respect to the role of 
documents of title affecting the seller's delivery obligations in 
shipment and destination contracts. As under the Uniform Com- 
mercial Code, the revised Act should incorporate separate rules, 
unconnected with questions of delivery, with respect to the effect 
of the reservation of a right of disposal and the place of inspection 
of goods after delivery. 

9. An unpaid seller's right to stop delivery of goods in transit as 
against the buyer should be governed in the revised Act by a pro- 
vision similar to UCC 2-705(2), so far as it relates to documents 
of title. 

10. Section 45 of the existing Sale of Goods Act is tautologous and 
should be omitted from the revised Act. 

11. Pending the adoption of a comprehensive documents of title law, 
transferees of documents of title should enjoy the same protection 
afforded to transferees of goods under the provisions of the revised 
Act as recommended in chapter 12, supra, and without prejudice 
to their rights under any other Act. 



CHAPTER 14 

DELIVERY AND PAYMENT 



A. DELIVERY 

1. Introduction 

A number of preliminary observations are in order. ^ First, by virtue 
of sections 26 and 27 of the Ontario Sale of Goods Act, the seller's basic 
obligation to deliver the goods conditions his prima facie right to payment 
and acceptance by the buyer. However, delivery also has other important 
consequences, both under existing Anglo-Canadian law and even more so 
under Article 2 of the Uniform Commercial Code. Under The Sale of 
Goods Act, delivery affects the seller's lien rights^ and the rights of third 
parties who deal in good faith with a buyer who has been entrusted with 
goods or with the documents of title thereto. ^ Further, in the case of a sale 
of future or unascertained goods,"^ delivery usually coincides with the trans- 
fer of title, and therefore determines the time for the transfer of risk. 

These important consequences have not been diminished by the Code. 
Indeed, Article 2 has increased their number. It may, therefore, fairly be 
said that, while the role of title has been demoted under the Code, that of 
delivery has been enhanced. This is not surprising, since most buyers are 
more conscious of the need to obtain possession of the goods, than they 
are to ascertain the status of an abstraction; the seller's right to sell is 
usually taken for granted. All this leads to the conclusion that there is no 
difference in doctrinal approach with respect to problems of delivery 
between The Sale of Goods Act and Article 2. The difference lies in 
matters of detail, and in the greater particularization of rules and situations 
adopted in Article 2. There is a further point. The Article 2 rules differ 
from the Ontario provisions in that they are closely integrated with the 
other Articles of the Code on Documents of Title (Article 7) and Secured 
Transactions (Article 9). The Ontario seller, on the other hand, is con- 
fronted with a large variety of statutes, federal as well as provincial,^ which 
are not necessarily consistent with one another or with the provisions of 
The Sale of Goods Act, and which need to be consulted for a full statement 
of his delivery obligations. 



ipor a general discussion of the topic of delivery and payment, see Crawford, 
"Performance Obligations: Delivery and Payment", Research Paper No. III.6. 

'^The Sale of Goods Act, R.S.O. 1970, c. 421, ss. 38-39. 

Vbid., ss. 25(2), 45. 

^Ibid., s. 19, Rule 5(ii). 

5See, for example, The Warehouse Receipts Act, R.S.O. 1970, c. 489; The Mer- 
cantile Law Amendment Act, R.S.O. 1970, c. 272; the Bills of Lading Act, 
R.S.C. 1970, c. B-6; the Carriage of Goods by Water Act, R.S.C. 1970, c. C-15; 
the Carriage by Air Act, R.S.C. 1970, c. C-14; as well as regulations under some 
of these and other statutes such as the Canada Grain Act, R.S.C. 1970, c. G-16, 
and the orders of the Board of Railway Commissioners and its successor estab- 
lishing the form of railway and truck bills of lading. 

[331] 



332 

Delivery, as defined in The Sale of Goods Act,^ does not coincide 
with the layman's understanding of the term. It means the transfer of pos- 
session of goods from the seller to the buyer. The concept does not require 
the physical movement of goods. Regrettably, neither the Code nor the Act 
is consistent in the use of the term. Delivery is sometimes used in its broad 
generic sense, and sometimes to describe the manner in which a transfer 
of possession may be effected: for example, by shipment or dispatch.'' 
Further terminological confusion may be engendered by the failure to 
distinguish adequately between a tender of delivery and delivery.^ The two 
concepts are distinct, and trigger different results and different obligations. 
Article 2 has made some progress in sorting out the terminological muddle. 
The process is not, however, complete, and a further effort seems worth- 
while, particularly in the light of the precedents afforded by the Hague 
Uniform Law on the International Sale of Goods and the draft UNCITRAL 
Convention. So far, the terminological confusion seems to have caused the 
courts little difficulty.^ While we do not wish to exaggerate the importance 



6Section l(l)(d). 

7UOC 2-301, which corresponds to section 26 of The Sale of Goods Act, sets 
forth the seller's basic obligation "to transfer and deliver". Here, "deliver" seems 
to be used in the generic sense, as is true in section 26. ("Transfer" presumably 
refers to the transfer of title.) On the other hand, section 28(1) of The Sale of 
Goods Act clearly uses "place of delivery" in the sense of physical transfer. The 
Code sometimes uses "shipment" to denote the physical transfer element of 
delivery: for example, section 2-3 10(1) (a), place of shipment as place of de- 
livery; section 2-501 (b), "when goods are shipped"; section 2-505, "by or before 
shipment"; and, section 2-509(1), dealing with risk of loss in shipment contracts. 
At other times the Code uses the term "to send" to reflect this element of 
delivery, but generally does so when it wants to encompass both shipment and 
destination contracts; for example, section 2-310(1) (b) and section 2-504. This 
term is also used in The Sale of Goods Act, ss. 28(2) and 31(1). Section 31(2) 
also speaks of "delivery to a carrier", a term used by the Code in section 
2-509(1) (a). Other modes of delivery used by the Code are as follows: delivery 
by document of title — sections 2-503(5) and 2-401(2); delivery at destination 
— sections 2-503(3), 2-504, and 2-509(1) (b); delivery without moving the 
goods — sections 2-503(4), 2-509(2) and 2-401(3). 

8The Code defines "tender of delivery" in section 2-503(1) in terms parallel to 
the statement of delivery and payment as concurrent terms in section 27 of The 
Sale of Goods Act. (See, also, section 28(4), adding further elements, also con- 
tained in UCC 2-503(1).) Section 2-507(1) makes tender a condition precedent 
to the buyer's obligation to pay, and section 2-508 conditions the seller's right 
to cure on the act of tender. Curiously, section 2-509(l)(b) requires "tender" in 
a destination contract, while section 2-509(1) (a) speaks of "delivery" to a 
carrier in a shipment contract. Also to be noted are UCC 2-509(3), requiring 
only tender of delivery by non-merchants (rather than receipt by the buyer) 
to transfer risk, and UCC 2-511 obliging the buyer to tender payment upon the 
seller's tender of delivery. As to the meanings of tender in the Code, Official 
Comment No. 1 to section 2-503 states the two basic meanings as: (a) an offer 
coupled with present ability to fulfill all the conditions of the tendering party, 
followed by performance if the other party is ready to proceed; and, (b) an 
offer of goods or documents as if in fulfillment of the contractual conditions 
even though there is a defect when measured against the contract obligation. 
The Comment adds that the first meaning prevails unless the context unmistak- 
ably indicates otherwise. 

^Crawford, footnote 1 supra, at pp. 6-7, 80, recommends that "performance" be 
substituted for "delivery", but this would create difficulties since "performance" 
embraces all of a party's contractual obligations and, as ordinarily understood, 
is not confined to the delivery obligation. 



333 

of the problem, we nevertheless recommend that the revised Act should 
strive for greater clarity in the use of the term "delivery" and its various 
derivatives, and that it should also distinguish more clearly between "tender 
of delivery" and "delivery". 

2. Time of Delivery 

The long established rule, contained in section 28(2) of The Sale of 
Goods Act, is that, where no time is specified for delivery, the seller is 
bound to send the goods "within a reasonable time". The same common- 
sense rule is adopted in the Code.^^ As commentators have noted,^^ while 
the language of section 28(2) is restricted to delivery involving the 
physical movement of goods, the courts have applied this rule to all forms 
of delivery. It seems desirable to correct this minor anomaly in the revised 
Ontario Act, as has been done in UCC 2-309(1 ).^2 Accordingly, we 
recommend that, following UCC 2-309(1), the revised Act should make 
it clear that, where the contract itself specifies no time for delivery, the 
seller's obligation to deliver the goods within a reasonable time is not re- 
stricted to cases where the seller is to send the goods to the buyer, but 
applies to all forms of delivery.^^ 

Time of delivery raises two other important questions. The first in- 
volves the consequences of a breach of the seller's obligation to deliver on 
time; the second is concerned with the binding effect of a waiver of such a 
breach, or the buyer's assent to an extension of time for delivery. As to the 
first question, section 11 of the Ontario Sale of Goods Act provides 
as follows: 

1 1 . Unless a different intention appears from the terms of the con- 
tract, stipulations as to time of payment are not of the essence of a 
contract of sale, and whether any other stipulation as to time is of the 
essence of the contract or not depends on the terms of the contract. 

This cautious language does not accurately reflect the weight of juris- 
prudence, since it is well established^'^ that in commercial contracts time of 
delivery is prima facie of the essence. ^^ Indeed, the case law goes even 
further. If time of shipment constitutes part of the description of the goods, 
deviation from the term will entitle the buyer to reject the goods on this 
ground alone. ^^ The Code approach is very different. As previously noted, *'' 
the Uniform Sales Act did not distinguish between warranties and condi- 
tions, and any breach of the seller's obligations, it would seem, triggered 



lOUCC 2-309(1), 1-204(2). 

liCrawford, footnote 1 supra, pp. 18-20, citing Allen v. Danforth Motors Ltd. 

(1957), 12 D.L.R. (2d) 572 (Ont. C.A.); Buddie v. Green (1857), 27 LJ. Ex. 

33; and, Hahbury's Laws of England (3rd ed., 1960), Vol. 34, s. 140, note (k). 
l2Section 2-309(1) provides as follows: 

The time for shipment or delivery or any other action under a contract 
if not provided in this Article or agreed upon shall be a reasonable time. 
l3See, Draft Bill, s. 5.7. 

^^Benjamin's Sale of Goods (1974), para. 603, especially note 96. 
i5This matter is discussed in greater detail in chapter 6, supra, at pp. 147-49. 
^^Bowes V. Shand (1877), 2 A.C. 455 (H.L.). 
^"^ Supra, ch. 6, at p. 146. 



334 

the same consequences. Article 2 adopts the same position with the result, 
as section 2-601 informs us, that the buyer may reject the goods if the 
goods or tender of delivery fail "in any respect" to conform to the contract. 
This rule, known as the "perfect tender rule" is discussed in a later chapter 
in this Report. 1^ 

In an earlier chapter we recommended that,^^ for the purpose of 
determining the parties' remedies, the revised Act should eschew a priori 
characterization of contractual terms, and should draw a distinction 
between material or substantial breaches of the contract, and breaches of 
lesser significance. In light of this recommendation, the position of section 
11 in the revised Act must be reconsidered. Since a priori characterization 
of the terms of a contract will be eschewed, it will no longer be appropriate 
to ask whether a stipulation as to time is of the essence of the contract. 
Rather, the question will be, how serious is the seller's breach? It would 
be possible to achieve the same result in the revised Act by introducing a 
provision indicating the circumstances in which breach of an obligation to 
perform by an agreed date will prima facie be deemed of a substantial or 
material character. We do not, however, favour such a presumptive rule, 
because the circumstances of individual cases differ too widely to admit of 
uniform treatment in all cases. For example, a contract for the sale of a 
new automobile for use by the purchaser is not the same as an overseas 
shipment of wheat which, to the knowledge of the seller, is likely to be 
resold by the buyer before delivery. The consequences of late delivery 
in the former case would ordinarily be much less severe than the conse- 
quences of late delivery in the latter. Accordingly, subject to recommenda- 
tions contained in chapter 17, infra, we do not recommend that the revised 
Act should adopt a rule making time of delivery of the goods prima facie 
an essential term of the contract, or treating a breach with respect to time 
of delivery as amounting prima facie to a substantial breach of the con- 
tract. However, it should be clearly understood that this recommendation 
would not preclude the parties from adopting their own rule with respect 
to the importance of punctual delivery for the purposes of their contract. 

The second question concerns waiver of the seller's obligation to 
deliver on time, and the buyer's assent to an extension of time. This 
is a common occurrence. Since there may be no consideration to support 
the buyer's indulgence,^^ to what extent is such a waiver binding? As 
noted in an earlier chapter,^! the modern position appears to be governed 
by the somewhat uncertain boundaries of the doctrines of waiver and 
equitable estoppel. We have earlier recommended^^ \}^q adoption of an 
explicit rule, similar to UCC 2-209, establishing the binding character of 
modifications of the terms of the contract agreed to in good faith, whether 
or not they are supported by consideration. If our recommendation is 
adopted, it will normally be unnecessary for the parties to rely on the 
existing doctrines of waiver and equitable estoppel. 



mnfra, ch. 16. 

^^Supra, ch. 6, sec. B. 

20C/m5. Richards Ltd. v. Oppenhaim, [1950] 1 K.B. 616 (C.A.), 

'^^Supra, ch. 5, sec. 4(b). 

'^^Supra, ch. 5, sec. 4(b) (ii). 



335 



3. Place and Form of Delivery 



As to the place and form of delivery, contractual stipulations may 
vary widely. Depending on the terms of the contract, the seller can 
satisfy his delivery obligations in a variety of ways. The most important 
distinction is between those contractual stipulations that require shipment 
of the goods and those that involve no movement. We deal with each of 
these situations in turn. In either event, documents of title may come 
into play and, where a right of disposal is reserved to the seller, their 
important role will need to be considered separately. 

(a) SALES NOT INVOLVING SHIPMENT 

Two questions occur in connection with sales not involving shipment. 
The first is concerned with the rules that should govern the place of 
delivery, absent contractual agreement between the parties. The second 
concerns delivery where the goods are in the possession of a third party. 

(i) Delivery at Seller's Place of Business or Residence 

Section 28(1) of The Sale of Goods Act provides as follows: 

28.( 1 ) Whether it is for the buyer to take possession of the goods or 
for the seller to send them to the buyer is a question depending 
in each case on the contract, express or implied, between the parties, 
and apart from any such contract, express or implied, the place of 
delivery is the seller's place of business, if he has one, and if not, 
his residence, but where the contract is for the sale of specific goods 
that to the knowledge of the parties, when the contract is made, are 
in some other place, then that place is the place of delivery. 

UCC 2-308 (a) and (b) contain provisions to the same effect. Neither 
section, however, indicates the position where the seller has more than 
one place of business or residence.^^ Although this omission does not 
appear to create difficulties in practice, it seems desirable to clarify the 
position in the revised Act. We therefore recommend adoption in the 
revised Act of the following presumptive rules, which should apply when 
the parties' agreement contains no contrary provision i^^ 

The place for delivery of goods under a contract of sale is governed 
by the following rules: 

1 . If the seller has only one place of business, it is the place for 
delivery. 

2. If the seller has two or more places of business only one of 
which is known to the buyer, that one is the place for delivery. 

3. If the seller has two or more places of business and the 



^^Benjamin's Sale of Goods (1974), para. 597. Nor does section 28 deal with the 
position where there is a change in the place of business or residence between 
the time of the making of the contract and the time of performance. We have 
not thought it necessary to deal with this problem in the Draft Bill. 

24See, Draft Bill, s. 5.6. 



336 

buyer knows two or more of them, the one at or from which the 
seller conducted the negotiations is the place for delivery. 

4. If the seller has no place of business, his residence is the place 
for delivery. 

5. If the seller has no place of business and two or more resi- 
dences only one of which is known to the buyer, that one is the 
place for delivery. 

6. If the seller has no place of business and two or more 
residences and the buyer knows two or more of them, the one at or 
from which the seller conducted the negotiations for the sale is the 
place for delivery. 

7. Where in a contract of sale of identified or unascertained 
goods the parties knew at the time of contracting that the goods 
were or were to be drawn from bulk or manufactured or produced 
at a particular place, that place is the place for delivery. 

Rules 1 and 4 reproduce the existing provisions in section 28(1) of 
The Sale of Goods Act and UCC 2-308 (a). Rules 2 and 5 deal, respec- 
tively, with the cases where the seller has more than one place of busi- 
ness or more than one residence, but the buyer is not aware of the fact. 
In both cases the Draft Bill adopts as the place of delivery that place of 
business or residence which is known to the buyer. Where the buyer 
knows that the seller has more than one place of business or more than 
one residence, rules 3 and 6 adopt as the place of delivery the place 
of business or residence from which the seller conducted the negotiations. 
Finally, rule 7, which is based on UCC 2-308 (b) and Article 15(b) 
of the 1977 draft UNCITRAL Convention, deals with the position where 
the parties knew at the time of contracting that the goods were located 
or were to be drawn from bulk or manufactured or produced at a particu- 
lar place. Here the parties' intention is assumed to be, in the absence of 
contrary agreement, that that place is to be the place of delivery. 

(ii) Delivery of Goods in Possession of Another 

It frequently happens, especially in sales involving commodities, that 
goods are held in storage by a warehouseman or other bailee. In such a 
case, section 28(3) of The Sale of Goods Act applies. This provision reads 
as follows: 

28.(3) Where the goods at the time of sale are in the possession of 
a third person, there is no delivery by the seller to the buyer unless 
and until such third person acknowledges to the buyer that he holds 
the goods on his behalf, but nothing in this section affects the opera- 
tion of the issue or transfer of any document of title to goods. 

Under the subsection, there is no delivery by the seller to the buyer unless 
and until the third person acknowledges to the buyer that he holds the 
goods on his behalf. It is, however, made clear that the provisions of the 
subsection do not affect the issuance or transfer of any document of title to 
goods. Section 2-503(4) of the Code is considerably more detailed, and 
provides as follows : 



337 

2-503.(4) Where goods are in the possession of a bailee and are to 
be deHvered without being moved 

(a) tender requires that the seller either tender a negotiable 
document of title covering such goods or procure acknow- 
ledgment by the bailee of the buyer's right to possession 
of the goods; but 

(b) tender to the buyer of a non-negotiable document of title 
or of a written direction to the bailee to deliver is sufficient 
tender unless the buyer seasonably objects, and receipt by 
the bailee of notification of the buyer's rights fixes those 
rights as against the bailee and all third persons; but risk 
of loss of the goods and of any failure by the bailee to 
honor the non-negotiable document of title or to obey 
the direction remains on the seller until the buyer has had 
a reasonable time to present the document or direction, 
and a refusal by the bailee to honor the document or to 
obey the direction defeats the tender. 

With minor changes, the Code provisions essentially reproduce the pro- 
visions in section 43 of the Uniform Sales Act?-^ However, the Code pro- 
visions differ in some respects from existing Anglo-Canadian law, and 
it is desirable to consider whether the Code rules should be adopted in the 
revised Ontario Act. 

The effect of the transfer of a negotiable document of title between 
the parties is the same in Canadian law as under the Code; that is, prima 
facie, it transfers title and constructive possession of the goods to the 
buyer. The adoption of subsection (4) (a) would not, therefore, effect 
any change in the existing Canadian position. The important changes 
would be introduced by the adoption of subsection (4)(b). Under exist- 
ing Canadian law, transfer of a non-negotiable document of title does 
not effect a transfer of possession of the goods until the bailee has been 
notified and has acknowledged the transfer.^^ Subsection (4)(b) would 
change the position by fixing the buyer's rights vis-a-vis the bailee and all 
third persons as soon as the bailee has been notified of the transfer, 
although risk of loss would remain with the seller until the buyer has had 
a reasonable time to present the document. 

Three objections have been raised to the provisions of UCC 2-503 
(4) (b).27 The first is that notification to the bailee by persons other than 
the buyer could have unexpected and undesirable consequences from 
the buyer's point of view. A second objection is that the bailee should not 
become obligated to the buyer against his will. A third objection concerns 
uncertainty created for the seller. While we appreciate these concerns, 
we are of the view that they can be answered satisfactorily. 



25See, NYLRC Study, ch. 5, footnote 52, supra, at pp. (469)-(470). 

26See, Checkik v. Price (1911), 18 W.L.R. 253 (Man. S.C, Tr. Div.); Richardson 

V. Gray (1869), 29 U.C.Q.B. 360 (C.A.); The Warehouse Receipts Act, R.S.O. 

1970, c. 489, s. 21(2). 
27Crawford, footnote 1 supra, at pp. 30-31. 



338 

So far as the first objection is concerned, it seems clear that notifica- 
tion of the transfer to the bailee enures for the buyer's benefit, and will 
not prejudice his position. In particular, there appears to be no basis for 
the fear that the buyer's special property rights, rights of replevin, or 
risk of loss will be affected to his detriment, since these incidents of the 
contract of sale are governed by separate provisions of the Code. 

As to the second objection, the question whether the bailee should 
attorn to the buyer is a little more difficult. At common law, an assign- 
ment of a chose is perfected by notice to the account debtor; there does 
not appear, in our view, to be any sound reason for treating a bailee of 
goods more favourably. ^^ Sections 20 and 21 of the Ontario Warehouse 
Receipts Act^^ also recognize that notification of a transfer is sufficient to 
bind a warehouseman. On the other hand, section 28(2) of The Personal 
Property Security Act^^ appears, in somewhat ambiguous language, to have 
retained the requirement of attornment for the purpose of perfecting a 
security interest in a non-negotiable document of title. It appears to us 
that the Code position better reflects mercantile practice, and we see no 
reason for a rule requiring the bailee to attorn to the buyer. 

A third objection to UCC 2-503(4) (b) involves the uncertainty 
created for the seller as a result of the rule adopted in subsection (4) (b), 
that transfer of risk does not occur until the buyer has had a reasonable 
time to present the document to the bailee. The answer to this objection 
appears to be that the provision was inserted for the seller's benefit; 
without such a requirement, the buyer could postpone the transfer of risk 
for an indefinite period of time. This would obviously be more unsatis- 
factory from the seller's point of view than the very modest uncertainty 
created by the concept of a reasonable delay in the presentation of the 
document. We do not, therefore, favour any change in subsection (4) (b) 
in this respect. 

Accordingly, the Commission recommends the adoption in the revised 
Act of both subsections (a) and (b) of UCC 2-503(4). We also recom- 
mend an amendment to section 28(2) of The Personal Property Security 
Act, in order to bring it into harmony with the provisions in the revised Act 
comparable to UCC 2-503(4) (b), and with sections 20 and 21 of The 
Warehouse Receipts Act. 

(b) SALES INVOLVING SHIPMENT 

Sales involving shipment are governed by section 31 of the Ontario 
Sale of Goods Act. This section provides as follows: 

31.(1) Where in pursuance of a contract of sale the seller is 
authorized or required to send the goods to the buyer, the delivery 
of the goods to a carrier whether named by the buyer or not, for the 
purpose of transmission to the buyer, is prima facie a delivery of the 
goods to the buyer. 



28See, Baer, "Documents of Title", Research Paper No. IV.3, at p. 21 

29R.S.O. 1970, c. 489. 

30R.S.O. 1970, c. 344, as amended. 



339 

(2) Unless otherwise authorized by the buyer, the seller shall 
make a contract with the carrier on behalf of the buyer that is reason- 
able having regard to the nature of the goods and the other circum- 
stances of the case, and if the seller omits so to do and the goods 
are lost or damaged in course of transit, the buyer may decHne to 
treat the delivery to the carrier as a delivery to himself or may hold 
the seller responsible in damages. 

The corresponding Code provisions appear in section 2-504, and read as 
follows: 

2-504. Where the seller is required or authorized to send the goods 
to the buyer and the contract does not require him to deliver them at 
a particular destination, then unless otherwise agreed he must 

(a) put the goods in the possession of such a carrier and make 
such a contract for their transportation as may be reason- 
able having regard to the nature of the goods and other 
circumstances of the case; and 

(b) obtain and promptly deliver or tender in due form any 
document necessary to enable the buyer to obtain posses- 
sion of the goods or otherwise required by the agreement 
or by usage of trade; and 

(c) promptly notify the buyer of the shipment. 

Failure to notify the buyer under paragraph (c) or to make a proper 
contract under paragraph (a) is a ground for rejection only if ma- 
terial delay or loss ensues. 

The two sets of provisions are substantially the same, but a number of 
differences deserve to be noted. 

First, section 2-504(a) omits the statement in section 31(2) of The 
Sale of Goods Act that the seller's contract with the carrier shall be made 
"on behalf of the buyer". This reference to an agency relationship may 
create difficulties, both in determining its incidents, and in reconciling its 
existence with those cases where the bill of lading is issued to the order 
of the seller.31 The Code's neutral position is, therefore, to be preferred. 
In other respects, the requirements under section 2-504 (a) reflect those 
of the existing common law.^^ 

A second difference is raised by UCC 2-504 (b). Subsection (b) 



31 Compare, Crawford, footnote 1 supra, at pp. 35-36, citing Vancouver Milling & 
Grain Co. Ltd. v. C.C. Ranch Co. Ltd., [1924] 2 D.L.R. 569 (Alta. S.C, 
App. Div.), aff'd [1924] S.C.R. 671; and May hew v. Scott Fruit Co. (1915), 
21 D.L.R. 54 (Alta. S.C, App. Div.). See, also, Atiyah, The Sale of Goods 
(5th ed., 1975), at pp. 223-24. 

32See, Benjamin's Sale of Goods (1974), para. 594. For examples of what consti- 
tutes an unreasonable contract or insufficient delivery in the several jurisdictions, 
see: Thomas Young & Sons Ltd. v. Hobson and Partners (1949), 65 T.L.R. 365 
(C.A.); B.C. Fruit Market Ltd. v. Nat. Fruit Co. (1921), 59 D.L.R. 87 (Alta. 
S.C, App. Div.); A.M. Knitwear v. All-America Export-Import Corp. (1976), 
20 U.CC Rep. 581 (N.Y. Ct. App.). 



340 

obligates the seller to obtain and promptly deliver or tender in due form 
any document necessary to enable the buyer to obtain possession of the 
goods. This provision has no counterpart in section 31 of The Sale of 
Goods Act. The requirement is, however, probably already implied at 
law33 and is, in any event, necessary to give business efficacy to the 
parties' agreement. 

There is a third difference. The seller's obligation to notify the buyer 
promptly of the shipment, contained in UCC 2-504 (c), again has no 
counterpart in section 31 of The Sale of Goods Act. This requirement 
corresponds with a similar requirement in section 2-503(1) involving a 
tender of delivery. Section 32(3) of the U.K. Sale of Goods Act'^^ con- 
tains a more restricted notification requirement where goods are shipped 
by sea "under circumstances in which it is usual to insure". ^^ Its clear 
purpose is to enable the buyer to effect insurance; hence, the subsection 
does not apply where it is the seller's duty to insure.^^ The issue that 
concerns us is whether the notice should be restricted to defined modes 
or transactions and for limited purposes as in the U.K. model, or whether 
the requirement should apply universally, as under the Code. If one 
accepts, as we do, that the buyer's interest in receiving notification is 
not restricted to protecting his insurance interest, but includes such matters 
as making arrangement for the receipt of the goods, then the merits of the 
Code's approach are compelling. However, even under the Code, there 
may be situations in which the buyer would not expect separate notifica- 
tion of shipment and would not be prejudiced by its absence. We do not 
read UCC 2-504 (c) as imposing an inflexible requirement: as the opening 
words of the section indicate, all provisions of UCC 2-504 yield to 
contrary agreement, including, of course, the usages prevailing in a given 
trade and any previous course of dealing between the parties. 

Assuming notification is required, a subsidiary question arises with 
respect to the consequences of the seller's breach of the obligation to 
notify. Section 32(3) of the U.K. Act provides that, if the seller is in 
default, the goods shall be deemed to be at his risk during sea transit.^*^ 
This language has been criticized^^ on two grounds: first, it requires no 



33This is certainly true in c.i.f. contracts (see, Benjamin, supra, para. 1539), and 

was assumed by the NYLRC Study, ch. 5, footnote 52, supra, at p. (431) to be 

generally true. 
3456 & 57 Vict., c. 71 (U.K.). 
35The Ontario Sale of Goods Act omits this provision, but in Boyd v. Montour 

Coal & Coke Co. (1923), 25 O.W.N. 115 (H.C.J. ), it was held that, unless 

otherwise agreed, the seller must notify the buyer of the location of the goods at 

the point of transit. 
36For example, in a c.i.f. contract: Law & Bonar Ltd. v. British American Tobacco 

Co. Ltd., [1916] 2 K.B. 605; Benjamin's Sale of Goods (1974), para. 1433; 

Fridman, Sale of Goods in Canada (1973), at p. 259. In Wimble, Sons & Co. 

V. Rosenberg & Sons, [1913] 3 K.B. 743 (C.A.), it was also held that the 

subsection does not apply if the buyer has enough information to insure. 
37See, Benjamin's Sale of Goods (1974), para. 1670. By contrast, in a contract 

calling for shipment c.i.f., the seller would be in breach for failure to insure: 

Benjamin, supra, paras. 1670 and 1524-34; Fridman, footnote 36 supra, at 

p. 260. 
38Atiyah, footnote 31 supra, at pp. 222-24. See, also, Wimble, Sons & Co. v. 

Rosenberg & Sons, [1913] 3 K.B. 743 (C.A.). 



341 

causal relationship between the loss and the seller's failure to notify; and 
secondly, it is inconsistent with the consequences of a breach of the obli- 
gations implied in section 32(2). By way of contrast, UCC 2-504 provides 
that failure to notify, or to make a proper contract of carriage, is only 
a ground for rejection if material delay or loss "ensues". This appears 
to predicate a causal relationship. However, as has been noted, ^^ a new 
difficulty arises under this provision. Section 2-509(1) only transfers the 
risk of loss to the buyer where the goods have been "duly" delivered to 
the carrier; the test of dueness is not satisfied if the seller has failed to 
meet his statutory obligations. We have dealt previously^^ with the latter 
difficulty. Apart from this feature, our view is that there is no need to 
spell out separately the consequences of a breach of the seller's shipment 
obligations, but that they should be governed by the same remedial rules 
as are applicable to other breaches by the seller. 

Accordingly, we recommend that the revised Act should adopt a 
provision similar to UCC 2-504 dealing with the seller's obligations in 
the case of a sale involving shipment, in preference to section 31 of the 
existing Sale of Goods Act; however, the reference in the concluding 
sentence of UCC 2-504 to the consequences of the seller's failure to 
notify or to make a proper contract of transportation should be omitted.*** 

(c) CHARACTER AND EFFECT OF SELLER'S RESERVATION 
OF RIGHT OF DISPOSAL^^ 

Ordinarily, in the absence of protective measures, the effect of the 
seller's delivery of goods to an independent carrier is to deprive him both 
of the title to the goods and of his right of lien or retention in respect 
of the unpaid purchase price. The first result would ensue because, under 
the presumptive rules in section 19 of The Sale of Goods Act, passage 
of title would normally occur not later than the entrustment of the goods 
to the carrier. The second result would occur because a right of lien or 
retention is dependent on the seller's retaining possession of the goods."*^ 
Delivery to the carrier will normally terminate the seller's lien or right of 
retention because section 41(l)(a) of the Act so provides, and because 
of the provision in section 31(1) that delivery to a carrier is prima facie 
deemed to be delivery to the buyer. As a result of the combined operation 
of these rules, the unpaid seller would therefore find himself without any 



39Honnold, in NYLRC Study, ch. 5, footnote 52, supra, at p. (472). 

405wp/-a, ch. 11, sec. 2(c)(ii)(l). 

4iSee, Draft Bill, s. 7.3. 

42As noted previously, UCC 2-401(1) deals generally with the effect of reservation 
of title after shipment by the seller. We have earlier recommended adoption of 
this provision in place of section 20(1) of the existing Sale of Goods Act (see, 
supra, ch. 11, sec. 2(h)). The present discussion deals with a particularized 
application of the general principle with respect to the issuance of a bill of 
lading. See, further, generally: Benjamin's Sale of Goods (1974), paras. 383-91; 
The Sale of Goods Act, s. 19, Rule 5(ii), and s. 20. As to the right of disposal 
in the case of bills of lading, see: Benjamin, para. 1405; Sassoon, C.I.F. and 
F.O.B. Contracts (2nd ed., 1975) (British Shipping Laws, Vol. 5), pp. 195 et 
seq., and 365 et seq.\ Lagergren, Delivery of the Goods (1954), pp. 108-17. 

43j/2e Sale of Goods Act, s. 39(1). 



342 

security for payment of the purchase price, where payment is not due until 
some time subsequent to the shipment of the goods. 

Before the advent of modern forms of credit financing, it was for a 
long time customary for sellers, who wished to protect themselves against 
this danger in cash transactions, to have the bill of lading issued to their 
order. In overseas transactions, this is still a common practice, in con- 
junction with letters of credit forms of payment. In this way, the seller 
obtains the benefit of section 20(2) of The Sale of Goods Act which 
provides that, where goods are shipped and by the bill of lading the goods 
are deliverable to the order of the seller or his agent, the seller prima facie 
reserves the right of disposal. There is also some authority, slender though 
it may be, that issuance of the bill of lading to the seller's order may 
displace the prima facie rule in section 31(1) of The Sale of Goods Act,^^ 
so that the seller retains constructive possession as well as the right of 
disposal with respect to the goods. 

Although the legitimacy of reserving the right of disposal by this 
means is fully recognized in section 20(2) of the Act, there are several 
difficulties that have provoked much difference of opinion among writers 
and in the decisions. The first, apparently a question of fact or of mixed 
fact and law, is whether, by having the bill of lading issued to his order, 
the seller has in fact evinced an intention to reserve the right of disposal. 
This difficulty arises because, according to section 20(2) of the Act, the 
form of the bill is only prima facie evidence of such an intention. The 
second difficulty involves the meaning of "right of disposal". This expres- 
sion is not defined in The Sale of Goods Act, but might suggest a limited 
interest falling short of legal title. According to Williston,'^^ the seller 
reserves legal title, although it should be noted that this view is by no 
means uncontroverted. The third difficulty, assuming Williston's view is 
correct, is to determine the nature of the legal title reserved by the seller. 
The case law appears to leave it unsettled whether it is an absolute title,"*^ 



44See, supra, ch. 13, footnote 30 and text thereto. 

"^^Williston on Sales, (Rev. ed., 1948), Vol. 2, sec. 283: "There seems no doubt 
that the seller who thus consigns the goods to himself has complete control over 
them, and that the so-called jus disponendi is in fact title." 

46This position is put forward in Wait v. Baker (1848), 2 Exch. 1 (which stressed 
an alleged difference between delivery of the goods to the master of a vessel as 
a person carrying goods on behalf of the seller, and delivery to the ship as a 
common carrier); Mirabita v. Imperial Ottoman Bank (1878), 3 Ex. D. 164, 
at 172, per Cotton, L.J., (but there it was held that, to reserve an absolute 
property, the seller had to follow a certain course of action); Ross T. Smyth 
& Co. Ltd. V. T.D. Bailey, Son & Co., [1940] 3 All E.R. 60 (H.L.), per Lord 
Wright at p. 68 (stressing the financing aspects as requiring the seller to retain 
a general property interest); Benjamin's Sale of Goods (1974), paras. 1699 
et seq. The case of Browne v. Hare (1858), 3 H. & N. 484, 157 E.R. 561 
(Exch.), aff'd (1859), 4 H. & N. 822, 157 E.R. 1067 (Exch.), analyzed the 
question in terms of intent. Mirabita, itself, seemed to hold that the buyer and 
seller both had property interests in the goods on the stated facts. 



343 

or simply a security title.'*'' The Ontario cases'*^ seem generally to favour 
the first view, and have in this way reached conclusions which, while 
logically consistent, are open to question on functional grounds. 

Williston,'*^ on the other hand, was not in doubt about the correct 
characterization of the seller's reservation of title: it was only by way of 
security, in the same way that a mortgagee holds title. This view was 
incorporated in section 20 of the Uniform Sales Act.^^ UCC 2-505 has 
built upon, and somewhat enlarged, the provisions of the Uniform Sales 
Act. UCC 2-505 provides as follows: 

2-505.(1) Where the seller has identified goods to the contract by 
or before shipment: 

(a) his procurement of a negotiable bill of lading to his own 
order or otherwise reserves in him a security interest in 
the goods. His procurement of the bill to the order of a 
financing agency or of the buyer indicates in addition only 
the seller's expectation of transferring that interest to the 
person named. 

(b) a non-negotiable bill of lading to himself or his nominee 
reserves possession of the goods as security but except in 
a case of conditional delivery (subsection (2) of Section 
2-507) a non-negotiable bill of lading naming the buyer 
as consignee reserves no security interest even though the 
seller retains possession of the bill of lading. 



47This position may have originated in Ogg v. Shuter (1875), 1 C.P.D. 47 (C.A.), 
in the opinion of Lord Cairns, speaking for himself, Kelly, C.B., Bramwell, B., 
and Blackburn, J,, at pp. 50-51. This approach was also taken in The Parchim, 
[1918] A.C. 157 (P.C.), and in Frebold and Sturznickel (Trading as Panda 
O.H.G.) V. Circle Products Ltd., [1970] 1 Lloyd's Rep. 499 (C.A.), at pp. 
504-05. It is also favoured by Sassoon, footnote 42 supra, paras. 424, 429; 
Carver, Carriage by Sea (12th ed., 1971) (British Shipping Laws, Vol. 3), 
para. 1066, arguing that for the seller to reserve the right of disposal in an 
f.o.b. contract is a breach of his obligations; Atiyah, footnote 31 supra, at 
pp. 224-25; and, Lagergren, footnote 42 supra, at pp. 112-16. Compare, Scrut- 
ton on Charterparties (17th ed., 1964), at p. 179. 
48For example, Scott v. Melady (1900), 27 O.A.R. 193; Vipond v. Sisco (1913), 
29 O.L.R. 200 (App. Div.). In both of these cases it was held, inter alia, 
that the property in the goods remained with the seller, and that he was not 
entitled to sue for the price even assuming the buyer had wrongfully refused to 
accept and pay for the goods. See, Sassoon, footnote 42 supra, paras. 441 to 442. 
49Williston, footnote 45 supra, sees. 283-84, 305. Compare, Note, "Significance of 
the Concept 'Title' Where the Seller Retains the Bill of Lading to Goods" 
(1929), 29 Colum. L. Rev. 1100, stating that the American common law posi- 
tion was generally considered to be that the seller retained an absolute title but 
that, on closer analysis, the matter was not so simple. 
50Seclion 20(2) of the Uniform Sales Act provides as follows: 

Where goods are shipped, and by the bill of lading the goods are deliverable 
to the seller or his agent, or to the order of the seller or of his agent, the 
seller thereby reserves the property in the goods. But if, except for the form 
of the bill of lading, the property would have passed to the buyer on ship- 
ment of the goods, the seller's property in the goods shall be deemed to be 
only for the purpose of securing performance by the buyer of his obligations 
under the contract. 



344 



(2) When shipment by the seller with reservation of a security 
interest is in violation of the contract for sale it constitutes an im- 
proper contract for transportation within the preceding section but 
impairs neither the rights given to the buyer by shipment and 
identification of the goods to the contract nor the seller's powers as 
a holder of a negotiable document. 

It will, therefore, be seen that there are differences in substance 
between section 20(2) of The Sale of Goods Act on the one hand, and 
the provisions of the Uniform Sales Act and those of the Uniform Com- 
mercial Code, on the other. These differences, and others, are apparent 
from the following comparative table. 

TABLE 1 

Reservation of Rights of Disposal: 
Comparison of 
SGA 20(2), USA 20, and UCC 2-5055^ 
SGA USA 



1. (Negotiable) bill of Reserves 
lading to order of right of 
seller or agent disposal 



2. (Non-negotiable) 
bill of lading to 
seller or nominee 

3. (Negotiable) bill of 
lading to order of 
buyer 

4. (Non-negotiable) 
bill of lading in 
buyer's name 



No express 
mention 



No express 
mention 



No express 
mention 



Reserves right 
of disposal, but 
only as security 
interest: 20(2) 

Reservation of 
security 
interest: 20(2) 

Reservation of 
right of posses- 
sion of goods: 
20(3) 

No express 
mention 



UCC 

Reserves right 
of disposal, but 
only as security 
interest: 2-505 
(l)(a) 

"Possession . . . 
as security"; 
2-505(1 )(b) 

Reservation of 
security interest; 
2-505(l)(a) 

No security 
interest in 
seller: 2-505 
(l)(b) 



It will be noted that section 2-505 distinguishes between a "security 
interest" in the goods^^ ^nd "possession ... as security". ^^ A learned 
commentator has suggested^"^ that no difference in result was intended. 
The distinction is anomalous in view of the definition of security interest 



SiUnlike UCC 2-505, section 20(2) of The Sale of Goods Act and section 20 of 
the Uniform Sales Act do not distinguish between negotiable and non-negotiable 
bills of lading. In deference to this difference, we have bracketed the references 
to "negotiable" and "non-negotiable" bills of lading in the table. For further 
discussion of this terminological issue, see supra, ch. 13, sec. 1. 

52Subsection (l)(a). 

53Subsection (l)(b). 

54Honnold, in NYLRC Study, ch. 5, footnote 52, supra, p. (475). 



345 

in section 1-201(37) of the Code. This definition draws no distinction 
between possessory and non-possessory interests, but defines a security 
interest, inter alia, as an interest in personal property or fixtures that 
secures payment or performance of an obligation. 

The consequences of characterizing the seller's interest in the bill of 
lading as a security interest^^ will vary with the nature of the problem. 
For residual title purposes, the buyer will be deemed to be the owner 
of the goods pursuant to the general rule laid down in UCC 2-401(1).^^ 
This could make a significant difference in third party situations. Be- 
tween seller and buyer, the result will be less dramatic since, as previously 
noted, their rights and duties are issue oriented, and rarely turn on the 
locus of title. 

Ontario has already committed itself, in The Personal Property 
Security Act, to the Code's concept of the nature of a security interest. 
Consistency suggests that the same characterization should be applied to 
the seller's reservation of a right of disposal after shipment. Moreover, as 
we have noted, the provisions of UCC 2-505 are more comprehensive 
than those of section 20(2) of The Sale of Goods Act; for example, as 
is apparent from Table 1 set out above, UCC 2-505 distinguishes between 
negotiable and non-negotiable documents of title. We therefore recom- 
mend that the essential features of UCC 2-505 should be adopted in the 
revised Act in lieu of section 20(2) of the existing Act, subject to the 
elimination of the distinction between "security interest" and "possession 
... as security" referred to above.^"^ 

If our recommendation is adopted, an appropriate amendment to 
The Personal Property Security Act should also be considered. Section 
3(2) of The Personal Property Security Act states that the rights of buyers 
and sellers under sections 20(2), 39, 40, 41 and 43 of The Sale of Goods 
Act are not affected by The Personal Property Security Act. The latter 
Act is based upon Article 9 of the Uniform Commercial Code and, by 
way of contrast, UCC 9-113 provides as follows: 

9-113. A security interest arising solely under the Article on Sales 
(Article 2) is subject to the provisions of this Article except that to 
the extent that and so long as the debtor does not have or does not 
lawfully obtain possession of the goods 

(a) no security agreement is necessary to make the security 
interest enforceable; and 

(b) no filing is required to perfect the security interest; and 

(c) the rights of the secured party on default by the debtor are 
governed by the Article on Sales (Article 2). 

As will be noted, the impact of Article 9 on the seller's reservation of the 
right of disposal is modest, so long as the buyer has not obtained posses- 



55The same observation applies to a reservation of title not represented by a 

document of title. 
56Supra, ch. 11, sec. 2(h). 
57See, Draft Bill, s. 7.4. 



346 

sion of the goods. We are persuaded by the merits of UCC 9-113, and 
accordingly recommend that consideration be given to amending section 
3(2) of The Personal Property Security Act in accordance with the Code 
provision. 

A final observation is in order on a constitutional point. The seller's 
right of disposal under section 20(2) of the existing Ontario Sale of 
Goods Act is not confined to bills of lading subject to provincial juris- 
diction. We are not aware of any conflict between this subsection and 
federal legislation governing documents of title. Accordingly, we have 
not thought it necessary to restrict the application of our recommended 
draft provision in a way that section 20(2) is not now restricted. 

4. The Use of Mercantile Terms 

For over 150 years, the custom of merchants deahng in international 
trade has been to describe their mutual obligations of performance in a 
symbolic shorthand of initials and words. The commonest of these are 
'f.o.b.' and 'c.i.f.', which signify 'free on board' and 'cost, insurance and 
freight' respectively.^^ In North America, these terms have not been 
restricted to use in export transactions, or to shipment by sea.^^ Their 
earliest use in Canada was in connection with the internal or domestic 
Great Lakes grain trade,^ but they were soon extended to carriage by 
rail, and are now also used in truck shipments. The different types of 
shipping terms, and the frequency of their use among the respondents 
to the C.M.A. Questionnaire, are shown in Table 2, set out below. 

TABLE 2 
SHIPPING TERMS61 



A Iways 




Rarely 


or often 


Mid 


or never 


% 


% 


% 



(a) Ex works (factory, warehouse, 

etc.) 42.1 22.3 35.5 

(b) F.O.R. — F.O.T. (free on rail — 

truck) named departure point 8.0 14.4 77.6 

(c) F.A.S. (free alongside ship) 

named port of shipment 2.6 9.0 88.5 



58Crawford, footnote 1 supra, p. 42. The terms 'f.o.b.' and 'c.i.f.' are not defined 
in The Sale of Goods Act, but have been intensively analyzed by the British 
courts. See, Benjamin's Sale of Goods (1974), chs. 19-21; and generally, Sas- 
soon, C.I.F. and F.O.B. Contracts, (2nd ed., 1975) (British Shipping Laws, 
Vol. 5). The Code provides a set of definitions in sections 2-319 to 2-323. 

59Crawford, footnote 1 supra, at pp. 42-43. 

(>^Wilmot V. Wadsworth (1853), 10 U.C.Q.B. 594; Howland v. Brown (1856), 
13 U.C.Q.B. 199. 

^^Source: Fisher, "Analysis of Computer Tabulation of Responses to Question- 
naire Distributed to Ontario Members of the Canadian Manufacturers' Associa- 
tion", Research Paper No. 1.2, Table 19, p. 55. ("Always" and "rarely" are 
used in the original table as condensed terms and have the meaning ascribed to 
them in the above columnar headings.) 



347 

(d) F.O.B. (free on board) named 

port of shipment 36.6 22.6 40.7 

(e) C. & F. (cost and freight) 

named port of destination 4.1 10.8 85.1 

(f) C.I.F. (cost, insurance, freight) 

named port of destination 6.9 15.7 77.5 

(g) Freight or carriage paid to named 

point of destination (inland) 20.5 30.8 48.7 

(h) Ex ship — named port of 

destination 1.2 3.7 95.7 

(i) Ex quay — named port of 

destination 0.8 2.3 96.5 

(j) Other 7.7 3.7 88.5 

It will be noted that, while shipment "ex works" is the single most com- 
mon term,^2 "f.o.b. named port of shipment"^^ comes a close second,^ 
and that, when combined, the various other forms of shipment terms 
substantially exceed in frequency sales made "ex works". However, fre- 
quency of use is not coterminous with agreement as to the meaning of 
the terms used, or variations thereof. To what extent, therefore, should 
the revised Ontario Act follow the lead of Article 2 in providing an 
authoritative catalogue of definitions? The preHminary, but far from 
exhaustive, inquiries made on our behalf indicate considerable sympathy 
for such an enterprise. The Canadian decisions interpreting the meaning 
of shipping terms are modest in number, and the courts have generally 
resorted to British precedents. We were advised that, even among ship- 
ping managers, the terms are not always fully understood, and that their 
statutory codification might help to dispel some of the uncertainty. 

It goes without saying that no final decision should be taken without 
further and comprehensive consultation with the interested parties. As- 
suming the reaction remains positive, two further questions arise: (a) 
which model should be adopted; and, (b) what provision should be made 
with respect to the impact of containerization? 

(a) WHICH MODEL? 

There are only two approaches that seriously commend themselves 
as precedents: namely, the provisions in sections 2-319 to 2-323 of the 
Uniform Commercial Code, and the Incoterms^^ adopted by the Inter- 
national Chamber of Commerce. The two sets of terms have been com- 
pared for us,^^ and the overall conclusion appears to be that the differences 



6242.1%. 

63Presumably, this should read "point" of shipment since, in North American 

practice, the f.o.b. term is not confined to maritime shipments. 
6436.6%. 
65International Chamber of Commerce, Incoterms 1953 and Supplement (1974), 

(Brochure No. 274). 
66See, Appendix 9 to this Report. 



348 

between them are modest. Nevertheless, there is little doubt in our minds 
that the Code terms make a more logical choice. We say this for two 
reasons. In the first place, the United States is our closest trading partner, 
and it is obviously desirable that Canadian and American businessmen 
should attach the same meaning to each other's trade terms. Secondly, 
the Article 2 definitions are better geared to North American practices 
and traditions since, unlike the Incoterms, they are not restricted to foreign 
trade contracts. Accordingly, we recommend that the revised Act incor- 
porate a definition of common trade terms. The definitions contained in 
UCC 2-319 to 2-323 should be adopted in preference to the Incoterms 
promulgated by the International Chamber of Commerce.^"^ 

(b) IMPACT OF CONTAINERIZATION68 

Containerization is a mode of shipment in which large numbers of 
packages or units are stored in sealed metal crates. The primary ad- 
vantages of containerization are simplicity of handling and increased 
security. The container revolution, which began in the middle 1960's, has 
had its most significant impact so far on the overseas shipping trade. To 
a lesser extent, it has influenced domestic shipping, with most container 
carriage going to those carriers, known as "combined transport operators", 
who containerize the shipper's goods in anticipation of their shipment 
by sea. In the future, intermodal^^ domestic containerization may be ex- 
pected to grow as regulatory difficulties are solved and shipper awareness 
of its advantages is increased. 

The containerization process differs from traditional breakbulk car- 
riage in many ways. First, it eliminates the individual handling of pack- 
ages by carriers and forwarding agents,*^^ thus making traditional bills of 
lading inappropriate for such carriage. Secondly, it complicates the pro- 
cess of determining which carrier is liable for damage to the goods, be- 
cause the container is sealed by the first carrier and not opened until the 
destination is reached. '^^ This may result in the initial carrier, usually 
the combined transport operator, bearing a greater burden of liability 
than in the past; it further points out the incongruous limitations on 
liability to which the various modes of carriage are now subject. '^^ Thirdly, 



67See, Draft Bill, ss. 5.19-5.23 inclusive. 

68For a general overview of Canadian developments at the non-legal level, see 
The Financial Post, "Special Report", July 8, 1978, pp. 29-34. 

69That is, involving a number of modes of transport. 

70Sassoon, "Trade Terms and the Container Revolution" (1969-70), 1 J. Mar. L. 
& Comm. 73, 78. 

^^Benjamin's Sale of Goods (1974), paras. 1835-36; Sassoon, footnote 70 supra, 
pp. 78-80. 

72ArticIe IV.5 of the Hague Rules, in force in Canada under the Carriage of 
Goods by Water Act, R.S.C 1970, c. C-15, provides, inter alia, that the carrier 
shall not limit liability to an amount less than $500. (This amount has become 
the standard.) The Hague-Visby Rules would raise the minimum to $662. 
Compare, Sassoon, footnote 70 supra, p. 79, n. 22. Domestically, common 
carriers are generally held to the standard of insurers, escaping liability only 



349 

it raises new problems of passage of title and risk of loss as between 
buyer and seller,*^^ especially where the contract is f.o.b. or c.i.f. and the 
seller is obliged to obtain a bill of lading. The reason, as some com- 
mentators have pointed out,'^'* is that a clean bill of lading for "shipped" 
not "received" goods may not be obtainable. Fourthly, questions of what 
constitutes a package for purposes of liability limitations have only begun 
to be litigated, '^^ and no uniform principles have yet emerged. 

As now constituted, the usual requirements of a bill of lading (that 
is, that it be issued by a shipowner, not a forwarding agent, '^^ that the 
goods be "on board" or "shipped"'''^ and not "received", that it be "clean","^^ 
and that it should confirm storage under deck'^^) cannot ordinarily be 



where the damage is caused by an act of God or war: Turgel Fur Co. Ltd. v. 
Northumberland Ferries Ltd. (1966), 59 D.L.R. (2d) 1 (N.S. S.C.); Boston & 
Maine Ry. v. Ratzkowski (1921), 30 Que. K.B. 445 (C.A.). Liability may also 
be limited pursuant to statute: for example, the Railway Act, R.S.C. 1970, c. 
R-2, s.294(2), authorizing the Canadian Transport Commission to establish 
limitations on liability. Under the auspices of UNCITRAL, a Draft Convention 
on the Carriage of Goods by Sea, to replace the Hague Rules, was completed 
in 1976 and was considered at a Conference of Plenipotentiaries held in Ham- 
burg in March, 1978. The proceedings at that Conference and the substance of 
the Convention that was there approved are described in Moore, "The Hamburg 
Rules" (1978), 10 J. Mar. L. & Comm. 1. The text of the United Nations 
Convention on the Carriage of Goods by Sea, 1978 is reproduced at (1978), 
10 J. Mar. L. & Comm. 147. See, further, Sweeney, "The UNCITRAL Draft 
Convention on Carriage of Goods by Sea" (1975-76), 7 J. Mar. L. «& Comm. 69, 
327, 487, 615, and ibid. (1977), 8 J. Mar. L. & Comm. 167; and Tetley et al., 
"Canadian Comments on the Proposed Uncitral Rules" (1978), 9 J. Mar. L. 
& Comm. 251. 

T^Benjamin's Sale of Goods (1974), paras. 1843-45; Sassoon, footnote 70 supra, 
pp. 80 et seq. 

74Sassoon, footnote 70 supra, pp. 81-82; Benjamin's Sale of Goods (1974), paras. 
1840-41. 

75The American cases are analyzed in Simon, "Container Law: A Recent Re- 
appraisal" (1976-77), 8 J. Mar. L. & Comm. 489. One line of cases, typified by 
Royal Typewriter Co. v. M/V Kulmerland (1973), 483 F. 2d 645 (U.S.C.A., 
2nd Cir.), would treat the container as a package for purposes of the limitation 
on liability. The other line of cases, for example, Matsushita Electric Corp. of 
America v. The S.S. Aegis Spirit (1976), 414 F. Supp. 894 (W.D. Wash.), 
would hold that the law must "reflect the realities of the maritime industry of 
today", and that the container is really more like the hold of a ship, so that the 
actual packages contained within it are the packages to which reference should 
be made. So far, there appear to be no reported English cases. Compare, Ben- 
jamin's Sale of Goods (1974), para. 1838. 

76International Chamber of Commerce, Uniform Customs and Practice for Docu- 
mentary Credits (1974), art. 19a, (Brochure No. 290). 
Tilbid., para. 18. 

78International Chamber of Commerce, The Problem of Clean Bills of Lading, 
(Brochure No. 283). 

79To avoid the exclusion in the Hague Rules, Article 1(c). Some cases have now 
raised the question of when it may be said that a custom or usage has developed 
to permit shipment of containers on deck: for example, du Pont de Nemours 
International SA. v. S.S. Mormacvega (1972), 367 F. Supp. 793 (S.D.N.Y.). 



350 

satisfied by container carriage. This fact indicates that the traditional rules 
will have to be adapted in time to conform to this new, and vastly more 
efficient, means of transportation. It may be that the terms f.o.b. and c.i.f. 
will have to be redefined to encompass container transport. Or, it may be 
that commerce will develop a new term or terms to signify the rights and 
duties of the parties where goods are shipped in this manner.^^ 

Many problems have yet to be litigated, and commercial handling 
of these transactions is still evolving. We therefore conclude that any 
attempt to codify the law regarding the rights and obligations of sellers 
and buyers under a container transport of goods at this time would be 
premature, and might stunt the development of containerization. 

B. BUYER'S OBLIGATION TO PAY 

1 . Time of Payment 

Time of payment is governed by section 27 of the Ontario Sale of 
Goods Act. This section provides as follows: 

27. Unless otherwise agreed, delivery of the goods and payment 
of the price are concurrent conditions, that is to say, the seller shall 
be ready and willing to give possession of the goods to the buyer in 
exchange for the price and the buyer shall be ready and willing to pay 
the price in exchange for possession of the goods. 

The presumptive rule is that payment and delivery are concurrent condi- 
tions. Prima facie, therefore, the buyer is not entitled to any period of 
credit, however short. The results of the C.M.A. Questionnaire show,^^ 
however, that this statutory rule is rarely applied in practice. 

Even where no period of credit has been agreed upon, it does not 
follow that failure to make punctual payment entitles the seller to ter- 
minate the agreement. Section 11 of the Act states that, unless otherwise 
provided, time of payment is not of the essence. The buyer's default will, 
of course, amount at least to a breach of warranty, and the seller will be 
entitled to exercise the rights of resale conferred upon him under section 
46 of The Sale of Goods Act. These important matters, together with the 
Code's much stricter view of the importance of timely payment, will be 
discussed more fully in the chapter on seller's remedies. ^^ x^e legal effect 
of the seller's waiver of his right to punctual payment, or his agreement 
to extend the time for payment, raises issues similar to those discussed 
earlier with respect to breach of the seller's obligation to deliver on time, 
and waiver by the buyer of his right to punctual delivery.^^ Our comments 



80See, Ramberg, "The Combined Transport Operator", [1968] J. Bus. L. 133. 

^^Fislier, footnote 61 supra. Table 20, p. 58. Only 3.9% of the respondents regu- 
larly require payment on delivery, compared with 82.3% who stipulate that pay- 
ment must be made within 30 days of delivery. 

82/n/ra, ch. 16. 

^^Supra, this chapter, sec. A.2. 



351 

in connection with the latter situation are equally applicable in the present 
context. For reasons similar to those expressed in support of our recom- 
mendation concerning time of delivery, and subject to our further recom- 
mendations in chapter 16, we also recommend that the revised Act should 
not contain a rule characterizing the importance of terms with respect to 
the time of payment or characterizing the prima facie gravity of a breach 
thereof. Again, however, it should be clearly understood that the parties 
would be free to establish their own rules with respect to these questions. 
Problems arising out of the rule in PinneVs Case,^"^ and its statutory modi- 
fication in The Mercantile Law Amendment Act,^^ have also been dis- 
cussed earlier,^^ and need not be repeated here. 

We now turn our attention to an issue of present concern: namely, 
how tender of payment is to be geared to individual modes of perform- 
ance. Given the diverse forms of delivery, the rule of concurrent payment 
and delivery contained in section 27 of the Ontario Sale of Goods Act 
provides no clear answer to this issue. UCC 2-310, on the other hand, 
provides the greater particularity that is required. The section reads as 
follows : 

2-310. Unless otherwise agreed 

(a) payment is due at the time and place at which the buyer is 
to receive the goods even though the place of shipment is 
the place of delivery; and 

(b) if the seller is authorized to send the goods he may ship 
them under reservation, and may tender the documents of 
title, but the buyer may inspect the goods after their ar- 
rival before payment is due unless such inspection is in- 
consistent with the terms of the contract (Section 2-513); 
and 

(c) if delivery is authorized and made by way of documents 
of title otherwise than by subsection (b) then payment is 
due at the time and place at which the buyer is to receive 
the documents regardless of where the goods are to be 
received; and 

(d) where the seller is required or authorized to ship the goods 
on credit the credit period runs from the time of shipment 
but post-dating the invoice or delaying its dispatch will 
correspondingly delay the starting of the credit period. 

It will be noted that subsection (a) substantially modifies the conclusion 
that would otherwise follow from a literal application of the concurrent 
payment and delivery rule: payment is due, not when the goods are 
shipped or delivered to the carrier, but when they are "received" by the 



84(1602), 5 Co. Rep. 117a, 77 E.R. 237 (C.P.), 
85R.S.O. 1970, c. 272. 
^^Supra, ch. 5, sec. 4(b). 



352 

buyer.^'^ As the Official Comment to section 2-310 explains, the section has 
been drawn to reflect modern business methods of dealing at a distance 
rather than face to face. Postponement of the time of payment to the time 
of receipt enables the buyer to exercise his preliminary right of inspection 
before making payment, even though, under the terms of delivery, risk 
of loss may have previously passed to the buyer. We examine more fully 
in chapter 17 the general question of the time and place of the buyer's 
right of inspection and his cognate right of rejection of non-conforming 
goods. For the moment, we content ourselves with the following observa- 
tions. We appreciate that the Code's rule in UCC 2-3 10(b) may be at 
variance with some early Ontario decisions^^ suggesting or holding that 
the buyer must inspect the goods at the place of shipment, regardless of 
where he actually receives, and is requested to pay for, the goods. How- 
ever, at least some English decisions^^ have shown a disposition to imply 
a term bringing the time of inspection more in accord with mercantile 
expectations. Presumably, the influence of these decisions will also be 
felt in Canada. Even if this were not so, we are persuaded by the sound- 
ness of the Code's reasoning which, it will be observed, is only directed 
to a presumptive, not a conclusive, implied term of the parties' agree- 
ment. We recognize, too, that the Code's more buyer-oriented rule may 
prejudice the seller if the goods are subsequently rejected for alleged 
non-conformity. However, the Code^ offers the seller a measure of reci- 
procity since, unlike existing Anglo-Canadian law, it does require a 
rejecting merchant buyer to follow the seller's reasonable instructions 
with respect to the goods and, in case of urgency, to take protective steps 
even without such instructions, if the seller has no agent or place of 
business at the market of rejection. 

The other subsections of UCC 2-310 also appear to be in accord 
with mercantile understanding. Accordingly, we recommend that the re- 
vised Act should adopt, in place of section 27 of the existing Act, a pro- 
vision comparable to UCC 2-310 insofar as this provision relates to time 
of payment.^i 

2. Payment Before Inspection 

The parties' agreement, express or implied, may, of course, require 
payment by the buyer without a preliminary right to inspect the goods, 
as in the case of goods that are sold "C.O.D.". Similarly, payment may be 
required before the goods are even available for inspection, as in the 



87With respect to the current rule, that payment and delivery are concurrent obli- 
gations, see, further, Atiyah, The Sale of Goods (5th ed., 1975), pp. 136-38. 

88For example, Falconbridge, CJ., in Craig v. Shaw (1903), 2 O.W.R. 449 (Div. 
Ct.), leave to appeal refused 2 O.W.R. 508 (C.A.); McLean Produce Co. v. 
Freedman (1908), 12 O.W.R. 1038 (Tr. Div.); Merrill v. Waddell (1920), 47 
O.L.R. 572 (C.A.). 

89For example, Moiling & Co. v. Dean & Son Ltd. (1901), 18 T.L.R. 217 
(K.B.D.); Boks & Co. v. J.H. Rayner & Co. (1921), 37 T.L.R. 800 
(C.A.). 

90See, UCC 2-603. 

9iSee, Draft Bill, s. 5.8. 



353 

case of documentary sales where the goods are in transit at the time of 
tender of the documents. These well known situations requiring payment 
before inspection are restated in UCC 2-513(3), which provides as 
follows: 

2-513.(3) Unless otherwise agreed and subject to the provisions of 
this Article on C.I.F. contracts (subsection (3) of Section 2-321), 
the buyer is not entitled to inspect the goods before payment of the 
price when the contract provides 

(a) for delivery 'C.O.D.' or on other hke terms; or 

(b) for payment against documents of title, except where such 
payment is due only after the goods are to become avail- 
able for inspection. 

We support the provisions of UCC 2-513(3), and recommend their adop- 
tion in the revised Act.^^ 

The provisions of section 2-513(3) must, however, be read subject 
to UCC 2-512. This section provides that, where the contract requires 
payment before inspection, non-conformity of the goods does not excuse 
the buyer from so making payment, subject to the following two excep- 
tions: namely, 

(a) where the non-conformity appears without inspection; or 

(b) where, despite tender of the required documents, the circum- 
stances would justify injunction against honor under the pro- 
visions of section 5-1 14 of the Code. 

As Comment 3 to section 2-512 explains, the first exception is based on 
common sense and normal commercial practice, and refers to a non- 
conformity that is evident in the mere process of taking delivery. We sup- 
port UCC 2-512(1 ) (a) and need not pursue it further. 

The rationale of the second exception, contained in UCC 2-512 
(l)(b), is less self-evident, and requires more careful consideration. 
Section 5-114, referred to in paragraph (b), entitles the issuer of a letter 
of credit to honour a demand for payment, despite its customer's complaint 
that fraud, forgery or other defect not apparent on the face of the docu- 
ments exists or has been committed, unless a court has enjoined such 
honour. Apparently, the provision reflects pre-Code case law.^^ According 
to Benjamin,^'* dicta in English cases are in accord with this provision.^^ 
It seems safe to assume that, what the buyer may do indirectly, he may 



92See, Draft Bill, s. 7.12(4). 

93For example, Brown v. C. Rosenstein Co. (1923), 200 N.Y.S. 491 (Sup. Ct.); 

Williams Ice Cream Co. v. Chase Nat'l. Bank (1924), 205 N.Y.S. 446 (App. 

Div.); see, also. Miller, "Problems and Patterns of the Letter of Credit", [1959] 

U. 111. L.F. 162. 
^^Benjamin's Sale of Goods (1974), para. 2074. See, also, Sassoon, footnote 42 

supra, pp. 407 et seq. 
^^Societe Metallurgique D'Aubrives & Villerupt v. British Bank for Foreign Trade 

(1922), 11 Lloyd's Rep. 168 (K.B.D.), at p. 170; Ilamzeh Malas dc Sons v. 

British Imex Industries Ltd., [1958] 2 Q.B. 127 (C.A.), at p. 130. 



354 

do directly; that is, he may refuse payment on the grounds of the seller's 
fraud. Ontario has no legislation directed specifically to letters of credit, 
and has no provision comparable to UCC 5-114. We recommend that 
the revised Act incorporate a provision comparable to UCC 2-512. How- 
ever, the provision in the revised Act comparable to UCC 2-512(1 )(b) 
should read "the seller has acted fraudulently".^^ 

3. Sufficiency and Form of Payment 

The Ontario Sale of Goods Act contains no express provisions deal- 
ing with sufficiency and form of payment, and these questions continue 
to be governed by the common law. The common law rule is^"^ that, unless 
otherwise agreed or established by usage of the trade or course of dealing 
between the parties, the price must be paid in legal tender of the realm. 
It goes without saying that this rule reflects a simpler mercantile age, 
and that little evidence will be needed to rebut its application at the pre- 
sent day. Express provisions relating to the sufficiency and form of pay- 
ment are contained in UCC 2-511(2), which provides as follows: 

2-511.(2) Tender of payment is sufficient when made by any means 
or in any manner current in the ordinary course of business unless 
the seller demands payment in legal tender and gives any extension 
of time reasonably necessary to procure it. 

This subsection seems to us to conform to modern commercial dealings. 
Accordingly, we recommend that a provision equivalent to UCC 2-511(2) 
be incorporated in the revised Act.^^ 

The question has, however, been raised^^ whether legislation of this 
nature would be intra vires the Province, given the federal Parliament's 
exclusive jurisdiction over currency and coinage, and bills and notes. ^^^ 
In our view, the adoption of a provision equivalent to UCC 2-511(2) in 
the revised Ontario Act would not trench upon fields of federal jurisdic- 
tion. The effect of such a provision would be simply to declare how the 
buyer's price obligations may be satisfied, and not to establish new forms 
of legal currency. 

It is settled law^^^ that, if the seller accepts payment by cheque or 
other type of instrument, the payment is only conditional and the original 
obligation will revive if the instrument is dishonoured. An express rule to 
this effect, involving payment by cheque, is now incorporated in UCC 
2-511(3), and is inferentially assumed in section 37(1) (b) of the Ontario 



96See, Draft Bill, s. 7.11. 
^"^ Benjamin's Sale of Goods (1974), para. 693. 
98See, Draft Bill, s. 7.10(2). 
99Crawford, footnote 1 supra, at p. 70. 

lOOj/je British North America Act, 1867, 30 & 31 Vict., c. 3 (U.K.), R.S.C. 1970, 
App. II, No. 5, s. 91.20, .14, .15, and .18. 

^^^Benjamin's Sale of Goods (1974), para. 695. 



355 

Sale of Goods Act.^^^ Assuming, as we do, that no conflict is involved with 
the federal Bills of Exchange Act,^^^ we recommend the adoption of a pro- 
vision similar to UCC 2-511(3) in the revised Ontario Act.^^'^ Although 
our recommended draft provision, following the Code, refers only to pay- 
ment by cheque, it should be understood that the rule is not intended 
to be restricted to cases of payment by cheque. Where payment assumes 
the form of other types of instrument, the common law rules concerning 
conditional payment will continue to apply by virtue of the provision of 
our Draft Bill preserving the general principles of law and equity.^^^ 

4. Place of Payment 

Place of payment is another area in which there appears to be a 
theoretical conflict between the presumptive common law rule and ac- 
cepted commercial practice. The common law rule is^°^ that the debtor 
must seek out his creditor. The rule will, however, yield to the contrary 
intentions of the parties, as gathered from all the surrounding circum- 
stances of the transaction. In the absence of such indications, Benjamin^^'' 
suggests that the basic rule is displaced in commercial transactions in 
favour of a presumption that payment is to be made at the place where 
the creditor resided or carried on business at the time of the contract. 
Earlier in this chapter, we discussed UCC 2-3 10. ^^^ It will be noted that 
this section deals explicitly with both the time and place of payment 
where the parties are not dealing face to face. We have recommended 
adoption in the revised Act of a provision similar to UCC 2-310, insofar 
as it relates to time of payment. In our view, the provisions of UCC 2-310, 
as they apply to place of payment, should be sufficient to take care of the 
apparently infrequent occasions when the question is likely to become an 
issue between the parties. Accordingly, we recommend their adoption in 
the revised Act.^^^ 

5. Letters of Credit 

The documentary letter of credit is a commercial instrument that has 
been in use for more than a hundred years as a means of financing in- 
ternational business transactions. Its use is now also spreading to a wide 
variety of domestic, and not necessarily sales-oriented, transactions. As 



i02Section 37(1 )(b) provides as follows: 

The seller of goods shall be deemed to be an 'unpaid seller' within the 
meaning of this Act, . . . 

(b) when a bill of exchange or other negotiable instrument has been 
received as conditional payment and the condition on which it was 
received has not been fulfilled by reason of the dishonour of the 
instrument or otherwise. 
103R.S.C. 1970, c. B-5, as amended. 
l04See, Draft Bill, s. 7.10(3). 
lOSSee, Draft Bill, s. 3.4(1). 

106E. Leonard & Sons v. Gushing Bros. Co. Ltd. (1914), 30 O.L.R. 646 (C.A.); 
Re Sovereen Mitt Glove and Robe <fe Go. v. Gameron (1915), 35 O.L.R. 143 
(H.C.J.) ; Gollins v. Wilson (1922), 70 D.L.R. 642 (Sask. C.A.). 
^^1 Benjamin's Sale of Goods (1974), para. 705, at p. 314. 
^^^Supra, this ch., sec. B.l. 
i09See, Draft Bill, s. 5.8. 



356 

has been stated, its object is "to solve two problems that arise in most 
sales involving a substantial period of shipment: the problem of furnish- 
ing security and that of raising credit". ^^^ The wide use of documentary 
credits in international transactions has led to a need for uniformity. ^ 
As noted in an earlier chapter, ^^^ ^j^g International Chamber of Commerce 
has played a key role in promoting this objective. The Chamber, in 1933, 
first promulgated a code of Uniform Customs and Practice for Docu- 
mentary Credits, a code known as the UCP. Revised versions of this code 
were issued in 1951 and 1962, and a further revision was completed in 
1974 113 The UCP has been enormously successful, and has been adopted 
by the bankers of 148 countries, including those of the U.S.A., the United 
Kingdom, Canada, and most other Commonwealth jurisdictions. 

For reasons that are not entirely clear, ^^"^ the sponsors of the Uniform 
Commercial Code decided to include a separate Article, Article 5, to deal 
with documentary letters of credit. Of all the Articles in the Code, Article 
5 is unique: it does not purport to supplant any existing comprehensive 
statute or series of statutes, but codifies, albeit only partially, an area 
previously almost untouched by the hand of the legislator. ^^^ Article 5 is 
not simply an American replica of the UCP, but appears to differ from it 
in significant respects.^ ^^ Our terms of reference do not include the law 
of letters of credit, and we offer no opinion on the desirability of codifying 
this branch of the law, or on the comparative merits of Article 5 and the 
UCP. It would be fair to say, however, that we have detected no evidence 
that the law of letters of credit is in need of reform, or that the business 
community is dissatisfied with its present informal status. This conclusion 
is supported, at least to some extent, by the negligible amount of Canadian 
jurisprudence on the subject. ^^"^ 



^^^Benjamin's Sale of Goods (1974), para. 2001. Compare, Joseph, "Letters of 
Credit: the Developing Concepts and Financing Function" (1977), 94 Bank. 
L.J. 816. 

lllCompare, McCrohan, "The Letter of Credit in a Changing Competitive Environ- 
ment" (1977), 9 J. Mar. L. & Comm. 151, contending that international use is 
declining. 

ii^Supra, ch. 2, sec. 5(d). 

ii3See, Schmitthoff, The Export Trade (6th ed., 1975), pp. 216-17; and compare, 
Benjamin's Sale of Goods (1974), para. 2008. 

114-Compare, NYLRC Study, ch. 5, footnote 52, supra, Vol. 3, p. (1575). 

ii^See, Professor Schlesinger's trenchant criticisms of the pre- 1955 version of 
Article 5 in the NYLRC Study, ch. 5, footnote 52, supra, Vol. 3, at pp. (1576) 
et seq. 

ii^The complete list of Canadian cases on letters of credit seems to be as follows: 
Davis O'Brien Lumber Co. v. Bank of Montreal, [1951] 3 D.L.R. 536 
(N.BC.A.); Sovereign Bank v. Bellhouse Dillon & Co. (1911), 23 Que. K.B. 
413 (C.A.); J acques-C artier Bank v. R. (1895), 25 S.C.R. 84; Rolland v. Caisse 
D'Economie Notre-Dame de Que. (1895), 24 S.C.R. 405; Bank of Toronto v. 
Ansell (1875), 7 R.L.O.S. 262 (C.A.); White v. Hunter (1841), 1 U.CQ.B. 
452 (C.A.); Gissing v. Hopper (1843), 6 O.S. 505 (C.A.); Co-operative 
Fisheries Ltd. v. Canadian Imperial Bank of Commerce (1969), 7 D.L.R. (3d) 
610 (Sask. Q.B.); and Rattner and Penneys v. Mercantile Bank of Canada (Ont. 
H.C.J.) , (decisioA of Holland, J., dated August, 1977, not yet reported). 



357 

While, as stated, we express no views as to the need for a compre- 
hensive review of the law of letters of credit, some aspects of the general 
area have a direct impact upon sales law and do, in our view, merit 
specific attention. We have been particularly concerned with UCC 2-325, 
which contains the only reference in Article 2 to documentary letters of 
credit. This section provides as follows: 

2-325(1) Failure of the buyer seasonably to furnish an agreed 
letter of credit is a breach of the contract for sale. 

(2) The delivery to seller of a proper letter of credit suspends 
the buyer's obligation to pay. If the letter of credit is dishonored, 
the seller may on seasonable notification to the buyer require payment 
directly from him. 

(3) Unless otherwise agreed the term 'letter of credit' or 
'banker's credit' in a contract for sale means an irrevocable credit 
issued by a financing agency of good repute and, where the shipment 
is overseas, of good international repute. The term 'confirmed credit' 
means that the credit must also carry the direct obligation of such 
an agency which does business in the seller's financial market. 

Subsections (1) and (2) conform to existing law and are unobjection- 
able. ^^^ The meaning of "letter of credit" in subsection (3) differs from 
the UCP provisions, which only require a clear statement as to whether the 
credit is revocable or irrevocable and, in the absence of a contrary indica- 
tion, treat it as revocable. ^^^ However, the precedent of the UCP is not 
too persuasive. The UCP is concerned with the obhgations of the issuing 
bank, and not with the obligations assumed by the buyer under the terms of 
the contract of sale. Since a documentary credit is designed to protect the 
seller's interests, a presumption of irrevocability appears to be more con- 
sistent with the parties' intentions, and is supported by judicial authority.^^o 
UCC 2-325(3) further requires that the letter of credit must be issued by 
a financing agency of good repute. This requirement is again consistent 
with the purpose of the documentary credit. The definition of "confirmed 
credit" in subsection (3) corresponds with the definition in the UCP,^^^ 
save that the latter contains no requirement that the confirming bank must 
carry on business in the seller's financial market. Again, however, the Code 
provision would appear to be in accord with commercial understanding.122 

Our overall conclusion is that all three subsections of UCC 2-325 are 
clearly related to the law of sales and would be useful additions to the 
revised Ontario Act. Accordingly, we recommend that the revised Act 
incorporate a provision comparable to UCC 2-325.^^3 j^ our view the 



iiSCrawford, footnote 1 supra, at pp. 76-77. Compare NYLRC Study, ch. 5, foot- 
note 52, supra, pp. (434)-(435). 

li9Article 1. 

^'2-QBenjamin's Sale of Goods (1974), para. 2034, citing Giddens v. Anglo-African 
Produce Co. Ltd. (1923), 14 Lloyd's Rep. 230 (K.B.D.). 

l2iArticle 3. 

122NYLRC Study, ch. 5, footnote 52, supra, p. (436). 

i23See, Draft Bill, s. 5.25. 



358 

enactment of such a provision falls within the provincial competence. We 
know of no conflicting federal provisions. 

6. Rights of Financing Agency 

Section 37(2) of the Ontario Sale of Goods Act provides that, for 
purposes of Part IV of the Act dealing with the rights of an unpaid seller 
against goods, " 'seller' includes a person who is in the position of a seller, 
as for instance an agent of the seller to whom the bill of lading has been 
endorsed . . .". UCC 2-707 contains a similar, but modernized, version of 
section 37(2). The Code provision is superior to section 37(2) insofar as 
it makes it clear that a "person in the position of a seller" includes a person 
who holds, "a security interest or other right in goods similar to that of a 
seller". We are of the view that the revised Act should adopt a provision 
similar to UCC 2-707, and so recommend. 1^4 

The Code contains a further, related, and to some extent overlapping, 
provision. UCC 2-506(1) states as follows: 

2-506. ( 1 ) A financing agency by paying or purchasing for value a 
draft which relates to a shipment of goods acquires to the extent of the 
payment or purchase and in addition to its own rights under the draft 
and any document of title securing it any rights of the shipper in the 
goods including the right to stop delivery and the shipper's right to 
have the draft honored by the buyer. 

In our view, this provision also reflects existing Ontario law. Since we 
have recommended adoption of the related sections in this part of Article 
2, we also recommend, for the sake of consistency, adoption of UCC 
2-506(1). 125 

The provisions of UCC 2-506(2) also merit reference. Subsection 
(2) of section 2-506 provides as follows: 

2-506.(2) The right to reimbursement of a financing agency which 
has in good faith honored or purchased the draft under commitment 
to or authority from the buyer is not impaired by subsequent dis- 
covery of defects with reference to any relevant document which was 
apparently regular on its face. 

The Sale of Goods Act contains no corresponding provision, no doubt 
because UCC 2-506(2) is concerned with the relationship between the 
buyer and his financing agency. However, there is nothing unusual about 
UCC 2-506(2). It appears merely to reflect the common law position,^ ^6 
albeit in a slightly wider context, with respect to the duties of a banker 



i24See, Draft Bill, s. 9.6. 

l25See, Draft Bill, s. 7.5(1). We have substituted "bill of exchange", the term 
sanctioned in the Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 2, 17, for the 
term "draft", used in UCC 2-506 and used interchangeably with bill of exchange 
in UCC 3-104(2) (a). Our draft provision also substitutes the word "seller" for 
"shipper" in UCC 2-506(1). 

i26See, Benjamin's Sale of Goods (1974), paras. 2062-64. 



359 

under a documentary credit to examine documents presented to him, and 
to reflect, also. Articles 7 and 9 of the Uniform Customs and Practice for 
Documentary Credits. Accordingly, for the sake of consistency, we also 
recommend adoption of subsection (2) of UCC 2-506.^27 

We have considered whether our draft provision should include a 
reference to promissory notes as well, but have decided against such a 
reference. Sellers do not ship valuable goods over long distances on the 
basis of a buyer's promissory note. Moreover, there is no evidence that 
they are likely to do so in the foreseeable future. For a long time, it was 
commercial practice (both in overseas and, to a lesser extent, domestic 
shipments) for a seller concerned to ensure payment for his goods to draw 
a bill of exchange at the time of shipment on the buyer or a bank with 
which the buyer had established a line of credit. The seller attached this 
bill to the bill of lading and, thus secured, the bill of exchange would be 
forwarded to the buyer for his acceptance, or entrusted to the seller's 
bank or other agent for the same purpose. This practice is reflected in 
section 20(3) of The Sale of Goods Act.^^^ Nowadays, this sequence of 
events is largely augmented or replaced by the use of a letter of credit 
issued by the buyer's bank. This practice substitutes the bank's credit for 
that of the buyer, and thus decreases the seller's risk. For these reasons 
we feel that it is proper to omit a reference to promissory notes. ^^9 

In recommending adoption of a provision similar to UCC 2-506, we 
have considered two constitutional issues. The first issue is whether, in 
legislating in respect of the rights of a financing agency, the Province would 
be dealing with banking, an exclusive head of federal legislative authority 
under section 91.15 of The British North America Act, 1867 P^ This 
issue arises because our recommended definition of "financing agency''^^! 
includes a "bank". While it is true that Parliament's power in respect of 
banking has been interpreted broadly,^^^ ^he courts have not given this 
federal power a very large role in terms of precluding provincial legisla- 
tion. ^33 Our recommended draft provision does not give rise to any appar- 



i27See, Draft Bill, s. 7.5(2). 

'28Compare, Cahn and Mayer v. Pockett's Bristol Channel Steam Packet Co. Ltd. 
[1899] 1 Q.B. 643 (C.A.). 

i29For a lucid exposition of current financing techniques in this area, see Har- 
field, Bank Credits and Acceptances (5th ed., 1974). 

13030 & 31 Vict., c. 3 (U.K.), R.S.C. 1970, App. II, No. 5. 

i3iSee, Draft Bill, s. 1.1(1)13. 

l32For example, Tennant v. Union Bank of Canada, [1894] A.C. 31 (P.C), at 
p. 46. 

i33This is evident in decisions that have upheld provincial legislation dealing with 
deposit taking and lending institutions, such as credit unions, some of the activi- 
ties of which are similar to those of banks: see, In re Dominion Trust Co., 
[1918] 3 W.W.R. 1023 (B.C.S.C); Re Bergethaler Waisenamt, [1949] 4 
D.L.R. 769 (Man. C.A.); La Caissc Populaire Notre Dame Limitee v. Moycn 
(1967), 61 D.L.R. (2d) 118 (Sask. Q.B.); but compare the dissenting opinion 
of Hall, J., (Spence, J., concurring) in Breckenridge Speedway Ltd. v. The 
Queen (1969), 9 D.L.R.(3d) 142 (S.CC). It is also apparent from a series of 



360 

ent conflict with the Bank ActP^ or with other potentially applicable 
federal banking legislation. Moreover, although our provision may affect 
banks in their capacity as financing agencies, this will clearly occur only 
in the context of sale of goods legislation. The Commission has concluded, 
therefore, that the true nature and character of the recommended provi- 
sion should properly be viewed as being in relation to property and civil 
rights, a head of exclusive provincial legislative authority under section 
92.13. The second constitutional issue is whether our recommended pro- 
vision may be impugned on the ground that it is legislation in respect of 
bills of exchange, which are exclusively a federal matter under section 
91.18 of The British North America Act. In our opinion, our provision 
does not interfere with the rights of a holder of a bill of exchange. Instead, 
it simply recognizes the existence of those rights, and gives a financing 
agency holding a bill of exchange additional rights in the nature of those 
that a seller enjoys in a sale of goods transaction. The Commission has 
concluded, therefore, that this provision may properly be characterized as 
relating to the sale of goods, an activity in respect of which a province 
may properly legislate under section 92.13. However, to put the matter 
beyond doubt, we have provided in our Draft BilP^s that nothing con- 
tained therein shall affect any right of a holder in due course of a bill, note 
or cheque within the meaning of the Bills of Exchange ActP^ 

Finally, we are aware that the bill of exchange and other traditional 
payment instruments may eventually be replaced by electronic forms of 
transfer and payment authorizations. This development may make it desir- 
able to broaden the scope of the recommended provision in the revised 
Act, and of references to payment instruments in other parts of the Act. 
These changes are, however, still in course of evolution. ^^"^ They will, in 
any event, involve far-reaching legislative changes in the area of banking 
and negotiable instruments. In our view, it would be premature at this stage 
to attempt to anticipate necessary corresponding amendments to the revised 
Sale of Goods Act. 



decisions holding banks subject to such general provincial statutes as those 
governing the follov^'ing: (a) mechanics' liens: Fonthill Lumber Co. v. Bank of 
Montreal (1959), 19 D.L.R. (2d) 618 (Ont. C.A.); Canadian Imperial Bank of 
Commerce v. T. McAvity cfe Sons, Ltd., [1959] S.C.R. 478; John M. M. Troup 
Ltd. V. Royal Bank of Canada, [1962] S.C.R. 487; (b) seizure for outstanding 
taxes: Brantford v. Imperial Bank, [1930] 4 D.L.R. 658 (Ont. C.A.); (c) 
landlords' rights of distraint: Re Newmarket Lumber Co. Ltd., [1951] D.L.R. 
720 (Ont. H.C.J.) ; (d) inspection of records for the purposes of civil litiga- 
tion: Sommers v. Sturdy (1957), 10 D.L.R. (2d) 269 (B.C.CA.). When 
this result has been obtained, it has always been in the absence of any valid and 
paramount federal legislation that might displace the relevant provincial legisla- 
tion so far as banking is concerned. 

134R.S.C. 1970, c. B-1. 

i35See, Draft Bill, s. 3.4(2). It will be noted that other sections of the Draft Bill, 
for example, s. 7.13, also refer to matters involving bills of exchange. 

136R.S.C. 1970, c. B-5. 

i37Compare, Branching Out, Report of the Canadian Computer-Communications 
Task Force (Dept. of Communications, Ottawa, May, 1972), Vol. 2, ch. 3. 



361 
RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should strive for greater clarity in the use of the 
term "delivery" and its various derivatives. 

2. The revised Act, following UCC 2-309(1), should make it clear 
that, where the contract itself specifies no time for delivery, the 
seller's obligation to deliver the goods within a reasonable time is 
not restricted to cases where the seller is to send the goods to the 
buyer, but applies to all forms of delivery. 

3. Pursuant to our earlier recommendation eschewing the a priori 
classification of contractual terms, and subject to further recom- 
mendations contained in chapter 17, the revised Act should not 
adopt a rule making time of delivery of the goods prima facie an 
essential term of the contract, or treating a breach with respect to 
time of delivery as amounting prima facie to a substantial breach 
of the contract. 

4. Since neither section 28(1) of the existing Sale of Goods Act 
nor UCC 2-308 deals with the questions, the revised Act should 
specify, in accordance with the presumptive rules set out in sec- 
tion 5.6 of our Draft Bill, the place of delivery where the seller 
has more than one place of business or residence or where, in a 
contract of sale of identified or unascertained goods, the parties 
knew at the time of contracting that the goods were located or 
were to be drawn from bulk or manufactured or produced at a 
particular place. 

5. The revised Act should incorporate a provision similar to UCC 
2-503(4) with respect to the seller's obligations where the goods 
are in the possession of a third person. 

6. Section 28(2) of The Personal Property Security Act dealing 
with the perfection of a security interest in goods held by a bailee, 
other than a bailee who has issued a negotiable document of title, 
should be amended to harmonize with the provision in the revised 
Act similar to UCC 2-503(4) (b) and with sections 20 and 21 of 
The Warehouse Receipts Act, which do not require attornment 
by the bailee to the buyer. 

7. A provision similar to UCC 2-504 dealing with the seller's obli- 
gations in the case of a sale involving shipment should be adopted 
in the revised Act in preference to section 31 of the existing Sale 
of Goods Act. However, the reference in the concluding sentence 
of UCC 2-504 to the consequences of the seller's failure to notify 
the buyer of the shipment or to make a proper contract of trans- 
portation should be omitted; breach of the seller's shipment obliga- 
tions should be governed by the same remedial rules applicable 
to other breaches by the seller. 



362 

8. The seller's reservation of a right of disposal in goods after ship- 
ment should be designated in the revised Act as the reservation 
of a security interest. Accordingly, a provision comparable to 
UCC 2-505 should be adopted in the revised Act in place of 
section 20(2) of the existing Act, subject to the elimination of 
the distinction in the Code provision between "security interest" 
and "possession ... as security". 

9. In light of the above recommendation, consideration should be 
given to amending section 3(2) of The Personal Property Secur- 
ity Act so as to make it correspond to UCC 9-113. 

10. The revised Sale of Goods Act should incorporate a definition 
of common trade terms. The definitions contained in sections 
2-319 to 2-323 of the Uniform Commercial Code should be ad- 
opted in preference to the Incoterms promulgated by the Inter- 
national Chamber of Commerce. 

11. No attempt should be made at this time to codify the law relating 
to the rights and obligations of sellers and buyers under a con- 
tainer transport of goods. 

12. Pursuant to our earlier recommendation eschewing the a priori 
classification of contractual terms, and subject to further recom- 
mendations contained in chapter 16, the revised Sale of Goods 
Act should not adopt a rule characterizing the importance of 
terms with respect to time of payment or characterizing the prima 
facie gravity of a breach thereof. 

13. The revised Act should adopt, in place of the concurrent payment 
and delivery rule contained in section 27 of the existing Sale of 
Goods Act, a provision comparable to UCC 2-310, insofar as 
the Code provision relates to time of payment. 

14. The revised Act should incorporate provisions relating to pay- 
ment before inspection of the goods similar to those contained in 
UCC 2-513(3) and UCC 2-512. The words "the seller has acted 
fraudulently" should, however, be substituted for the existing 
language of UCC 2-512(1) (b). 

15. The revised Act should adopt an express provision, similar to 
UCC 2-511(2), to the effect that tender of payment is sufficient 
when made by any means or in any manner current in the ordin- 
ary course of business, unless the seller demands payment in legal 
tender and gives any extension of time reasonably necessary to 
procure it. 

16. The revised Act should adopt an express provision, similar to 
UCC 2-511(3), to the effect that payment by cheque is condi- 
tional and may be defeated as between the parties if the cheque is 
dishonoured. 

17. Provisions similar to UCC 2-310, as they relate to place of pay- 
ment, should be adopted in the revised Ontario Sale of Goods 
Act. 



363 

18. No opinion is expressed concerning the desirability of codifying 
the law relating to letters of credit or the comparative merits of 
Article 5 of the Uniform Commercial Code and the Uniform 
Customs and Practice for Documentary Credits promulgated by 
the International Chamber of Commerce; the revised Act should, 
however, incorporate a provision similar to UCC 2-325. 

19. The revised Act should adopt provisions comparable to UCC 
2-707 dealing with a "person in the position of a seller" and 
UCC 2-506 dealing with rights of a financing agency, in place of 
section 37(2) of the existing Sale of Goods Act. 



CHAPTER 15 

FRUSTRATION IN CONTRACTS OF SALE 



1. Introduction 

Like the law of mistake, the rules governing the frustration of agree- 
ments belong to one of the most difficult branches of contract law.^ The 
relatively small number of Canadian sales cases involving frustration issues 
and the infrequency with which the parties themselves may encounter the 
problem in periods of national and international stability^ mask the legal 
difficulties. In an environment of intense inflation and rapidly changing 
economic and political conditions, the parties are often faced with conting- 
encies not foreseen at the time of contracting or which undermine their 
common assumptions. Force majeure clauses are a regular feature in well 
drafted contracts,^ and the parties may seek to protect themselves against 
future imponderables by the insertion of other appropriate clauses in their 
contracts. These drafting devices may diminish the need for clear rules; 
they do not replace them. 

With the exception of section 8, The Sale of Goods Act does not pur- 
port to codify the law of frustration in its relation to contracts of sale. 
Cases falling outside the provisions of section 8 continue to be governed 
by common law principles."^ The common law position, though much liti- 
gated in this century in the United Kingdom, is far from clear, and both 
the theory of frustration and its scope as a defence remain unsettled. There 
is, therefore, much to be said for an attempt to clarify the present law. As 
will be seen, the Uniform Commercial Code contains a substantial num- 
ber of provisions which, while disclaiming any pretence at a comprehensive 
statement, do clarify and improve the existing position in important re- 
spects in so far as contracts of sale are concerned. For a number of rea- 
sons, we support a similar approach in the revised Act to that adopted in 
the Code. The desirability of a general restatement of frustration principles 
should, we believe, be left for future consideration as part of our proposed 
Law of Contract Amendment Project. 

2. The Sale of Goods Act, Section 8 

Section 8 of The Sale of Goods Act deals with one aspect of the law 
of frustration in relation to a contract of sale; that is, the loss of specific 
goods. The section provides as follows: 



iFor a general discussion of the topic of frustration, see McCamus, "The Doctrine 
of Frustration in the Law of Sales", Research Paper No. II. 7. 

2Approximately 85% of the respondents to the CMA Questionnaire (Research 
Paper No. I.l, Q. 51) stated that frustration problems arose rarely or never, 
and represented not more than 0.5% of total sales. It should be noted, however, 
that the questionnaire was answered before the 1973-74 oil crisis and the subse- 
quent dislocation of the economies of many Western countries. 

3See, McCamus, footnote 1 supra, at p. 5b. 

^Summarized in McCamus, footnote 1 supra, at pp. 6-38. See, also, Benjamin's 
Sale of Goods (1974), paras. 424-49. 

[365] 



366 

8. Where there is an agreement to sell specific goods and subse- 
quently the goods without any fault of the seller or buyer perish be- 
fore the risk passes to the buyer, the agreement is thereby avoided. 

The effect of section 8 is to discharge the seller's obligation to deliver and 
the buyer's obligation to pay the price. The section should be read in 
conjunction with its companion provision, section 7,^ which applies similar 
principles to determine the effect on the contract of the parties' mistaken 
assumption with respect to the existence of the goods. As was noted in an 
earlier chapter,^ section 7 raises problems of construction. This is also the 
case with section 8. The section is, moreover, seriously incomplete. We 
turn now to consider the deficiencies of section 8."^ 

First, section 8 deals only with the loss of "specific" goods. It is not 
clear whether the term "specific" is to be interpreted as referring solely to 
goods in existence at the time of making the contract. The Act defines 
"specific goods" in section l(l)(m) as "goods identified and agreed upon 
at the time the contract of sale is made". In Howell v. Coupland,^ however, 
a seller was excused from a contract of sale of potatoes to be grown on 
his land when the crop failed. This case, decided before the enactment of 
the Sale of Goods Act, 1893, and other similar decisions, have raised the 
possibility of the application of section 8 to "quasi-specific goods". The 
law has not, however, developed.^ 

Secondly, it will be noted that section 8 of The Sale of Goods Act 
only applies where the goods "perish". In chapter 5 of this Report, in the 
context of mistake, we considered^^ the question when goods have "per- 
ished" within the meaning of section 7 of the Act. The term "perish" 
raises similar problems of interpretation in the context of section 8. For 
example, it is difficult to determine what degree of deterioration of the 
subject matter will bring the section into operation. There is some author- 
ity,^^ disputed though it is,^^ tj^^t the concept of perishment includes deteri- 
oration that alters, but does not destroy, the goods. Similarly, the concept 



^Section 7 reads as follows: 

Where there is a contract for the sale of specific goods and the goods with- 
out the knowledge of the seller have perished at the time the contract is 
made, the contract is void. 
^Supra, ch. 5, sec. 5(a). 

7See, McCamus, footnote 1 supra, at pp. 42 et seq. 
8(1876), 1 Q.B.D. 258 (C.A.). See, also, In Re Badische Co. Ltd., [1921] 2 

Ch. 331, and cases cited by Sutton, The Law of Sale of Goods in Australia and 

New Zealand (2nd rev. ed., 1974), at p. 83. 
9In In re Wait, [1927] 1 Ch. 606 (C.A.), at p. 630, Atkin, LJ., said that these 

cases could be explained either as sales dependent on a contingency that fails, or 

as covered by a rule of common law not inconsistent with the Act. 
^^Supra, ch. 5, sec. 5(a). 
nRendell v. Turnbull & Co. (1908), 27 N.Z.L.R. 1067 (S.C). See, also, Esher, 

M.R., in Asfar & Co. v. Blundell, [1896] 1 Q.B. 123 (C.A.), at p. 127; Atiyah, 

The Sale of Goods (5th ed., 1975), at pp. 46-47; Sutton, footnote 8 supra, at 

p. 87. 
^morn v. Minister of Food, [1948] 2 All E.R. 1036 (K.B.). 



367 

of perishment causes difficulty in indivisible contracts' ^ where part of the 
subject matter of the contract is destroyed. There is authority'"^ that partial 
destruction will result in frustration of an indivisible contract, with the 
result that, even though the buyer is willing to take the remaining goods, 
he cannot force the seller to deliver. 

Thirdly, it is not clear to what extent "fault" includes loss due to 
negligence. '5 Section l(l)(f) of The Sale of Goods Act defines "fault" 
to mean "a wrongful act or default". This definition is wide enough to 
embrace negligent conduct, and such a reading would be consistent with 
the rule applied in the case of self-induced frustration. Still, a small amend- 
ment to the definition would put the point beyond doubt. 

Fourthly, difficulties are created by the restriction of section 8 to an 
"agreement to sell". By virtue of section 2(3) of The Sale of Goods Act}^ 
there is an agreement to sell where there has been no transfer of property 
in the goods to the buyer, but where such transfer is to take place at a 
future time or subject to some condition to be fulfilled thereafter. It seems 
clear, therefore, that section 8 has no application to contracts of sale where 
property or title has passed to the buyer. Yet, where title has passed, risk 
may nevertheless remain with the seller by agreement, or control of the 
goods may not have passed to the buyer. In the latter case, it is true that 
the line between frustration concepts and the seller's obligation to deliver 
the goods blurs. Nevertheless, it may well be argued that the doctrine of 
frustration should apply in the situations discussed above, notwithstand- 
ing that title may have passed to the buyer. 

Fifthly, similar difficulties arise because section 8 is restricted to 
cases where goods perish "before the risk passes to the buyer". The sec- 
tion will not apply, therefore, where risk of loss has been assumed by the 
buyer, even though property in and possession of the goods remain with 
the seller. Indeed, there might be a difficulty in applying the concept of 



^3No difficulty is encountered if the seller's obligation with respect to the destroyed 
goods is severable. The severable portion of the contract relating to the goods 
still in existence is enforceable; that portion that concerns the destroyed goods 
is discharged. 
^^Barrow, Lane & Ballard Ltd. v. Phillip Phillips & Co. Ltd., [1929] 1 K.B. 574. 
Lovatt V. Hamilton (1839), 5 M. <& W. 639, 151 E.R. 271 (Exch.). Compare, 
obiter dicta in Howell v. Coupland, footnote 8 supra, and H. R. & S. Sainsbury 
Ltd. V. Street, [1972] 3 All E.R. 1127 (Q.B.D.). The result is that the buyer 
cannot compel delivery of the remaining goods even if he is willing to pay the 
full price, and even if the quantity destroyed is small: Sutton, footnote 8 supra, 
at p. 88. 
l5The point was expressly left open in Joseph Constantine Steamship Line Ltd. v. 
Imperial Smelting Corp. Ltd., [1942] A.C. 154 (H.L.). For support for the view 
that negligence precludes operation of the doctrine, see In re Arthur, Arthur v. 
IVynn (1880), 14 Ch. D. 603; Lebeaupin v. Richard Crispin & Co., [1920] 
2 K.B. 714. 
i^Section 2(3) provides as follows: 

(3) Where under a contract of sale the property in goods is transferred 
from the seller to the buyer, the contract is called a sale, but, where the 
transfer of the property in the goods is to take place at a future time or 
subject to some condition thereafter to be fulfilled, the contract is called an 
agreement to sell. 



368 

frustration to this situation: to discharge the seller from his obligation to 
deliver, on the ground of frustration, would also discharge the buyer from 
his obligation to pay the price, and this would conflict with the term of the 
contract placing the risk of loss on the buyer.^"^ Professor Glanville Wil- 
liams^^ would resolve this dilemma by applying frustration only to the 
obligation of the seller to deliver and not to the contract as a whole. 

Sixthly, section 8 contains no reference to the relevance of foresee- 
ability. A literal application of the section would lead to the conclusion, 
contrary at least to one line of frustration theory,^^ that the seller is ex- 
cused from non-performance, even though he could reasonably foresee a 
substantial risk of loss of or damage to the goods. 

Apart from these constructional points, section 8 is open to the further 
objection of serious incompleteness. The section fails to deal with accepted 
forms of frustration, other than those where specific goods have perished. 
For example, it omits any reference to impossibility with reference to the 
designated means of delivery, illegality, or frustration of purpose. ^^ Such 
cases are left to the common law for resolution. Again,^! there would 
appear to be no justification for the distinction drawn by the section be- 
tween specific and unascertained goods, if one accepts, as we do, that 
frustration doctrines can apply just as readily to agreed or assumed sources 
of supply as to goods identified at the time of the formation of the con- 
tract. The courts have applied common law frustration concepts where 
the contractual source of supply fails,^^ but have not extended this analysis 
to the area of so-called "economic frustration"; that is, situations where 
alternative sources of supply, or performance generally, have become 
prohibitively expensive or otherwise burdensome.^^ As we shall see, the 
Code provisions, while not exhaustive, cover many more situations than 
does the Act. Before turning to the Code provisions, however, we think 
it appropriate to make brief reference to the provisions of the Uniform 
Sales Act. 



i^Hence, the risk of loss may be on the seller: Atiyah, The Sale of Goods (5th 
ed., 1975), at p. 171. 

iSWilliams, The Law Reform (Frustrated Contracts) Act 1943 (1944), at pp. 82- 
83. Sealy, " 'Risk' in the Sale of Goods" (1972 B), 31 Camb. L.J. 225, at p. 237, 
puts forth the alternative suggestion that the buyer in such a case implicitly 
"waives all claims and rights which arise from the non-performance by the seller 
of his obligations in so far as this is attributable to such loss or damage". 

19See, for example, Davis Contractors Ltd. v. Fareham U.D.C., [1956] A.C. 696 
(H.L.), at p. 728; Canadian Government Merchant Marine v. Canadian Trading 
Co. (1922), 64 S.C.R. 106, 123; Ziger v. Shiffer and Hillman Co. Ltd., [1933] 
O.W.N. 293, [1933] 2 D.L.R. 691 (C.A.); Restatement of the Law of Contracts, 
s. 456. 

20See, McCamus, footnote 1 supra, at p. 48. 

21/6/af., at pp. 55-56. 

22See, In Re Badische Co. Ltd., footnote 8 supra (contract to supply goods known 
only to be available in Germany discharged by war). Compare, Monkland v. 
Jack Barclay Ltd., [1951] 2 K.B. 252 (C.A.). 

23Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H., [1962] A.C. 93 (H.L.) 
(closure of Suez Canal did not create frustration). See, also, Ocean Tramp 
Tankers Corp. v. F/O Sovfracht (The Eugenia), [1964] 2 Q.B. 226 (C.A.), 
(closure of Suez did not discharge shipowner from charterparty to carry goods 
from Genoa to India). 



369 

3. Uniform Sales Act, Section 8 

Section 7 and subsection (1) of section 8 of the Uniform Sales Act 
were cast in the same terms as sections 7 and 8 of the Ontario Sale of 
Goods Act, respectively. Subsection (2) of section 8 was new, however, 
and gave the buyer the option to avoid the contract, or to acquire the 
remaining goods or the undeteriorated portion of them, where part of the 
goods had perished, or the whole or a material part of the goods had so 
deteriorated as to be materially changed in character. However, the value 
of this option was greatly weakened by the requirement that the buyer 
had to pay the full price for the remaining goods if the contract was indi- 
visible. ^"^ Obviously, this gave him little incentive to exercise the option. 

4. Code Provisions 

Sections 2-613 to 2-616 of the Uniform Commercial Code contain the 
important provisions of Article 2 on the definition of frustrating events 
and their impact on the parties' rights and duties. These provisions, though 
falling short of a complete codification of the rules of frustration as applied 
to contracts for the sale of goods, are much more extensive in their cover- 
age than section 8 of the Ontario Sale of Goods Act. We think it desir- 
able to deal generally with the major features of these provisions before 
turning our attention to their more detailed discussion. 

Section 2-613 deals with goods identified to the contract that suffer 
"casualty" before the risk of loss has passed to the buyer. This section 
reproduces, with an important change, the provisions in section 8 of the 
Uniform Sales Act. Where the loss is total, the contract is avoided; where 
partial loss or deterioration results, the buyer has the option to avoid the 
contract or, unlike the position under the Uniform Sales Act, to accept the 
contract with an allowance for the deficiency. 

Subsection (1) of section 2-614 deals with a failure of the agreed 
means of carriage or delivery. It provides that, if a commercially reason- 
able substitute is available, such substitute performance must be tendered 
and accepted. Presumably, although this is not explicitly stated, the ab- 
sence of such a substitute will result in avoidance of the contract. Subsec- 
tion (2) is concerned with failure of the means or manner of payment 
due to government regulation. Where, in such circumstances, the seller has 
not delivered the goods, he may withhold them, unless the buyer provides 
a substantially equivalent means of payment. If delivery has already oc- 
curred, the buyer is permitted to keep the goods and pay as allowed by 
the government regulation, if the regulation is not discriminatory, oppres- 
sive or predatory. 

In terms of Anglo-Canadian law, UCC 2-615 contains the Code's 
most radical provisions. Arguably, the section substantially expands the 
basis and scope of the doctrine of frustration as traditionally, but not 



24McCamus, footnote 1 supra, at pp. 62-63, citing Williston on Sales (Rev. ed., 
1948). sec. 164. 



370 

consistently, applied in our law. Paragraph (a)^^ of UCC 2-615 provides, 
inter alia, that a seller who complies with the balance of the section is not 
in breach where the occurrence of a contingency "the non-occurrence 
of which was a basic assumption on which the contract was based", results 
in a delay in delivery or non-delivery in whole or in part. Paragraph (b) 
requires the seller to allocate in a fair and reasonable manner his remain- 
ing "production" among his customers, or, if he wishes, among his regular 
customers. Paragraph (c) requires him to give notice of the delay or 
non-delivery, and of allocation to the buyer. Apparently, the seller may 
modify his obligations under this section only by undertaking greater 
responsibilities. 

Section 2-616 deals with the buyer's rights upon receipt of notice 
under UCC 2-615 (c) of delay or of an allocation justified under section 
2-615. The buyer who receives the required notice may terminate the 
contract and discharge any unexecuted portion thereof, or may modify 
the contract by agreeing to accept the allocated amount. If, however, the 
contract is an instalment contract, a substantial impairment of value is 
required for the buyer to terminate. Silence by the buyer causes the con- 
tract to lapse in 30 days, and the protection afforded the buyer by the 
section cannot be altered by agreement, except insofar as the seller in- 
creases his obligations under section 2-615. 

We support, in general, the provisions of UCC 2-613 to 2-616 and 
believe that, subject to the modifications discussed hereafter, they could 
usefully be incorporated in the revised Ontario Act. We proceed now to 
examine the Code provisions in greater detail. 

(a) UCC 2-613 

It will be recalled that we have already discussed UCC 2-613 in 
chapter 5 of this Report, in the context of section 7 of The Sale of Goods 
Act. In chapter 5, we recommended that the revised Act should adopt, in 
place of section 7 of the existing Act, a provision comparable to UCC 
2-613 with respect to the effect on the contract of the parties' mistaken 
assumption as to the existence of the goods. In the context of our discus- 
sion of frustration, it will be convenient to set out, once again, the pro- 
visions of UCC 2-613, which read as follows: 

2-613. Where the contract requires for its performance goods identi- 
fied when the contract is made, and the goods suffer casualty without 
fault of either party before the risk of loss passes to the buyer, or in 
a proper case under a *no arrival, no sale' term (Section 2-324) then 

(a) if the loss is total the contract is avoided; and 

(b) if the loss is partial or the goods have so deteriorated as no 
longer to conform to the contract the buyer may nevertheless 
demand inspection and at his option either treat the contract as 



25This paragraph is the statutory offspring of s. 454 of the Restatement of the Law 
of Contracts, and thus does not represent a major shift in the American state- 
ment of the doctrine. 



371 

avoided or accept the goods with due allowance from the con- 
tract price for the deterioration or the deficiency in quantity 
but without further right against the seller. 

This section felicitously fuses the old provisions in sections 7 and 8 of the 
Uniform Sales Act. As has been previously noted, it improves on them, 
and a fortiori on the provisions of section 8 of the Ontario Act, insofar as 
it confers an option on the buyer to obtain the surviving or deteriorated 
goods with an abatement in the price. Further, in our view, the term 
"casualty" is more meaningful to express the applicability of the Code 
section to all forms of loss or damage affecting the goods, without regard 
to the extent or value of the loss or damage, and overcomes the difficulties 
inherent in the use of the word "perish" in our Sale of Goods Act. But 
the section also has its weaknesses and, in our view, could be improved or 
clarified in a number of respects. We therefore recommend adoption in the 
revised Act of a provision similar to UCC 2-613 with respect to casualty 
to identified goods, but subject to the following amendments. 

First, the section should not be confined to "goods identified when the 
contract is made". This phraseology continues the present requirement of 
specific goods, with its attendant problems. ^^ There appears to be no suf- 
ficient reason why the rule should not also apply where goods are subse- 
quently identified to the contract with the consent of both parties. Accord- 
ingly, we recommend that the provision in the revised Act comparable to 
UCC 2-613 should apply to "goods identified when the contract is made 
or goods that have been subsequently identified to the contract with the 
consent of the buyer and the seller".^^ 

Secondly, the application of the section should not be confined, as 
under section 8 of The Sale of Goods Act, to cases in which goods suffer 
casualty "before the risk" passes to the buyer. As Glanville Williams first 
suggested,28 this linking of discharge of the seller to the location of risk is 
misconceived. Earlier in this chapter,^^ we discussed the difficulties that 
can arise where risk has passed to the buyer, but property in and posses- 
sion of the goods remains with the seller. These difficulties may occur 
equally under UCC 2-613. The function of the rules governing passage 
of risk, which in Ontario are contained in section 21 of The Sale of Goods 
Act, is to determine which party to a contract bears the risk of loss of, or 
damage to, the goods. Section 21 does not, of itself, answer the question 
whether, where the goods have suffered casualty, the seller is discharged 
from his obligation to perform. That function is served by the doctrine of 
frustration. In our opinion, the question whether a seller should be dis- 
charged from his obligations should be wholly severed from the question 
of who bears the risk of loss at the time of casualty. Furthermore, the 
seller's right to be discharged, in whole or in part, from the performance 
of his obligations should not affect the buyer's obligation to pay the 
price if he has assumed the risk of loss. Accordingly, we recommend that 



"^^Supra, this ch., sec. 2. 
27See, Draft Bill, s. 8.13(2) (a) 
^^Supra, footnote 18. 
^^Supra, this ch., sec. 2. 



372 

the application of the provision in the revised Act comparable to UCC 
2-613 should not be restricted to cases where goods suffer casualty before 
risk of loss has passed to the buyer. This recommendation is subject to the 
qualification that the buyer should retain the right to compel partial perfor- 
mance, with due allowance, in the case of partial loss or destruction of the 
goods, where the risk of such casualty has not passed to him. Where the 
risk of casualty is with the buyer, he should also have the right to claim the 
remaining goods, but without an abatement in the price. ^° It follows from 
what we have said that the section in the revised Act comparable to UCC 
2-613 should expressly provide that, in the case of casualty to goods, the 
seller's obligation is discharged, but the buyer is discharged from the ob- 
ligation to pay the price only if the risk of such loss has not passed to the 
buyer. 31 

Thirdly, like its predecessors, section 2-613 appears to operate ab- 
solutely, without regard to the foreseeability of the casualty, or to any 
undertaking on the seller's part to assume hability for delivery in any 
event. To cover this contingency, it has been suggested to us^^ ti^^t the 
operation of the section be excluded where the promisor has special knowl- 
edge leading him to "anticipate" the casualty which he does not communi- 
cate to the buyer, even though he has reason to believe that the buyer 
does not possess the knowledge. A further suggestion is that the section 
should not apply where the seller assumes responsibility for the continued 
and unblemished existence of the goods. We think that both these factors 
can be accommodated by making it clear that the section applies "unless 
the circumstances indicate that either party has assumed a greater obliga- 
tion". We therefore recommend that these words be added to the provi- 
sion in the revised Act corresponding to UCC 2-613.^3 Any remaining 
lacunae will be picked up by the existing requirement in UCC 2-613 that 
both parties must be "without fault", and by the general requirement of 
good faith applicable throughout the revised Act. 

Earlier in this chapter,^^ ^^ indicated that it is unclear whether 
"fault", as used in section 8 of The Sale of Goods Act, includes loss due 
to neghgence. Comment 1 to UCC 2-613 states that " 'fault' is intended 
to include negligence and not merely wilful wrong". We are of the view 
that "fault" as used in the revised Act should include loss due to negli- 
gence, and accordingly recommend that the revised Act adopt the Code 
definition of "fault".35 

While we do not favour retaining even an improved version of sec- 
tion 8 of the Ontario Act as an isolated provision governing one aspect of 
the rules of frustration, we support^^ a provision comparable to UCC 
2-613 in the context of a larger group of frustration provisions. We ap- 



30See, Draft Bill, s. 8.13(1). 

^Ubid., s. 8.13(1)1. 

32McCamus, footnote 1 supra, at p. 74. 

33See, Draft Bill, s. 8.13(1), lines 6 and 7. 

^^Supra, sec. 2. 

35See, Draft Bill, s. 1.1(1)12. 

36Compare, NYLRC Study, ch. 5, footnote 52, supra, p. (679). 



373 

predate that it may be contended that UCC 2-613 deals with but one 
instance of the appHcation of the broader rule codified in UCC 2-615, and 
that no good purpose would be served by including such a provision in 
the revised Act. We are not, however, persuaded by this line of reasoning, 
and favour a specific provision along the lines of UCC 2-613 on two 
grounds. First, it would set forth expressly the buyer's rights in the event 
of the seller's discharge, whereas such a provision is lacking at present in 
section 2-615. Secondly, it would make it clear that casualty to identified 
goods is unarguably a frustrating event. 

(b) UCC 2-614 

Under existing Anglo-Canadian law, if a stipulated method of per- 
formance becomes impossible the contract will, as a general rule, be 
deemed frustrated. ^"^ Certainly, this result will follow where the perfor- 
mance involves an essential term of the contract, and the contract does 
not require or permit a substitutional form of performance, however ade- 
quate or reasonable it may be in the circumstances. The rigidity of this 
rule can lead to manifestly uncommercial results, and can provide an 
unwilling party with an easy excuse for avoiding a bargain that has become 
unattractive to him on unrelated grounds. Similar difficulties arise where 
the agreed means or manner of payment fails because of domestic or 
foreign law. UCC 2-614 deals with both situations as follows: 

2-614.(1) Where without fault of either party the agreed berthing, 
loading, or unloading facilities fail or an agreed type of carrier be- 
comes unavailable or the agreed manner of delivery otherwise be- 
comes commercially impracticable but a commercially reasonable 
substitute is available, such substitute performance must be tendered 
and accepted. 

(2) If the agreed means or manner of payment fails because of 
domestic or foreign governmental regulation, the seller may with- 
hold or stop delivery unless the buyer provides a means or manner 
of payment which is commercially a substantial equivalent. If de- 
livery has already been taken, payment by the means or in the manner 
provided by the regulation discharges the buyer's obligation unless 
the regulation is discriminatory, oppressive or predatory. 

The section would appear to be on very firm ground in importing at least 
a presumption that reasonable persons intend the bargain to be saved, if 
this can be achieved without serious prejudice, and do not intend that it 
should be frustrated on insubstantial grounds. ^^ Accordingly, the Com- 
mission recommends adoption in the revised Ontario Act of a provision 
similar to UCC 2-614.39 



^'^Societe Franco-Tunisienne d'Armement v. Sidermar S.P.A., [1961] 2 Q.B. 278; 
Vancouver Milling & Grain Co. v. C.C. Ranch Co., [1924] S.C.R. 671. But 
see, contra, Ocean Tramp Tankers Corp. v. V/O Sovfracht {The Eugenia), 
[1964] 2 Q.B. 226 (C.A.); Tsakiroglou & Co. Ltd. v. Noblee Thorl G. m.b.H., 
footnote 23 supra. 

38See, NYLRC Study, ch. 5, footnote 52, supra, p. (543). 

39See, Draft Bill, s. 8.14. 



374 

It will be noted, however, that section 2-614 is limited to questions 
of shipment and delivery. Prima facie, the section will not apply to super- 
vening events affecting other aspects of the seller's performance. Suppose, 
for example, that a seller agrees to deliver goods labelled in a particular 
manner. Suppose, also, that subsequent legislation requires alteration in 
the contents, or display of the contents, of the label. It would surely be 
harsh to conclude that the contract has been frustrated because the seller 
can no longer perform in accordance with the letter of the agreement. 
Comments 5 and 6 to section 2-615 suggest a good faith approach in re- 
solving problems not covered by the express language of that section. The 
rationale of section 2-614 suggests a similar solution where a substitutional 
mode of performance not restricted to questions of shipment is involved. 
It will also be noted that section 2-614 is silent with respect to adjustments 
in the price arising out of any substituted performance. Presumably this is 
to be implied. 

We have considered the desirabihty of expanding our recommended 
provision to embrace the types of situation mentioned above. On balance, 
however, we have decided that these matters can safely be left to case law 
development, aided by the analogical and good faith principles enshrined 
in the proposed revised Act. 

(c) ucc 2-615 

Section 2-615 of the Uniform Commercial Code provides as follows: 

2-615. Except so far as a seller may have assumed a greater obli- 
gation and subject to the preceding section on substituted perform- 
ance: 

(a) Delay in delivery or non-delivery in whole or in part by a 
seller who complies with paragraphs (b) and (c) is not a 
breach of his duty under a contract for sale if performance 
as agreed has been made impracticable by the occurrence 
of a contingency the non-occurrence of which was a basic 
assumption on which the contract was made or by compli- 
ance in good faith with any applicable foreign or domestic 
governmental regulation or order whether or not it later 
proves to be invalid. 

(b) Where the causes mentioned in paragraph (a) affect only 
a part of the seller's capacity to perform, he must allocate 
production and deliveries among his customers but may at 
his option include regular customers not then under con- 
tract as well as his own requirements for further manu- 
facture. He may so allocate in any manner which is fair 
and reasonable. 

(c) The seller must notify the buyer seasonably that there will 
be delay or non-delivery and, when allocation is required 
under paragraph (b), of the estimated quota thus made 
available for the buyer. 

This section has three principal components. Paragraph (a) states the 



375 

circumstances in which a "delay in delivery or non-delivery in whole or 
in part" will be excused on grounds of frustraton. Paragraph (b) intro- 
duces the principle of apportionment where, following the frustrating 
event, the seller is not left with sufficient supplies to meet all legitimate 
demands. Paragraph (c) imposes a notice requirement on the seller and 
follows logically from the duty to allocate and the right of election con- 
ferred on the buyer under section 2-616. It will be convenient to post- 
pone discussion of paragraph (c) until we consider the provisions of UCC 
2-616. 

Paragraph (a) of UCC 2-615 raises the question of the basic pur- 
poses and applications of the doctrine of frustration. Various theories of 
the true "basis" of the frustration doctrine have been judicially asserted. 
One theory was stated by Lord Blackburn in Taylor v. Caldwell,^^ and 
holds that, from the nature of the contract, the courts find an implied term 
to the effect that, on the occurrence of certain events, performance will be 
excused. A second theory, which has its origins in the dissenting opinion of 
Viscount Haldane in F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican 
Petroleum Products Co. Ltd.,^^ would view the contract as vanishing with 
the disappearance of the foundations of the contract. A third theory sees 
frustration as a device by which courts may reach the result that justice 
demands. "^2 x^g gj-g^ theory has come under attack lately in England^^ and 
in Canada,'^'^ and the third theory has gained in popularity. By contrast, 
UCC 2-615 follows the middle path; that is, the theory that the contract 
vanishes with the disappearance of its foundations. 

Apart from the possible theoretical basis of the doctrine of frustra- 
tion, there is the question of the situations to which the doctrine applies. 
Since Taylor v. Caldwell,^^ no one has questioned the application of a 
doctrine of frustration, however it is rationalized, to situations where per- 
formance has become impossible. The case of Krell v. Henry^^ expanded 
the application of the doctrine to instances where literal performance re- 
mained possible, but the underlying purpose of the contract seemed de- 
feated. This extension, by means of a frustration of purpose test, met with 
mixed criticism ;'^'7 and its status was uncertain in Ontario, at least until 
recently,'^^ and still remains so in England. A third possible situation to 



40(1863), 3 B. & S. 824, 839; 122 E.R. 309, 314 (Q.B.). 

41 [1916] 2 A.C. 397 (H.L.), at pp. 406-7. 

42////-y7 Mulji V. Cheong Yue S.S. Co. Ltd., [1926] A.C. 497 (P.C.), at p. 510. 

43For example, Davis Contractors Ltd. v. Fareham U.D.C., [1956] A.C. 696 

(H.L.), per Lord Radcliffe at pp. 728-29. 
44For example, Peter Kiewit Sons' Co. of Canada Ltd. v. Eakins Construction, 

[1960] S.C.R. 361, 368; Cahan v. Fraser, [1951] 4 D.L.R. 112 (B.C.C.A.). 
^^Supra, footnote 40. 
46[1903] 2 K.B. 740 (C.A.). 
47See, Lord Wright in Maritime National Fish Ltd. v. Ocean Trawlers Ltd., 

[1935] A.C. 524 (P.C.), at pp. 528-29; Lord Finlay, in Larrinaga and Co. Ltd. 

V. Societe Franco-American des Phosphates De Medulla, Paris (1922), 29 Com. 

Cas. 1, 7, 92 L.J. K.B. 455, 459 (H.L.); D. M. Gordon, Note (1936), 52 L.Q.R. 

324; and, D. A. Landon, Note (1936), 52 L.Q.R. 168. See, also, contra, Lord 

Loreburn, in F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum 

Products Co. Ltd., footnote 41 supra, at p. 403. 
48See, Capital Qualitv Homes Ltd. v. Colwyn Construction Ltd. (1975), 9 O.R. 

(2d) 617, (1975) 61 D.L.R. (3d) 385 (C.A.), discussed infra, at p. 376. 



376 

which the frustration doctrine might be apphed is the case where perfor- 
mance is possible, but would impose severe hardship upon the promisor.*^ 
This extension has received little judicial encouragement. It is to the second 
situation, that is, to frustration of the underlying purposes of the contract, 
that UCC 2-615 appears to address itself by applying a test of commercial 
impracticality, or commercial frustration. The question that needs consid- 
eration is whether this test should now be formally adopted in the revised 
Sale of Goods Act. Such a step would not be radical, and, we believe, can 
be justified on two grounds. 

First, the existing law is not simply a test of literal impossibility.^^ 
The frustration of purpose test has been present, though little used, in 
Anglo-Canadian law since at least Krell v. Henry,^^ in which Vaughan 
Williams, L.J., stated a test of frustration, extending Taylor v. CaldweW^ 
in terms not dissimilar to those adopted by the draftsmen of UCC 2-615. 
While, as noted, the courts have been divided in their reaction to Krell v. 
Henry, the Ontario Court of Appeal, in Capital Quality Homes Ltd. v. 
Colwyn Construction Ltd.P recently gave new life to the principle ex- 
pressed in that decision. The Court of Appeal held that a contract for the 
sale of land was frustrated by the enactment of certain provisions of The 
Planning Act^^ that prevented subdivision of the land. The Court stated 
as follows with respect to the "supervening event" that gives rise to frus- 
tration i^^ 

The supervening event must be something beyond the control of the 
parties and must result in a significant change in the obligation as- 
sumed by them. 

This language clearly supports a frustration of purpose test, and is con- 
sistent with the Code's test of commercial impracticability or frustration. 
The Court also emphasized that, in its view, the theory of the implied 
term "has been replaced by the more reahstic view that the Court imposes 
upon the parties the just and reasonable solution that the new situation 
demands". 5^ Since the buyer's known purpose to subdivide the land could 
not be realized, the contract was frustrated.^*^ 

The second reason for believing the change is not radical lies in the 
draftsmen's own interpretation of the scope of section 2-6 15 (a), and in the 



^Wrauer & Co. (Great Britain) Ltd. v. James Clark (Brush Materials) Ltd., 

[1952] 2 All E.R. 497 (C.A.), per Denning, L.J., at p. 501; Davis Contractors 

Ltd. V. Fareham U.D.C., footnote 19 supra, per Lord Reid, at p. 724. 
50The literal impossibility test was the initial step taken in the application of 

frustration doctrine, and had its origins in Taylor v. Caldwell, footnote 40 

supra. 
^"^Supra, footnote 46. 
^'^Supra, footnote 40. 
53(1975), 9 O.R. (2d) 617, (1975), 61 D.L.R. (3d) 385 (C.A.). See also, the 

Comment on the case by Reiter, in (1978), 56 Can. Bar Rev. 98. 
54R.S.O. 1970, c. 349. 
55(1975), 9 O.R. (2d) 617,623. 
^eibid. 
57The Court, it should be noted, also discussed, but was not troubled by, the 

doctrine of equitable conversion, which states that equitable title passes to the 

buyer at the time the contract is entered into. 



377 

cautious attitude towards this provision displayed by American courts. 
Orticial Comment 4 to section 2-615 makes it clear that "increased cost 
alone does not excuse performance unless the rise in cost is due to some 
unforeseen contingency which alters the essential nature of performance". 
Something more substantial is required. The American courts have moved 
hesitantly in granting a non-performing party the shelter of UCC 2-61 5(a). 
A good example is the recent case of Eastern Airlines Inc. v. Gulf Oil 
Corp.^^ This case involved a contract for the supply of oil by Gulf Oil to 
Eastern Airlines. The contract rate was frozen because it had been pegged 
to a certain index for Texas oil that was itself artificially frozen by the U.S. 
Government. World prices, which Gulf had to pay, had, on the other hand, 
risen 400%. Gulf argued that it was a basic assumption of the contract that 
the index for Texas oil would continue to reflect world prices. On the basis 
of the available evidence and all the surrounding circumstances, the Court 
refused to make such a finding, and accordingly held that the contract had 
not been frustrated. The same reluctance has been shown by other Ameri- 
can courts confronted with a defence under UCC 2-615, and one must 
look hard to find a case where frustration was permitted on grounds other 
than impossibility.^^ 

There is little danger, therefore, that the adoption in Ontario of a 
provision similar to paragraph (a) of section 2-615 would result in ready 
acquiescence by the courts to attempts by dissatisfied buyers and sellers to 
seek relief from contracts that have lost their initial attraction. Further, 
we feel that the provision has positive merit, in that it leads to a more 
direct canvassing by the courts of the factors underlying the parties' com- 
mon assumptions, and the important role played by economic considera- 
tions in shaping those assumptions. 

We accept the test of commercial impracticability or frustration con- 
tained in UCC 2-61 5(a). Subject to the following consequential issues, we 
recommend that a provision comparable to UCC 2-6 15 (a) be incorpor- 
ated in the revised Ontario Act. 

(i) Foreseeability of event. Official Comment No. 1 to section 2-615 
suggests that the seller is not intended to be relieved of his contractual 
obligations where the contingency in question is sufficiently foreshadowed 
at the time of contracting to be fairly regarded as among the risks assumed 
by the seller. The cases interpreting UCC 2-615(a) treat foreseeability 
as a material factor,^^ ^^d a persuasive case can be made for spelling 
this out expressly and not leaving it to implication. Indeed, it could be 



58(1975), 19 U.C.C. Rep. 721 (S.D. Fla.)- See, also, Maple Farms, Inc. v. 
City School Dist. of Elmira (1974), 352 N.Y.S. 2d 784 (N.Y.Sup.Ct.); Neal- 
Cooper Grain Co. v. Texas Gulf Sulphur Co. (1974), 16 U.C.C. Rep. 7 (7th 
Cir.). See, further, Miniter, "Annual Workshop on Commercial and Consumer 
Law, 1976: What Was Said" (1977-78), 2 C.B.L.J. 364-67; Duesenberg, "Con- 
tract Impracticality: Courts Begin to Shape S. 2-615" (1977), 32 Bus. Law J. 
1089. 

59The Neal-Cooper case, supra, at least admitted of the possibility of frustration 
by commercial impracticability. 

60For example, Dahurlos v. Commercial Ins. Co. of Newark, New Jersey (1975), 
521 F. 2d. 18 (3rd Cir.). 



378 

objected that the omission of an express reference to foreseeability leaves 
the false impression that "occurrence of a contingency the non-occurrence 
of which was a basic assumption on which the contract was made" is the 
conclusive test, and that factors other than those referred to in the section 
are to be ignored. While not denying the force of this reasoning, we have 
decided not to recommend a change in UCC 2-61 5 (a) on this score. It 
is clear that its draftsmen intended the subsection to provide a flexible 
test; we think that it should remain that way. To attempt to enumerate all 
the factors that are relevant in determining whether frustration should be 
admitted as a defence would be a self-defeating task. Moreover, the fore- 
seeability test is not very helpful. Many contingencies are foreseeable, and 
even "on the cards", in today's rapidly shifting world. Just as non-foresee- 
ability should not provide an automatic defence, it would be mistaken to 
conclude that foreseeability of the event that has occurred should preclude 
a defence of frustration. All the relevant circumstances must be canvassed 
in each case. Accordingly, we recommend that the provision in the revised 
Act comparable to UCC 2-61 5 (a) should not be amended to include 
specific reference to the element of foreseeability, or to other factors that 
would prevent frustration from being pleaded as a defence. 

(ii) Fault. There is no express provision in UCC 2-61 5 (a) dis- 
qualifying a seller whose "fault" contributes to the occurrence of the con- 
tingency, although the common law rule is that a party cannot rely on a 
self-induced act of frustration.^^ We recommend that the provision in the 
revised Act comparable to UCC 2-61 5 (a) should make it clear that the 
section will not apply to excuse a seller whose fault contributes to the 
occurrence of the contingency in question. ^^ 

(iii) Frustration of buyer's purpose. As worded at present, section 
2-61 5 (a) only applies to events interfering with the seller's performance. 
Comment 9 to section 2-615 suggests that the rationale of the section may 
entitle the buyer to claim excuse where his contractual purpose has been 
frustrated. At least one state that has adopted the Code^^ has amended 
section 2-615 to make this explicit. We recommend a similar amendment 
to the corresponding provision in the revised Act. If this recommendation 
is accepted, the counterparts in the revised Act to the remaining provisions 
of UCC 2-615 and the provisions of UCC 2-616, which we discuss below, 
should also apply, mutatis mutandis, where the buyer's performance has 
been frustrated.^ 

As previously indicated, paragraph (b) of UCC 2-615 introduces the 
principle of apportionment where, following a frustrating event, the seller 
is left with insufficient supplies to satisfy all legitimate demands. In provid- 
ing for the prorating of a scarce supply in a frustration context, UCC 



6iM«r///mc National Fish Ltd. v. Ocean Trawlers Ltd., [1935] A.C. 524 (P.C). 
62See, Draft Bill, s. 8.15(a) (i), "by the occurrence of a contingency that was 

not due to the fault of either party . . ." 
^^Mississippi: see Uniform Laws Annotated: Uniform Commercial Code (1976), 

Vol. lA, at p. 339. The Iowa Supreme Court interpreted UCC 2-615 as enacted 

to reach the same result: Nora Sprinf^s Cooperative Co. v. Brandon (1976), 20 

U.C.C. Rep. 909. 
64See, Draft Bill, s. 8.15(2). 



379 

2-6 15(b) presents a solution to a problem that has not been resolved by 
the courts. ^5 ^ seller whose supply is unexpectedly and excusably limited, 
faced with the demands of a number of customers, might, at common law, 
be forced to allocate his supplies to one customer and suffer damage ac- 
tions from the others. His defence of impossibility could be defeated by the 
fact that it was self-induced vis-a-vis the customers whom he did not 
satisfy. UCC 2-6 15(b) permits the seller to prorate his supply and to be 
excused with respect to the deficiencies. We support the principle of UCC 
2-61 5(b). We would, however, extend its application to the offer of a 
short delivery not involving allocation of supplies among a number of 
customers, as where the buyer is the seller's only customer. Subject to this 
change, we recommend adoption in the revised Ontario Act of a provision 
comparable to UCC 2-6 1 5 (b).^^ 

With respect to the ability of the parties to contract out of the pro- 
visions of UCC 2-615, the section is expressed to apply "except so far as a 
seller may have assumed a greater obligation". Apart from its obvious 
meaning, this proviso is apparently also intended to lay down the rule 
that the section "provides a minimum beyond which agreement may not 
go".^*^ If this is a sound construction, it seems a circuitous way of saying 
that the provisions of the section may not be excluded by the seller. 
The proviso also appears to be open to more serious objections. 
First, it is not obvious why the section should be subject to a special 
rule concerning excludability, and why the general doctrine of un- 
conscionability is not sufficient to prevent overreaching by the seller.^^ 
Secondly, it is not clear what will be deemed to amount to a vio- 
lation of the proviso. Presumably, it will not apply to a general 
clause in an agreement permitting the seller to terminate the con- 
tract at his discretion, even where no frustrating event has occurred. 
If this is correct, the proviso draws an invidious, and in our view unjusti- 
fiable, distinction between different types of termination clause. Conver- 
sely, if the proviso is capable of application to every type of termination 
clause, it clearly goes too far. Again, since UCC 2-615 only applies 
to the seller's performance obligations, the proviso might lead to the 
inference that termination clauses in favour of the buyer are not sub- 
ject to a minimum standard of conscionability. This would obviously be an 
undesirable result. For these reasons, we recommend that the proviso "ex- 
cept so far as a seller has assumed a greater obligation", not be included 
in the section in the revised Act comparable to UCC 2-615. It follows that 
the parlies would be free to vary the provisions of the section, subject to 
the doctrine of unconscionability. 

(d) UCC 2-615(c) AND 2-616 

As previously noted, paragraph (c) of UCC 2-615 requires the 

65See, Hudson, "Prorating in the English Law of Frustrated Contracts" (1968), 31 
Mod. L.R. 535. 

66See, Draft Bill, s. 8.15(b). 

67See, UCC 2-615, Comment No. 8. For other observations on the proviso, see 
NYLRC Study, ch. 5, footnote 52, .supra, at p. (689). 

^^Compare, Restatement of the Law, Contracts 2d, Comment a to section 281, 
which clearly recognizes the parties' right to contract out under the compar- 
able rule in the Restatement. 



380 

seller to notify the buyer of any delay or non-delivery, and of allocation. 
Section 2-6 15(c) should be read in conjunction with UCC 2-616, which 
provides as follows: 

2-616.(1) Where the buyer receives notification of a material or in- 
definite delay or an allocation justified under the preceding section 
he may by written notification to the seller as to any delivery con- 
cerned, and where the prospective deficiency substantially impairs 
the value of the whole contract under the provisions of this Article 
relating to breach of installment contracts (Section 2-612), then also 
as to the whole, 

(a) terminate and thereby discharge any unexecuted portion of 
the contract; or 

(b) modify the contract by agreeing to take his available quota 
in substitution. 

(2) If after receipt of such notification from the seller the buyer 
fails so to modify the contract within a reasonable time not exceed- 
ing thirty days the contract lapses with respect to any deliveries af- 
fected. 

(3) The provisions of this section may not be negated by agree- 
ment except in so far as the seller has assumed a greater obligation 
under the preceding section. 

We support the buyer's right to notice under UCC 2-6 15(c) and his right 
of election under section 2-616 as significant improvements on existing 
Anglo-Canadian law. Subject to the following comments concerning UCC 
2-616(1) (b) and UCC 2-616(3), we recommend that the revised Act 
adopt provisions comparable to both UCC 2-615(c) and UCC 2-616.^9 

It will be noted that UCC 2-616(l)(b) does not contain language 
permitting the buyer to modify the contract by agreeing to a material or 
indefinite delay. We think that the provision in the revised Act comparable 
to UCC 2-616(1) (b) should make it clear that the buyer may modify the 
contract by agreeing to the delay, and we so recommend. In addition, 
UCC 2-616(1) (b) makes no provision for adjustment of the contract price 
where the buyer elects to modify the contract by agreeing to take his avail- 
able quota. Provision for due allowance, is, however, made in UCC 2- 
613(b), in the case of casualty to identified goods. The Commission 
recommends that additional language entitling the buyer to claim due 
allowance should be included in the provision in the revised Act com- 
parable to UCC 2-616(1) (b).7o We deem this amendment desirable 
because of the position adopted under prior American law"^^ that a buyer 



69See, Draft Bill, ss. 8.15(c) and 8.16. 

70See, Draft Bill, s. 8.16(1) (b). 

7iSee, Restatement of the Law of Contracts, s. 463 and illustration 1; Williston 
on Sales (Rev. ed., 1948), para. 162. The English position generally has ap- 
peared to be the same: McElroy and Williams, Impossibility of Performance 
(1941), p. 25, although a recent case, H. R. & S. Sainsbury Ltd. v. Street, [1972] 
3 All E.R. 1127 (Q.B.D.), suggests the buyer might be allowed to purchase 
at a reduced price. 



381 

was only entitled to part delivery on payment of the full contract price. 
Since this rule is explicitly rejected in UCC 2-613, doubts might arise if 
the same course were not followed in UCC 2-616. 

There remains the question whether parties should be permitted to 
contract out of the provision in the revised Act comparable to UCC 2-616. 
Subsection (3) of section 2-616 states that the provisions of the section 
may not be negated by agreement, except insofar as the seller has assumed 
a greater obligation under UCC 2-615. While the prohibition against con- 
tracting out is free from the ambiguities in the proviso to UCC 2-615, 
discussed earlier, it is open to the same objection on the grounds of prin- 
ciple: it is not obvious why a rule of non-excludability is more neces- 
sary here than in other parts of Article 2 of the Code. We note that several 
American jurisdictions have deleted subsection (3) from their versions of 
UCC 2-6 16. "^2 Ij^ our view, the general test of unconscionabiHty previously 
recommended by us for adoption in the revised Act is sufficient, and we 
therefore recommend that a provision comparable to UCC 2-613(3) 
should not be adopted in the revised Act. 

5. Effects of Frustration and The Frustrated Contracts Act 

At common law, the effects of the discharge of a contract by frustra- 
tion on the rights and duties of the parties to the contract are complex 
and unsatisfactory.'^^ Over the years, the common law rules have been 
exposed to much adverse criticism. '^'^ In the United Kingdom the Law 
Reform (Frustrated Contracts) Act 1943'^^ was adopted in order to correct 
the most important defects. The counterpart in Canada to the U.K. Act is 
the Uniform Frustrated Contracts Act,'^^ which was adopted in 1948 by 
the Conference of Commissioners on Uniformity of Legislation in Can- 
ada. "^"^ In Ontario, the Uniform Act was enacted as The Frustrated Con- 
tracts ActP^ Most of the other common law provinces'^^ have also adopted 
the Uniform Act. For reasons that remain obscure, both the U.K. and 
Canadian Acts exclude contracts for the sale of specific goods. ^^ ^s a 



72See, Uniform Laws Annotated, Uniform Commercial Code, Vol. lA, at p. 345. 

73lt will suffice to note two particular difficulties. First, the rule in Chandler v. 
Webster, [1904] 1 K.B. 493 (C.A.), was that money paid under a frustrated 
contract could not be recovered because the action for money had and received 
would not lie unless the contract was void ab initio. This was specifically over- 
ruled in Fibrosa Spolka Akcyjna v. Fairbairn, Lawson, Combe, Barbour, Ltd., 
[1943] A.C. 32 (H.L.), at pp. 48-49, 51-53, at least in cases where the con- 
sideration has wholly failed. Secondly, recompense for goods supplied ran into 
similar problems under the rule in Appleby v. Myers (1867), L.R. 2 C.P. 651 
(Exch.), holding that where the promisor's obligation is entire, he cannot re- 
cover in contract or restitution unless he has fully performed. 

74For example, McNair, "The Law Reform (Frustrated Contracts) Act, 1943" 
(1944), 60 L.Q.R. 160; Williams, footnote 18 supra; Payne, "Reform of the 
Law of Frustrated Contracts in Saskatchewan" (1960), 25 Sask. Bar Rev. 94. 

756 & 7 Geo. 6 (U.K.), c. 40. 

76See, Feltham, "The Frustrated Contracts Act" (1960), 18 Advocate 5. 

77Now known as the Uniform Law Conference of Canada. 

78Now, R.S.O. 1970, c. 185. 

79Nova Scotia and Saskatchewan excepted. 

80For example, in Ontario, R.S.O. 1970, c. 185, s. 2(2) (c). 



382 

result, the common law rules continue to apply. ^^ This is an omission that 
obviously should be rectified. We therefore recommend that the revised Act 
should provide that The Frustrated Contracts Act should apply in two 
situations: first, to a contract of sale of goods that has been terminated 
pursuant to the frustration provisions of the revised Act; and, secondly, 
to a buyer who has accepted partial or delayed performance in the case of 
a partial frustration. ^^ Wg consider that this explicit reference to cases of 
partial frustration is necessary to avoid judicial doubts concerning the 
scope of The Frustrated Contracts Act. We note that a consequential 
amendment would be required, and accordingly recommend that The 
Frustrated Contracts Act should be amended to delete the exception of 
contracts of sale of goods from the application of the Act. Finally, there 
may be some overlap between the provisions of the revised Sale of Goods 
Act and The Frustrated Contracts Act. We therefore consider it desirable 
that a provision should be included in the revised Act to the effect that, 
in the case of a conflict between the two Acts, the provisions of the revised 
Sale of Goods Act shall prevail. We so recommend. ^^ 

Apart from the aforegoing, we note that the research paper prepared 
for the Commission on the topic of frustration concludes^"^ that The Frus- 
trated Contracts Act is generally in need of review and revision, and makes 
a substantial number of recommendations for suggested improvements. 
These proposals are reproduced in an appendix to this Report. ^^ This 
subject falls outside our terms of reference, and accordingly, has not been 
considered by the Commission. Nevertheless, the proposals put forward 
in the appendix may prove a useful basis for discussion by interested 
parties. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. Subject to the following, more specific, recommendations, the 
revised Act should adopt provisions comparable to UCC 2-613, 
2-614, 2-615 and 2-616, dealing with the impact of the doctrine 
of frustration on the law of sales; the desirability of a general re- 
statement of frustration principles should be considered as part 
of the proposed Law of Contract Amendment Project. 

2. Further to recommendation No. 12(a) in chapter 5, supra, the 
revised Act should adopt, in the context of a larger group of 
frustration provisions, a section comparable to UCC 2-613 deal- 
ing with casualty to identified goods in place of section 8 of the 
existing Sale of Goods Act. The section in the revised Act com- 
parable to UCC 2-613 should, however, incorporate the follow- 
ing features: 



SiSee, Atiyah, The Sale of Goods (5th ed., 1975), at pp. 170-73, 176. 

82See, Draft Bill, s. 8.17(1). 

mbid., s. 8.17(2). 

84McCamus, footnote 1 supra, at pp. 85-90. 

85See, Appendix 10 to this Report. 



383 

(a) The section should not be confined to goods identified when 
the contract is made, but should apply also to goods that 
have been subsequently identified to the contract with the 
consent of both parties. 

(b) Subject to recommendation (c), infra, the application of the 
section should not be restricted to cases where goods suffer 
casualty before risk of loss has passed to the buyer. 

(c) Where risk of loss has not passed to the buyer, discharge 
of the seller should be limited by the buyer's right to compel 
partial performance with due allowance in the case of partial 
loss or destruction of the goods. Where, however, risk of 
loss is with the buyer, he should have the right to claim the 
remaining goods, but without an abatement in the price. 

(d) In view of the recommendations in (b) and (c), supra, 
the section should expressly provide that, in the case of 
casualty to goods, the seller's obhgation is discharged, but 
the buyer is discharged from the obligation to pay the price 
only if risk of such loss has not passed to the buyer. 

(e) In order to exclude the operation of the section where casu- 
alty to goods is foreseeable or where the seller has under- 
taken to assume liability for delivery in any event, the sec- 
tion should include the words "unless the circumstances in- 
dicate that either party has assumed a greater obhgation". 

3. In order to make it clear that the term "fault" in the provision 
in the revised Act comparable to UCC 2-613 is intended to in- 
clude loss due to neghgence, the revised Act should adopt the 
Code definition of "fault". 

4. A provision comparable to UCC 2-614 dealing with substitutional 
performance in cases of frustration of shipment and delivery ob- 
ligations should be included in the revised Act. 

5. The principle of substitutional performance contained in UCC 
2-614 should not be extended expressly to other types of per- 
formance obligations; nor should the section make express refer- 
ence to adjustment in the price arising out of any substituted per- 
formance. Rather, these matters should be left to case law develop- 
ment, aided by the recommended analogical and good faith pro- 
visions. 

6. The revised Act should incorporate a provision comparable to 
UCC 2-61 5(a) adopting a test of commercial impracticability or 
frustration to determine when a delay in delivery or non-delivery 
in whole or in part will be excused. 

7. The provision in the revised Act comparable to UCC 2-61 5(a) 
should not be amended to include specific reference to the element 
of foreseeability, or to other factors that would prevent frustra- 
tion from being pleaded as a defence. 



384 

8. The provision in the revised Act comparable to UCC 2-6 15 (a) 
should make it clear that the section will not apply to excuse a 
seller whose fault contributes to the occurrence of the contin- 
gency in question. 

9. The provision in the revised Act comparable to UCC 2-6 15 (a) 
should be expanded to apply expressly to non-performance by a 
buyer, and the counterparts in the revised Act to the remaining 
provisions of UCC 2-615 and the provisions of UCC 2-616 should 
apply, mutatis mutandis, where the buyer's performance has been 
frustrated. 

10. The revised Act should incorporate a provision comparable to 
UCC 2-615 (b) requiring the seller to allocate his production and 
deliveries where a delay in delivery or non-delivery in whole or 
in part affects only a part of the seller's capacity to perform; the 
application of the section should, however, be extended to the 
offer of a short delivery not involving allocation of supplies 
among a number of customers, as where the buyer is the seller's 
only customer. 

11. In order to permit the parties to a contract to vary the provisions 
of UCC 2-615, subject to the doctrine of unconscionability, the 
words "except so far as a seller has assumed a greater obligation", 
contained in UCC 2-615, should not be included in the provision 
in the revised Act comparable to UCC 2-615. 

12. A provision comparable to UCC 2-6 15(c) requiring the seller 
to notify the buyer of a delay or non-delivery or of allocation 
should be incorporated in the revised Act. 

13. Subject to the following three amendments, the revised Act should 
include a provision similar to UCC 2-616: 

(a) Additional language entithng the buyer to modify the con- 
tract by agreeing to a material or indefinite delay should be 
included in the provision comparable to UCC 2-616(l)(b). 

(b) Additional language entitling the buyer to claim due allow- 
ance from the contract price should be included in the pro- 
vision comparable to UCC 2-616(l)(b). 

(c) Subject to the doctrine of unconscionability, the parties 
should be free to contract out of the provisions of UCC 
2-616. Accordingly, a provision comparable to UCC 
2-616(3) should not be adopted in the revised Act. 

14. The revised Act should provide that The Frustrated Contracts 
Act shall apply: (a) to a contract of sale that has been terminated 
pursuant to the frustration provisions of the revised Act; and, (b) 
to a buyer who has accepted partial or delayed performance in 
the case of a partial frustration. 



385 

15. The Frustrated Contracts Act should be amended to delete the 
exception of contracts of sale of goods from the application of 
that Act. 

16. The revised Act should contain a provision to the effect that, in 
the case of a conflict between the provisions of The Frustrated 
Contracts Act and the revised Sale of Goods Act, the provisions 
of the revised Sale of Goods Act shall prevail. 



PART VI 

SELLER'S AND BUYER'S REMEDIES 
FOR BREACH OF CONTRACT 

Introduction 

Both The Sale of Goods Act and Article 2 of the Uniform Com- 
mercial Code treat separately the seller's and buyer's remedies for breach 
of the other's obligations. It will be convenient to follow the traditional 
pattern in this part of the Report. This is not to suggest that these remedies 
constitute two solitudes, without common points of contact. Nor do we 
suggest that greater attempts should not be made to integrate the underly- 
ing principles and policies. One of the merits of the Code is that it strives 
for this conscious parallelism. In the ensuing discussion, chapter 16 deals 
with the seller's remedies and chapter 17 with the buyer's remedies. Since 
a substantial number of remedial issues are common to both parties, we 
deal with these common issues separately in chapter 18. 

The Sale of Goods Act distinguishes^ between the seller's real and 
personal remedies. Real remedies in this context refer to the seller's rights 
in relation to the goods that can be exercised extra-judicially and that 
constitute a form of security for payment of the price. The seller's personal 
remedies, on the other hand, involve an action against the buyer for 
performance of the buyer's obligations or damages for breach of contract. 
The seller's real remedies comprise the rights of lien,^ stoppage in transitu,^ 
and resale."^ His personal remedies are represented by an action for the 
price^ or a claim for damages.^ Independently of these remedies, the seller 
may also have the right to rescind, that is, to cancel, the contract if the 
necessary prerequisites are satisfied. 

On the buyer's side, there is no true analogue to the seller's real 
remedies. Unlike the Uniform Sales Act"^ and now the Uniform Commercial 
Code,^ The Sale of Goods Act confers no lien rights in favour of an ag- 
grieved buyer who is in possession of rejected goods for which he has paid. 
The buyer's counterpart to the seller's action for the price is the action for 
specific performance.^ In the alternative, where the property in the goods 
has passed to the buyer, he may seek an order of specific restitution^^ and, 
in Ontario, he may also be entitled to bring an action in replevin.^ ^ Of the 
buyer's other remedies, his right to reject non-conforming goods usually 
coincides with the exercise of a right of cancellation, and is a most power- 
ful remedy. His claim to damages is conceptually the same as the seller's, 
both being based on the test of foreseeability, a test that is usually referred 



iSee, ss. 37-47 and 48-49, 52. 
2Ss. 39-41. 
3S. 42. 
4S. 46. 
5S. 47. 
6Ss. 48, 52. 
7See, s. 69(5). 
8UCC 2-711(3). 
^The Sale of Goods Act, s. 50. 
^^Cohen v. Roche, [1927] 1 K.B. 169. 
iij/ze Replevin Act, R.S.O. 1970, c. 412, s. 2. 

[387] 



388 

to as the rule or rules in Hadley v. Baxendale}'^ Quantitatively, however, 
the buyer's claim is potentially much more formidable; it may include a 
claim for consequential losses many times the size of the purchase price. 
Hence, the seller will frequently attempt to exclude or curtail such damage 
claims by the use of disclaimer clauses. 

The differences between the treatment of seller's and buyer's remedies 
in Article 2 of the Uniform Commercial Code and the treatment accorded 
these remedies in The Sale of Goods Act are both numerous and impor- 
tant. The Uniform Sales Act contained important deviations from the 
principles adopted in The Sale of Goods Act, and Article 2 has added 
significantly to their number. ^^ Among the more noteworthy innovations 
may be mentioned the following: namely, the seller's expanded right of 
resale and his right to recover an actual deficiency ;^'^ the buyer's right to 
cover;^^ the abandonment of title concepts in determining the seller's right 
of retention and right to sue for the price ;^^ both parties' right to seek 
assurances of performance^"^ where a breach is apprehended but has not 
yet materialized; the seller's right to cure a non-conforming tender ;^8 and, 
the buyer's enlarged rights to seek specific performance.^^ These points 
will be developed in the chapters that follow. Article 2 also strives for a 
more systematic and comprehensive, although not exhaustive, treatment of 
this branch of sales law. This feature, coupled with the Code's conceptual 
and practical improvements, provide a rich storehouse of ideas for desir- 
able changes in the existing Ontario Act. 



12(1854), 9 Exch. 341. 

i3See, generally, 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 LJ. 199. 
14UCC 2-706. 
15UCC 2-712. 
16UCC 2-703(a); 2-709(1). 
17UCC 2-609. 
18UCC 2-508. 
19UCC 2-716. 



CHAPTER 16 

SELLER'S REMEDIES 



1 . Index Of Seller's Remedies and Characterization of 
Buyer's Breach 

Section 38 of The Sale of Goods Act indexes the real remedies of an 
unpaid seller, but provides no index with respect to the seller's personal 
remedies.^ The Code differs from the Ontario Sale of Goods Act in this 
respect; UCC 2-703 purports to index both the seller's personal and real 
remedies. The section reads as follows i^ 

2-703. Where the buyer wrongfully rejects or revokes acceptance of 
goods or fails to make a payment due on or before delivery or repudi- 
ates with respect to a part or the whole, then with respect to any goods 
directly affected and, if the breach is of the whole contract (Section 
2-612), then also with respect to the whole undelivered balance, the 
aggrieved seller may 

(a) withhold delivery of such goods; 

(b) stop delivery by any bailee as hereafter provided (Section 

2-705); 

(c) proceed under the next section respecting goods still uni- 
dentified to the contract; 

(d) resell and recover damages as hereafter provided (Section 
2-706); 

(e) recover damages for non-acceptance (Section 2-708) or in 
a proper case the price (Section 2-709) ; 

(f) cancel. 

In our view, section 2-703 is a useful, although not essential, provision, 
and we recommend that the revised Act adopt a similar, but substantially 
amended, section. ^ 

We deal hereafter with the specific remedies listed in UCC 2-703, but 
several observations of a general character may be in order at this point. 
In the first place, UCC 2-703 is not exhaustive. It enumerates only those 
remedies that are specifically dealt with in Article 2; it does not, for 
example, refer to the seller's general right to recover damages for breach 
of the buyer's obligations. Presumably, this and other gaps are to be filled 
by general principles of contract law. Secondly, UCC 2-703 is not merely 
an index provision; it is also substantive in character. Two of the remedies 



iFor a general discussion of the topic of seller's remedies, see, Baer, "Seller's 

Remedies", Research Paper No. III. 9. 
2UCC 2-703 must be read in conjunction with UCC 2-702, which deals with the 

seller's remedies on discovery of the buyer's insolvency. 
3See, Draft Bill, s. 9.3. 

[389] 



390 

listed in the section, the right to withhold delivery"^ and the right to cancel,^ 
are not further elaborated in later sections. The right to withhold delivery 
is the Code's nomenclature for the right of lien or retention conferred 
under The Sale of Goods Act.^ The right to cancel is not specifically 
referred to in the Ontario Act, but is necessarily implied. "Cancellation" 
is defined in UCC 2-106(4) as occurring "when either party puts an end 
to the contract for breach by the other and its effect is the same as that of 
'termination' except that the cancelling party also retains any remedy for 
breach of the whole contract or any part thereof'.'^ "Cancellation" is there- 
fore the Code's synonym for the very ambiguous term "rescission", com- 
monly used in Anglo-Canadian law to describe an innocent party's right to 
put an end to a contract for breach by the other contracting party. Rescis- 
sion of a contract is implied under existing law where, for example, a seller 
is permitted to sue for damages for the buyer's neglect or refusal to accept 
and pay for goods, or where a buyer rejects non-conforming goods on or 
after the contractual date of delivery. We much prefer the Code's concept 
of cancellation to the common law's confusing terminology of rescission. 
We recommend, therefore, that the index section of seller's remedies in 
the revised Act should refer explicitly to the seller's right to cancel.^ 

Finally, a most important difference apparently resides between the 
Code's treatment of a breach by the buyer, and the treatment of such a 
breach under Anglo-Canadian law. Under the Code's "perfect tender" rule, 
any breach by the buyer, whether major or minor, apparently entitles the 
seller to cancel the contract and to exercise the remedies enumerated in 
UCC 2-703. Under Ontario law, the seller can only cancel the contract 
when the buyer's breach amounts to breach of a condition. This difference 
is particularly important with respect to the buyer's payment obligations, 
and is reflected in the contrast between the Code's treatment of the buyer's 
failure to make punctual payment, and the consequences attached to such 
a failure by The Sale of Goods Act. A literal reading of UCC 2-703 leads 
to the conclusion that any delay in payment, however short, is treated as a 
breach of an essential term, and entitles the seller to cancel the contract 
and to exercise, as appropriate, the other remedies referred to in the 
section.^ It is not clear whether the same strict performance test will be 
applied to other breaches by the buyer; for example, the failure to take 
delivery of the goods at the right time. By way of contrast, reference may 
be made to the buyer's remedies in the case of a non-conforming tender 
or delivery by the seller. The Code affords the seller an opportunity to 



4UOC 2-703 (a). 

5UCC 2-703 (f). 

6S. 38. 

^"Termination" is defined in UCC 2-106(3) as occurring ". . . when either party 
pursuant to a power created by agreement or law puts an end to the contract 
otherwise than for its breach. On 'termination' all obligations which are still 
executory on both sides are discharged but any right based on prior breach or 
performance survives". Compare, Draft Bill, s. 1.1 (2) (b). 

8See, Draft Bill, ss. 9.3(2), and 9.12(2) (dealing with the buyer's right in the 
converse situation), and the definition of "cancellation" in s. 1.1 (2) (c). 

^Surprisingly little attention appears to be paid to this feature in the standard 
Code texts. For the position under the Uniform Sales Act, see ss. 61, 65; and 
compare, Williston on Sales (Rev. ed., 1948), sees. 453b, 550. 



391 

cure his breach, ^^ and there are a substantial number of other instances^ ^ 
in which the Code makes exceptions to the "perfect tender" rule. With one 
exception,^2 ^q similar indulgences appear to be made in the buyer's favour. 

With respect to breaches by the buyer, The Sale of Goods Act does 
not, as we have noted previously, characterize the relative importance of 
the buyer's obligations. In the typical contract of sale, the buyer's primary 
obligations are to pay for, and to take delivery of, the goods. Section 11 of 
The Sale of Goods Act expressly provides that time of payment is not of 
the essence, unless the contract evinces a different intention. While section 
1 1 does not address itself to the buyer's obligation to take delivery of the 
goods, the ambiguous case law^^ appears to support the same conclu- 
sion; that is, that time is not of the essence in the absence of special 
circumstances. 

We have previously recommended^"^ that the revised Act should 
eschew a priori characterization of obligations, whether they be obligations 
of the seller or buyer, and that, instead, remedies should turn on the 
gravity of the breach and whether or not it is substantial in character. In 
the seller's context, this means that, in the absence of contrary agreement, 
he would not be entitled to cancel the contract for untimely payment or for 
breach of any other obligation by the buyer, nor to exercise the other 
remedies consequent upon cancellation (specifically the right of resale and 
the right to sue for damages for non-acceptance) unless the buyer were 
guilty of a substantial breach. We think that this distinction should be 
clearly drawn in the section of the revised Act that indexes the seller's 
remedies. Accordingly, we recommend that this index section should dis- 
tinguish between the remedies for substantial and for non-substantial 
breaches of a contract of sale.^^ 

It will be convenient, at this stage, to set out our recommended index 
section of seller's remedies. Our draft provision reads as follows i^^ 



loucc 2-508. 

iiSee, UCC 2-323(2), 2-504, 2-608, 2-612. 

12UCC 2-612(3) (dealing with breach of instalment contract). Subsection (3) 
does not expressly refer to breaches by the buyer, but may fairly be construed 
as applying to breaches by either party. 

l3See, for example, Woolfe v. Horn (1877), 2 Q.B.D. 355; and Kidston and Com- 
pany V. Monceau Iron Works Co. Ltd. (1902), 7 Com. Cas. 82; and Atiyah, The 
Sale of Goods (5th ed., 1975), at pp. 139-40. Note, however, the more restric- 
tive view of the law taken in Benjamin's Sale of Goods (1974), para. 674. 
Section 36 of the Ontario Sale of Goods Act also supports Atiyah's position, 
and, presumably, the seller's right under section 48(1) of the Act to bring an 
action for non-acceptance does not arise unless the buyer's conduct amounts to a 
substantial breach. The precise relationship between sections 11, 27, 36 and 
48(1) of The Sale of Goods Act still awaits authoritative judicial exposition. 
Note, too, that the time of taking delivery will be regarded as of the essence 
when the goods are perishable {Sharp v. Christmas (1892), 8 T.L.R. 687 (C.A.); 
Mooney v. Lipka, [1926] 4 D.L.R. 647 (Sask. C.A.)) and in the case of a spot 
contract {Thames Sack and Bag Co., Lim. v. Knowles & Co. Lim. (1918), 88 
L.J.K.B. 585). 

^^Supra, ch. 6, sec. B. 

l5See, Draft Bill, s. 9.3. 



392 

( 1 ) Where the buyer breaches the contract, the seller may, 

(a) maintain an action for damages; 

(b) withhold delivery of any goods in his possession; 

(c) stop delivery by any bailee; 

(d) in a proper case recover the price, 

as provided in this Act. 

(2) Where the buyer's conduct amounts to a substantial breach, 
the seller, in addition to his rights under subsection 1, may exercise 
any one or more of the following rights : 

1 . Cancel the contract 

(i) with respect to any undelivered goods, 

(ii) where the buyer has wrongfully rejected or re- 
voked acceptance, or 

(iii) where the goods are in the buyer's possession and 
the seller is otherwise entitled to reclaim them. 

2. Proceed under section 9.5 respecting goods still un- 
identified to the contract. 

3. Resell and recover damages as provided in this Act. 

We appreciate that our recommendation in favour of a test of substantiality 
may appear to encourage uncertainty. However, the uncertainty exists now. 
Moreover, some degree of uncertainty is, in our view, a justifiable price for 
the greater measure of flexibility and prevention of hardship provided by 
the test of substantiality. 

Nevertheless, we recognize that uncertainty should be reduced wher- 
ever possible. We believe that this can be achieved by allowing the seller, 
in the case of the buyer's late payment or failure to take delivery, to treat 
the breach as a substantial breach, whether or not it would otherwise be a 
substantial breach, where the buyer has failed to cure his default after 
being given reasonable notice by the seller to do so. We recommend that 
the revised Act incorporate a provision to this effect. ^'^ It should also be 
emphasized that the parties will retain their contractual freedom to charac- 
terize the importance of the buyer's obligation and the consequence of a 
breach thereof. In such a case, the seller will not need to rely on his right 
to demand cure. Even in the absence of such an agreement, the seller will 
retain the right to argue that the initial breach amounted to a substantial 
breach, if he is satisfied that the facts warrant such a claim. 

There are important precedents for our recommendation. These are 
found, first, in section 46(3) of the existing Sale of Goods Act and, 
secondly, in the "Nachfrist" provisions in the Uniform Law on the Inter- 
national Sale of Goods (ULIS) and in Articles 45(1) and 46(1) of the 



^Vbid., s. 9.4. 



393 

1977 draft UNCITRAL sales Convention.is Section 46(3) of The Sale of 
Goods Act is examined more fully later in this chapter; suffice it to say at 
this juncture that it entitles the unpaid seller to resell the goods in his 
possession, notwithstanding that title may have passed to the buyer, where 
the goods are of a perishable nature or when he "gives notice to the buyer 
of his intention to resell and the buyer does not within a reasonable 
time pay or tender the price". Articles 45(1) and 46(1) of the draft 
UNCITRAL Convention provide as follows: 

Article 45 

( 1 ) The seller may fix an additional period of time of reason- 
able length for performance by the buyer of his obligations. 

Article 46 

(1 ) The seller may declare the contract avoided: 

(a) if the failure by the buyer to perform any of his obliga- 
tions under the contract and this Convention amounts 
to a fundamental breach of contract; or 

(b) if the buyer has not, within the additional period of 
time fixed by the seller in accordance with paragraph 
(1) of article 45, performed his obligation to pay the 
price or taken delivery of the goods, or if he has 
declared that he will not do so within the period so 
fixed. 

It will be observed that, while section 46(3) of The Sale of Goods Act is 
restricted to delay in payment, the UNCITRAL provisions also embrace 
delay in taking delivery. In both cases, the seller may declare the contract 
avoided; that is, cancelled. He is not obliged to resell the goods if he does 
not wish to do so. We support the principle of the UNCITRAL provisions 
and, in accordance with our recommendation, have sought to give effect 
to them in our Draft Bill.^^ \^ ^g hdiwt noted, the seller would not be 
obliged to resort to the section if he is satisfied that the buyer's breach 



iSFor the ULIS provisions see Arts. 62(2) and 66(2). "Nachfrist" is the German 
term for the additional period of time that a creditor may allow a defaulting 
debtor (not necessarily a buyer or seller) before being entitled to treat the non- 
performance as amounting to a substantial breach of the debtor's obligation. 
See, further, Cohn, Manual of German Law (2nd ed., 1968), Vol. II, sees. 
226-27; and Treitel, "Remedies for Breach of Contracts", in International Ency- 
clopedia of Comparative Law, Vol. VII, ch. 16, sees. 11, 149-50. It should be 
emphasized that while the ULIS and UNCITRAL provisions have been influ- 
enced by the German concept, they are not identical with it in scope or detail. 
(We are indebted to Dr. Ulrich Drobnig of the Max Planck Institut in Ham- 
burg for making much of the aforegoing information available to us.) 
Another precedent for our recommendation lies in equity which, while not 
ordinarily treating time as of the essence in contractual stipulations, would allow 
the aggrieved party to make it of the essence after serving a demand for per- 
formance on the party in default. Compare, Cheshire & Fifoot, The Law of 
Contract (7th ed., 1969), at p. 495; Stickney v. Keeble, [1915] A.C. 386; Ajit 
V. Sammy, [1967] A.C. 255. 

i9See, Draft Bill, s. 9.4. 



394 

already amounts to a substantial breach of the contract, or if the contract 
itself treats the breach as a substantial breach. 

Two further points require consideration. The first is whether the 
seller's right to convert a minor breach into a substantial breach for the 
buyer's failure to take delivery should apply, even where the price, or a part 
thereof, has been paid. It is arguable that the seller suffers no serious 
prejudice in such a case and that, as is provided in section 36 of the 
Ontario Sale of Goods Act in respect of uncollected goods generally, he 
should be content with a claim in damages. While recognizing the force of 
this reasoning we have, in the interests of simplicity, decided not to dis- 
tinguish between cases where the seller is unpaid, and cases where payment 
has been made in full or in part. Our reason is that it would require the 
drawing of fine distinctions between partly paid and fully paid goods, and 
between durable goods and those goods that are perishable or decline in 
value and that therefore require prompt action by the seller. Such com- 
plexities hardly seem warranted. Accordingly, we recommend that the 
seller should have the right, upon the buyer's failure to take delivery, to 
convert the buyer's minor breach into a substantial breach, notwithstanding 
that the buyer may have paid for the goods, in full or in part. 

The second point is whether the seller's right to demand cure should 
be extended to all breaches by the buyer, or whether it should be restricted 
to cases where the buyer fails to make payment or to take delivery of the 
goods. We were initially attracted by the suggestion that it should be so 
extended, especially where the buyer is in a position to cure his default 
without undue expense, risk or prejudice to himself. We were, however, 
subsequently persuaded that the probable costs of such an extension would 
exceed any possible benefits. Nevertheless, we favour an enlarged construc- 
tion of the meaning of payment and taking delivery, so as to include such 
preparatory steps (for example, the opening of a letter of credit or the 
designation of a vessel or other carrier) as may reasonably be considered 
part of the buyer's obligations to make payment and to take delivery. We 
so recommend.2^ 

2. Real Remedies 

As previously mentioned, the seller's real remedies encompass the 
right of lien or retention, the right of stoppage, and the right of resale. With 
the exception of cases dealing with the right of resale, most, if not all, of 
the leading cases involving the seller's real remedies are of pre-1893 origin, 
and the statutory provisions have since then engendered only a modest 
amount of litigation. This suggests either that these provisions are uncon- 
tentious, or that changes in selling practices and the extension of credit 
have substantially reduced their practical significance. Certainly, the latter 
explanation applies to the right of stoppage in transitu. In any event, we 
do not find it necessary to review the provisions in detail, and our attention 
will largely be confined to those provisions that would appear to be in need 
of clarification or revision. We shall deal first with the treatment of real 
remedies under The Sale of Goods Act, and then compare the provisions 
of this Act with those of the Uniform Commercial Code. 

^01 bid., s. 9.4(2). 



395 



(a) THE EXISTING LAW 



Section 38 of The Sale of Goods Act indexes the real remedies of an 
"unpaid seller" as defined in the Act.^^ This section provides as follows: 

38.(1) Subject to this Act and any statute in that behalf, 
notwithstanding that the property in the goods may have passed to 
the buyer, the unpaid seller of goods, as such, has by implication 
of law, 

(a) a lien on the goods or right to retain them for the price 
while he is in possession of them; 

(b) in case of the insolvency of the buyer, a right of stopping 
the goods in transitu after he has parted with the posses- 
sion of them; 

(c) a right of resale as hmited by this Act. 

(2) Where the property in goods has not passed to the buyer, 
the unpaid seller has, in addition to his other remedies, a right of 
withholding delivery similar to and co-extensive with the rights of lien 
and stoppage in transitu where the property has passed to the buyer. 

We now turn to consider a number of points raised by the section. 

(i) The Relevance of Title 

Section 38 distinguishes between cases where property in the goods 
has passed to the buyer and cases where property has not so passed. In 
the former case, the seller has a right of lien, a right of stoppage and a 
right of resale; in the latter case, however, section 38(2) makes no specific 
mention of the right of resale. It is generally accepted that this omission 
is not fatal, since a seller with title does not need a statutory power of 
resale. The power derives from his status as owner,^^ although, it may be 
argued that this does not answer the question whether he has a right of 
resale. Our view is that, like other parts of the Act, the section betrays an 
obsession with title and its consequences that is unnecessary for the pur- 
poses of determining the parties' rights. As will be seen, here as elsewhere. 
Article 2 has abandoned property concepts and has substituted a functional 
test. We favour the same approach in the revised Act and accordingly 
recommend that, with respect to the seller's real remedies, the revised Act 
should draw no distinction between those cases in which title has passed 
to the buyer, and those in which it has not. 



2iSee, s. 37(1). 

22See, Baer, footnote 1 supra, at pp. 30-31. Atiyah, The Sale of Goods (5th ed., 
1975), at pp. 249-50, draws a distinction between the power of resale and the 
right of resale and argues that, while the retention of ownership in the goods 
confers a power on the unpaid seller to pass a good title to a third party, it does 
not necessarily make his action rightful vis-a-vis the buyer. This apparent para- 
dox is convincingly explained in Professor Baer's paper; and see, also, R. V. 
Ward Ltd. v. Bij,'nall, [1967] 1 Q.B. 534 (C.A.); and compare, Robinson v. 
Long, [1923] 3 D.L.R. 918 (N.B.S.C, App. Div.). 



396 

(ii) Lien Right (Right of Retention) 

By section 38(1), an unpaid seller has a lien on goods for the price, 
while they are in his possession, and notwithstanding that the property in 
the goods may have passed to the buyer. Section 38(2) confers an equiva- 
lent right upon the unpaid seller where property in the goods has not 
passed to the buyer. The unpaid seller's lien right is merely a logical con- 
sequence of the statutory rule^^ that the seller's duty to tender delivery and 
the buyer's duty to pay for the goods are concurrent conditions. The 
reasonableness of the lien right requires no justification. There are, how- 
ever, a substantial number of subsidiary questions involving the creation 
and duration of the lien that require examination. 

The two conditions essential to the creation of the lien, as stated in 
section 38(l)(a) of the Act, are that the seller must be unpaid, and that 
he must be in possession of the goods. Of course, if the seller has agreed 
to extend credit, he cannot justify withholding the goods on the grounds 
of non-payment. This is necessarily implied in subsection (l)(a) of sec- 
tion 39 of the Act. Section 39 provides as follows: 

39.(1) Subject to this Act, the unpaid seller of goods who is 
in possession of them is entitled to retain possession of them until 
payment or tender of the price, 

(a) where the goods have been sold without any stipulation as 
to credit; 

(b) where the goods have been sold on credit but the term of 
credit has expired; or 

(c) where the buyer becomes insolvent. 

(2) The seller may exercise his right of lien notwithstanding 
that he is in possession of the goods as agent or bailee for the buyer. 

However, an apparent difficulty is created because of the provision in 
section 39(1) (b), the effect of which is to revive the seller's lien "where 
the goods have been sold on credit but the term of credit has expired". 
Read literally,^^ this suggests that the seller could take advantage of his 
own failure to deliver. Although this result was probably not intended, the 
ambiguity should be resolved. Accordingly, we recommend that the provi- 
sion in the revised Act dealing with the seller's right of lien should make 
it clear that, where the seller has extended credit, he cannot justify with- 
holding the goods on the ground of non-payment where he has not met his 
delivery obligations. ^^ 

The Sale of Goods Act is unusually detailed in spelling out the ramifi- 
cations of the seller's lien right in various circumstances. However, there 
are still significant gaps, and in other cases the provisions of the Act are 
open to question on grounds of poUcy. This is true of a number of situa- 
tions, which we now discuss. 



23r/ie Sale of Goods Act, s. 27. 
24See, Baer, footnote 1 supra, at p. 6. 
25See, Draft Bill, s. 9.7(1) (a). 



397 

(1) Seller in Possession as Agent 

Section 39(2) of The Sale of Goods Act affirms the seller's lien right, 
even though he is in possession of the goods as agent or bailee for the 
buyer. 2^ Assume, however, that the buyer has elected to leave the goods 
with the seller, even though he was entitled to delivery; it may be con- 
tended that, in this situation, the seller's right to claim a lien because of 
supervening events is anomalous. This is particularly so if the seller carries 
on a separate business as bailee and charges for his services. While this 
may be conceded, it must also be recognized that it is often difficult to 
determine the precise time when a seller, who has not formally agreed to 
retain the goods for safekeeping, assumes the garb of a bailee. In our view, 
section 39(2) at least has the merit of avoiding the need to draw fine 
distinctions. On balance, therefore, we favour retaining the provision, and 
accordingly recommend that the substance of section 39(2) be reproduced 
in the revised Act.^^ 

(2) Part Delivery 

Section 40 of The Sale of Goods Act provides as follows: 

40. Where an unpaid seller has made part delivery of the 
goods, he may exercise his right of lien or retention on the 
remainder unless the part delivery has been made under such 
circumstances as show an agreement to waive the lien or right 
of retention. 

This section merits clarification. It fails to distinguish between an entire or 
indivisible contract and an instalment or divisible contract.^^ It also fails to 
indicate whether, in an instalment contract, the unpaid seller may assert a 
general lien on future instalments to cover payment owing on previous 
instalments. Although the case law appears to deny such a right,^^ on the 
ground of the severable nature of the instalments, we favour its recognition. 
Accordingly, we recommend that the provision in the revised Act dealing 
with the seller's right to withhold delivery should make it clear that the 
seller's right to withhold where there has been part delivery covers amounts 
due under an instalment contract, as well as amounts due under an entire 
or indivisible contract. ^^ 

We do not, however, favour enlarging the seller's right still further, so 
as to confer a lien in respect of future payments as well as overdue pay- 
ments. Our opposition to such a proposal rests on several grounds. First, it 
would depart significantly from existing law, which recognizes no such 



26There is some controversy concerning the extent, if any, to which this provision 
changed the common law. Benjamin's Sale of Goods (1974), para. 1070, claims 
that it did, but the contrary position appears to be adopted in WilUston on Sales 
(Rev. ed., 1948), sec. 506, commenting at large on s. 54 of the Uniform Sales 
Act. See, also, Chalmers' Sale of Goods Act 1893 (16th ed., 1971), pp. 173-75. 

27See, Draft Bill, s. 9.7(3). 

280n instalment contracts, see s. 30 of The Sale of Goods Act, and infra, ch. 18. 

29See, for example, Sna^proof Limited v. Brody (1922), 69 D.L.R. 271 (Alta. 
S.C., App. Div.), especially at p. 275. 

30See, Draft Bill, s. 9.7(4). 



398 

right. ^^ Secondly, a proposal of this nature would conflict with the general 
treatment of instalment contracts as proposed later in this Report. ^^ 
Thirdly, it would lead to the anomalous result that a seller in an instalment 
contract would have greater rights than a seller under an indivisible con- 
tract, where delivery is to be made in one instalment. Finally, an instalment 
seller who feels insecure about future payment can always invoke his right 
to seek an adequate assurance of performance, pursuant to a recommenda- 
tion made later in this Report. ^^ 

(3) Effect of Judgment on Lien 

Section 41(2) of The Sale of Goods Act restates the common law 
rule that the unpaid seller does not lose his lien right by reason only that 
he has obtained a judgment for the price. Read literally, the statutory 
language does not cover the position where a judgment has been obtained 
after a stoppage in transitu. It is, however, reasonable to assume that the 
draftsman intended the same rule to apply in both situations. ^^^ In any 
event, the position should be clarified in the revised Act. Accordingly, we 
recommend that the revised Act should make it clear that a judgment for 
the price does not affect either the seller's right to withhold delivery or the 
seller's right of stoppage. ^^ 

(4) Non-Possessory Lien Rights Where Buyer Insolvent; 
UCC 2-702 

Under The Sale of Goods Act, an unpaid seller has a right of lien 
only while the goods are in his possession, although, where the buyer is 
insolvent, the unpaid seller who has parted with possession of the goods 
may also stop them in the course of transit. A difficult question is whether 
the revised Act should recognize a limited statutory non-possessory lien, 
as does UCC 2-702(2),36 in a case where the buyer has become insol- 
vent after receiving the goods. The Code subsection entitles the seller 
to reclaim the goods if a demand for their return is made within 10 days of 
their receipt. The ten-day limitation does not apply if a misrepresentation 
of solvency has been made to the seller within three months of the delivery 
of the goods. The seller's rights of reclamation are subject to the rights of 
a buyer in ordinary course or other good faith purchaser from the seller's 
buyer.^"^ A comparable provision, involving the buyer's right of recovery 

3iSee, Benjamin's Sale of Goods (1974), para. 1072, and authorities there cited. 

^Vnfra, ch, 18, sec. 5. 

^^Infra, ch. 18, sec. 3; and compare, Draft Bill, s. 8.9. 

34-Compare, Benjamin's Sale of Goods (1974), para. 1089. 

35See, Draft Bill, s. 9.7(5). 

36UCC 2-702(2) provides as follows: 

(2) Where the seller discovers that the buyer has received goods on 
credit while insolvent he may reclaim the goods upon demand made within 
ten days after the receipt, but if misrepresentation of solvency has been 
made to the particular seller in writing within three months before delivery 
the ten day limitation does not apply. Except as provided in this subsection 
the seller may not base a right to reclaim goods on the buyer's fraudulent 
or innocent misrepresentation of solvency or of intent to pay. 
37UCC 2-702(3). The original version of subsection (3) also applied to lien 
creditors, and this led to diflRculties. See, White & Summers, Handbook of The 
Law Under the Uniform Commercial Code (1972), at pp. 243 et seq. The refer- 
ence to lien creditors was deleted in 1966. 



399 

of goods in the seller's hands where the seller becomes insolvent after 
receiving payment, appears in UCC 2-502. As is noted in a later chapter,^^ 
UCC 2-502 has negligible practical value, and its constitutionality in a 
provincial statute may be open to question. ^^ While the rights conferred on 
a seller under UCC 2-702 are somewhat broader, the constitutional diffi- 
culty remains. Even in the absence of constitutional considerations, there 
is the important objection that an unpaid seller's right of reclamation in 
bankruptcy would introduce an apparently novel principle in Canadian 
bankruptcy law, the need for which may not be generally conceded."^^ Be 
that as it may, a provision such as UCC 2-702 is best dealt with in the 
context of federal bankruptcy legislation and, accordingly, we do not 
recommend its adoption in the revised Ontario Act. The parties would, of 
course, be free to enter into a consensual security agreement under The 
Personal Property Security Act. 

(5) Should the Seller's Lien Right Cover Damages or 
Expenses as well as the Unpaid Price? 

At common law, the seller's lien right was restricted to the unpaid 
price, and did not extend to expenses incurred by him while detaining the 
goods. '^i The supporting reason was that the detention was for his own 
benefit. The Sale of Goods Act has not changed this position.'^^ xhe 
question that needs to be considered is whether the revised Act should 
do so. 

The traditional explanation for denying the seller such an extended 
lien is not very persuasive. Taken to its logical conclusion, it would also 
deny a secured seller repossessing the goods on the buyer's default the 
right to claim a security interest in respect of expenses incurred in relation 
to his repossession of the goods. The right of the seller to claim such a 
security interest was recognized in the former Conditional Sales Act'*^ and 
is now recognized in Part V of The Personal Property Security Act.^^ 
Moreover, even at common law, an unpaid seller may have an independent 



38/«/ra, ch. 17. 

39This is because of the federal Parliament's paramount jurisdiction in questions 
of bankruptcy and insolvency under s. 91(21) of The British North America 
Act, 1867. 

40The Quebec Civil Code, in arts. 1998 and 1999, recognizes the right of an un- 
paid vendor to revendicate goods within 30 days after delivery, provided certain 
conditions are met. The Report of the Study Committee on Bankruptcy and 
Insolvency Legislation (Ottawa 1970), sec. 3.2.045, recommended that a simi- 
lar provision be incorporated in the revised Bankruptcy Act for the benefit of 
unpaid sellers in all provinces in the event of the buyer's bankruptcy. Accord- 
ing to information conveyed to us, the recommendation was opposed by impor- 
tant segments of the commercial community and was abandoned. There is no 
reference to such a right in the revised Bankruptcy Bill, Bill S-11, introduced in 
the Senate on 21 March, 1978. 

^^Somes V. The Directors of the British Empire Shipping Co. (1860), 8 H.L.C. 
338, 345, 1 1 E.R. 459, 462 (H.L.); Chalmers' Sale of Goods Act 1893, footnote 
26 supra, p. 174, n. (i). 

^Wenjamins Sale of Goods (1974), para. 1074. 

43R.S.O. 1970, c. 76 as am., s. 9(1). 

44R.S.O. 1970, c. 344 as am., s. 58. 



400 

claim for damages arising out of his detention of the goods.'*^ The question, 
therefore, seems to resolve itself into the narrow issue whether the seller 
should be forced to sue for his expenses, or whether he should be able to 
use his lien as a vehicle for assuring reimbursement. It has been argued 
that enlarging the unpaid seller's Hen would introduce uncertainty, since 
the parties may disagree on the amount of the seller's damages, and that it 
might increase the seller's opportunity for coercive tactics. This might well 
be true if the seller's lien were extended to include unliquidated damages; 
but the dangers would be substantially less if the seller's claim were limited 
to actual out-of-pocket expenses. 

Article 60 of the 1977 draft UNCITRAL Convention, following a 
similar provision in the Uniform Law on the International Sale of Goods,"*^ 
permits the seller to retain the goods until he has been reimbursed his 
reasonable expenses by the buyer. So, apparently, did the Uniform Sales 
Act.^'' The seller's position is not spelled out as clearly in the Code, but the 
available evidence points to the same result. By way of comparison, it may 
be noted that UCC 2-711 (3) creates a statutory security interest in favour 
of a buyer who has rejected non-conforming goods. This statutory security 
interest covers any expenses reasonably incurred in the inspection, receipt, 
transportation, and care and custody of the goods, as well as any payment 
made on their price. Again, UCC 2-706(1) empowers an unpaid seller, 
exercising his right of resale, to deduct from the proceeds any "incidental 
damages" incurred by him in relation to the goods. The words "incidental 
damages" are broadly defined in UCC 2-710 to cover expenses incurred 
by the seller subsequent to the buyer's breach. It would be anomalous if 
the seller could deduct his expenses from the proceeds of a resale, but not 
be entitled to claim them as a condition of releasing the goods to the buyer. 

In the light of these precedents, we are of the view that the equities 
favour an extension of the seller's lien rights. We therefore recommend that, 
in the revised Act, the seller's right to withhold delivery should include any 
reasonable expenses in relation to the care and custody, transportation 
and stoppage of the goods, and other incidental expenses incurred by him 
subsequent to the buyer's breach or insolvency."^^ 

(iii) Right of Stoppage in Transitu^^ 

The unpaid seller's right to stop goods in transit is set out in section 
42 of The Sale of Goods Act, which provides as follows: 

42. Subject to this Act, when the buyer of goods becomes insol- 
vent, the unpaid seller who has parted with the possession of the 
goods has the right of stopping them in transitu, that is to say, he may 
resume possession of the goods as long as they are in course of transit, 
and may retain them until payment or tender of the price. 



^^Benjamin's Sale of Goods (1974), para. 1074, n. 4. See, also, The Sale of 

Goods Act, s. 36. 
46Art. 91. 

47S. 51, last sentence. See, Williston on Sales (Rev. ed., 1948), sees. 499, 559. 
48See, Draft Bill, s. 9.7(2). 
49See, The Sale of Goods Act, ss. 42-45. 



401 

The right of stoppage in transit seems to have lost much of its practical 
importance. The reasons for this decHne include the ubiquitous use of 
documentary letters of credit in international shipments, modern credit 
checking facihties, and the difficulties of learning of the buyer's insolvency 
before the goods are delivered to the buyer. We can, therefore, dispose of 
the right of stoppage quite briefly. As has already been noted, under The 
Sale of Goods Act the right of stoppage only arises where the buyer has 
become insolvent ;50 mere non-payment of the price, or other forms of 
breach, are not sufficient. Moreover, by section 43(1), goods must, to be 
in the course of transit, be delivered to a carrier or other bailee for the 
"purpose of transmission" to the buyer. The right of stoppage is, there- 
fore, restricted to cases where the goods have been so entrusted to a 
carrier or other bailee. It is not sufficient to show merely that the goods 
are in the hands of a bailee. ^^ As will be seen, the Code adopts a different 
approach on both these points. We return to the seller's right of stoppage 
later in this chapter. Suffice it to say at this juncture that we support the 
retention of the seller's right of stoppage in the revised Act and, subject 
to the amendments that are discussed later, so recommend. 

(iv) Right of Resale 

Subsections (3) and (4) of section 46 of The Sale of Goods Act deal 
with the seller's right of resale. These provisions read as follows: 

46.(3) Where the goods are of a perishable nature or where 
the unpaid seller gives notice to the buyer of his intention to resell 
and the buyer does not within a reasonable time pay or tender the 
price, the unpaid seller may resell the goods and recover from the 
original buyer damages for any loss occasioned by his breach of 
contract. 

(4) Where the seller expressly reserves a right of resale in case 
the buyer should make default, and on the buyer making default, 
resells the goods, the original contract of sale is thereby rescinded, 
but without prejudice to any claim the seller may have for damages. 

Subsection (3) confers a statutory right of resale, and its important 
features are considered below. Subsection (4) recognizes the seller's power 
to reserve expressly a right of resale in case of the buyer's default, and 
deals with the consequences of the exercise of such a right. Similar con- 
tractual resale provisions have long been a familiar feature in conditional 
sale agreements. Prior to the adoption of The Personal Property Security 
Act, their proper characterization, and the right of the conditional seller to 
sue for a deficiency, gave rise to much difficulty. These questions are now 
dealt with in The Personal Property Security Act, and need not be pursued 
here. 

Section 46(3) is the critical provision and, in its existing form, suffers 
from numerous shortcomings. Traditionally, the subsection was thought of 



50"lnsolvent" is defined in s. 1(3). Compare, Draft Bill, s. 1.1(1)17. 

5lAs we point out later in this chapter, however, this difference may not be signi- 
ficant in the context of the seller's total remedies under the existing Act. See, 
infra, at p. 406. 



402 

as providing a statutory mechanism for the reahzation of the seller's lien 
interest in the goods. This position finds support in the judgment of 
Finnemore, J., in Gallagher v. Shilcock,^^ but was rejected by the English 
Court of Appeal in R.V. Ward Ltd. v. Bignall.^^ As a result, it now appears 
to be the law that the effect of a statutory resale is to rescind the contract of 
sale, and that the essential function of the subsection is to enable the seller 
to convert what may only be a minor breach of an obligation (the failure 
to pay) into breach of a condition. ^^^ The conceptual importance of the 
provision is, therefore, limited. It should also be noted that the subsection 
is misleading because it incorrectly suggests that the seller can only exercise 
a right of resale under the circumstances described in the subsection. It is 
clear, however,^^ that the seller retains his common law rights to cancel and 
resell where there has been breach of a condition, whether because of non- 
payment or breach of any other term of the contract, or, where the buyer 
has otherwise repudiated the contract. 

Subsection (3) is also deficient in the following respects. First, by 
virtue of its linkage to sections 37 and 38, the statutory right of resale is 
confined to breaches by the buyer involving payment of the price. Secondly, 
as mentioned, it is not clear whether it applies to cases where the unpaid 
seller has retained title to the goods, and this question has given rise to 
differences of opinion. ^^ Again, there is some doubt whether the subsection 
entitles the unpaid seller to cancel the contract without reselling the 
goods. 5*^ Fourthly, subsection (3) fails to indicate whether the seller is 
entitled to recover a deficiency based on the resale price, or whether the 
seller's measure of damages is still governed by the market price test 
enshrined in section 48(3). The consensus appears to be in favour of the 
market price test.^^ A similar question arises concerning the relationship 
between section 46(3) and the seller's right to recover the price under 
section 47 of the Act. The theory of section 46(3) adopted in R.V. Ward 
Ltd. V. Bignall, as the decision itself shows, leads inescapably to the conclu- 
sion that, once the right of resale has been exercised, the contract is 
rescinded and the seller loses his right to sue for the price. Presumably, he 
also loses the benefit of any judgment he may have already obtained for 
the price. Many sellers would not regard this as a commercially sound 
result, and understandably so. In the sixth place, the subsection is silent on 
the disposition of any surplus proceeds arising from the resale. Finally, 



52[1949] 2 K.B. 765. 

53[1967] 1 Q.B. 534 (C.A.). 

54It also serves another function; namely, to revest title in the seller where title 

has passed to the buyer. It was no doubt the title considerations that weighed 

most heavily with the 19th century English courts. Compare, Williston on 

Sales (Rev. ed., 1948), sees. 544-45. 
55Baer, footnote 1 supra, at pp. 34 et seq\ Benjamin's Sale of Goods (1974), 

paras. 1137 et seq. For a contrary view, see, Fridman, Sale of Goods in Canada 

(1973), at p. 333. 
56See, footnote 22 supra, and the text thereto. 
57The theory of section 46(3) adopted in R. V. Ward Ltd. v. Bignall, footnote 

53 supra, strongly suggests that he can. 
sSBenjamin's view is that the market price test prevails: Benjamin's Sale of Goods 

(1974), para. 1156; and see, also, para. 1238. 



403 

section 46(3) provides no guidelines for the conduct or machinery of the 
resale, so as to protect the buyer against excessive deficiency claims. ^^ 

The conclusion that emerges from these points is that the role of 
section 46(3) needs to be reconsidered. In this reassessment two issues 
should be kept quite separate. The first concerns the circumstances in 
which the seller should be entitled under the revised Act to treat the 
buyer's failure to pay as amounting to a substantial breach of the contract. 
We have dealt with this earlier.^ The second issue may be stated as 
follows: assuming the seller is entitled to resell, under what circumstances 
should he be able to use the results of the resale as proof of his damages, 
and to sue for any deficiency in the price? As will be seen, UCC 2-706 
addresses itself to this issue and, on the whole, we think, answers it very 
convincingly. 

(v) Residual Questions 

Two related questions deserve to be discussed briefly. The first is 
whether an unpaid seller in possession of the goods should be obliged to 
exhaust his real remedies before being entitled to sue for the price. It is 
clear that the existing Act imposes no such duty on the seller. It may be 
argued that such a rule^^ is consistent with the seller's general duty to 
mitigate his damages. Whether this analogy is entirely apt is open to 
question; but it seems to us in any event that the Code has found a more 
satisfactory solution to the problem. By virtue of UCC 2-709(1) the 
seller is generally only entitled to sue for the price where the buyer has 
accepted the goods. As a result, only exceptionally will the seller in posses- 
sion of the goods be in a position to elect between suing for the price or 
claiming damages. Later in this chapter, we recommend adoption in the 
revised Act of a provision comparable to UCC 2-709(1). We do not, 
therefore, recommend that the revised Act should contain a provision 
requiring the seller to exhaust his real remedies before being entitled to 
sue for the price. 

The other question is whether the revised Act should extend the 
seller's right of repossession and resale to cases where the goods have been 
delivered to the buyer and he has failed to pay; in other words, should the 
unpaid seller have a statutory non-consensual, non-possessory lien or right 
of cancellation in respect of the unpaid purchase price? It will be observed 
that this question raises in a broader form the issue that was considered 
previously in connection with goods delivered to an insolvent buyer. Some 
legal systems recognize such a right. It is clear, however, that no such 
right obtains under our law,^^ except where the seller has retained title to, 
or a security interest in, the goods, where the buyer has been guilty of 
fraud or misrepresentation, or where the contract has been rescinded by 
mutual agreement. Where title and possession have passed, the theory 
appears to be that non-payment by the buyer, or breach of any other 

59Admittedly, this criticism is only valid if the resale price is in fact binding on 

the buyer. 
60See, supra, at p. 392. 
6 'See, Baer, footnote 1 supra, at pp. 44-45. 
^Wenjamin's Sale of Goods (1974), para. 1147. 



404 

obligation, however serious, cannot unilaterally revest title in the seller. 
The logic of this conclusion is not obvious since, in other circumstances, 
the law finds no difficulty in permitting an involuntary retransfer of title. 
Be this as it may, preoccupation with title concepts diverts attention from 
the important policy consideration. The point is that rights of repossession 
and resale after the goods have been delivered to the buyer have a 
potentially adverse effect on the legitimate expectations of third parties, 
and should, therefore, only be permitted subject to proper safeguards such 
as are found in The Personal Property Security Act. Moreover, it would be 
anomalous to confer upon a seller greater rights against a solvent buyer 
than are available against an insolvent buyer. Our conclusion is, therefore, 
that the existing position is sound, and we do not recommend the confer- 
ment on the seller of a general statutory non-possessory lien right. This 
recommendation is not, however, intended to derogate from the seller's 
right to obtain a consensual security interest in accordance with the provi- 
sions of The Personal Property Security Act. 

(b) THE CODE POSITION 

The Article 2 provisions on real remedies corresponding to those in 
The Sale of Goods Act are to be found in sections 2-702, 2-703, 2-705 and 
2-706 of the Uniform Commercial Code. UCC 2-702 ( 1 ) is concerned with 
the seller's right to withhold or to stop delivery where the buyer is insol- 
vent, and corresponds with existing Anglo-Canadian law. We have dealt 
earlier in this chapter with UCC 2-702(2). The provisions in UCC 2-703, 
the Code's index of seller's remedies, have also been referred to previously. 
UCC 2-705 contains the Code's version of the seller's right of stoppage, 
while UCC 2-706 is concerned with his right of resale. Of these provisions, 
those on resale are by far the most important. 

(i) The Right to Withhold Delivery 

The right to withhold is the Code's nomenclature for the right of lien 
or retention conferred under The Sale of Goods Act. This right is conferred 
by UCC 2-703, the index section, but, as we have pointed out, is not 
further elaborated in other sections of the Code. The Code is able to use a 
single expression because title concepts play no role in determining the 
seller's remedies. Hence, it is not necessary to distinguish the situations in 
which title has passed from those in which it still remains with the seller. 
We have previously indicated our support for this approach. Equally note- 
worthy is the fact that Article 2 contains no provisions corresponding to 
sections 39-41 of the Ontario Sale of Goods Act with respect to the scope 
and termination of the right to withhold, although such provisions appeared 
in the Uniform Sales Act. Presumably, they were omitted because they 
were no longer regarded as of practical importance. This is, however, a 
view that we do not share. Finally, it should be noted that the right to 
withhold is not restricted in the Code to cases of non-payment or the 
buyer's insolvency,^^ as is true under The Sale of Goods Act, but also 



63The right to withhold in the case of the buyer's insolvency is dealt with in 
UCC 2-702. 



405 

extends to the other breaches enumerated in 2-703, notably repudiation 
by the buyer.^ 

The Commission recommends that, following the Code nomenclature, 
the seller's lien right should be described in the revised Act as a right to 
withhold. We also recommend that the seller should be able to withhold 
delivery of goods in his possession in the following circumstances: (a) until 
the buyer pays any sum due on or before delivery; (b) until payment of 
the price where the buyer is insolvent; or, (c) where the buyer repudiates 
the contract, until retraction of the repudiation as provided in other pro- 
visions of the revised Act.^^ 

(ii) Stoppage in Transitu 

The seller's right to stop goods in transit is dealt with in UCC 2-705. 
This section provides as follows: 

2-705. ( 1 ) The seller may stop delivery of goods in the possession of 
a carrier or other bailee when he discovers the buyer to be insolvent 
(Section 2-702) and may stop delivery of carload, truckload, plane- 
load or larger shipments of express or freight when the buyer re- 
pudiates or fails to make a payment due before delivery or if for any 
other reason the seller has a right to withhold or reclaim the goods. 

(2) As against such buyer the seller may stop delivery until 

(a) receipt of the goods by the buyer; or 

(b) acknowledgment to the buyer by any bailee of the goods 
except a carrier that the bailee holds the goods for the 
buyer; or 

(c) such acknowledgment to the buyer by a carrier by reship- 
ment or as warehouseman; or 

(d) negotiation to the buyer of any negotiable document of title 
covering the goods. 

(3) (a) To stop delivery the seller must so notify as to enable the 

bailee by reasonable diligence to prevent dehvery of the 
goods. 

(b) After such notification the bailee must hold and deliver the 
goods according to the directions of the seller but the seller 
is liable to the bailee for any ensuing charges or damages. 

(c) If a negotiable document of title has been issued for goods 
the bailee is not obliged to obey a notification to stop until 
surrender of the document. 



^Repudiation here appears to refer to anticipatory repudiation of the buyer's 
obligations, and must be read in conjunction with the provisions in UCC 2-610 
and 2-611. See, further, infra, ch. 18, sec. 4. 

65See, Draft Bill, s. 9.7(1). 



406 

(d) A carrier who has issued a non-negotiable bill of lading is 
not obliged to obey a notification to stop received from a 
person other than the consignor. 

UCC 2-705 reproduces the essence of the common law concept of stoppage 
in transitu, but extends it in one, and possibly two, respects. ^^ First, at least 
in the case of the buyer's insolvency, the right of stoppage is no longer 
limited to situations where the goods are delivered to a carrier or other 
bailee "for the purpose of transmission" to the buyer, as is true under the 
Ontario Act. Under the Code provision, the right of stoppage applies 
wherever the goods are "in the possession" of a carrier or other bailee,^'' 
whether or not for purposes of transmission. However, it seems doubtful 
whether the Code has effected a change in substance. At common law, 
where at the time of sale the goods were in the possession of a bailee, there 
was no deemed delivery by the seller to the buyer, and therefore no transfer 
of possession, unless and until the bailee attorned to the buyer, or the 
buyer was supplied with a document of title that had the effect of trans- 
ferring possession of the goods to the buyer. This rule is essentially re- 
enacted in section 29(3) of the Ontario Sale of Goods Act.^^ It follows 
that, under existing Ontario law, until either of these events has occurred 
the seller retains his lien rights as an unpaid seller.^^ The seller does not 
have to rely on his right of stoppage; in fact, it cannot arise because the 
goods are not in transit to the buyer. 

The Code appears to have changed the prior law by the introduction 
of the provisions of UCC 2-503(4). This subsection provides, inter alia, 
that, where the goods are in the possession of a bailee and are to be 
dehvered without being moved, tender to the buyer of a non-negotiable 
document of title, or of a written direction to the bailee to deliver, is suffi- 
cient tender unless the buyer seasonably objects. Formal attornment by the 
bailee is not necessary. The effect of such a tender would be that the seller 
loses his right to withhold delivery under UCC 2-703 (a), since delivery 
will be deemed to have taken place upon acceptance of the tender. Conse- 
quently, the seller may be obliged to rely upon the Code's extended right of 
stoppage under UCC 2-705. Assuming this analysis to be correct,'^^ the net 
effect of the Code provisions is simply to reduce the scope of the seller's 
lien right in favour of an enlarged right of stoppage. 

Ordinarily, there would be little point in making the same change to 
the revised Ontario Act. However, we have previously recommended adop- 
tion of a provision similar to UCC 2-503(4)."^^ In recommending adoption 
of this provision, it was not our intention to reduce the overall benefit of 



66Compare, NYLRC Study, ch. 5, footnote 52, supra, at p. (557); Duesenberg 
and King, Sales and Bulk Transfers Under the Uniform Commercial Code, 
Bender's Uniform Commercial Code Service, Vol. 3 A, at p. 13-14, s. 13.03 [3]; 
Void, Law of Sales (2nd ed., 1959), at p. 258, n. 2. 

67UCC 2-705(1). 

68Compare, Benjamin's Sale of Goods (1974), para. 591; Void, footnote 66 
supra, at pp. 250-51. 

69Benjamin, supra, para. 1082. 

70The textwriters do not discuss the point; nor does it appear to have arisen in the 
few reported cases under UCC 2-705(1). 

"^^Supra, ch. 14, sec. A.3(a)(ii). 



407 

the real remedies available to the unpaid seller. Accordingly, we recom- 
mend the extension of the seller's right of stoppage in the revised Act to all 
cases where the goods are in the possession of a carrier or other bailee, 
whether or not for the purpose of transmission to the buyer.'^^ 

The other difference between UCC 2-705 ( 1 ) and the right of stoppage 
in the Ontario Act is that, under the Code, and subject to the qualification 
noted below, the right is not confined to the buyer's insolvency. It also 
arises, at least where the goods are in the hands of a carrier and involve a 
larger shipment, when the buyer repudiates, fails to make a payment due 
before delivery, "or if for any other reason the seller has a right to with- 
hold or reclaim the goods". We support this extension of the grounds upon 
which the right of stoppage may be exercised. In our view, they should, so 
far as practicable, be the same as in the case of the right to withhold. 
According to our information, rights of stoppage are exercised very rarely 
and, if the reactions of one large national carrier are a reliable guide, it 
seems unlikely that the Code's expanded right of stoppage would encounter 
much opposition in Ontario. Accordingly, we recommend that, under the 
revised Act, the seller should be able to stop goods in transit not only where 
the buyer is insolvent but also where the buyer has repudiated, fails to 
make a payment due before delivery, or if for any other reason the seller 
has a right to withhold or reclaim the goods. 

Under the Code, in non-insolvency cases, the right of stoppage only 
applies to a delivery of "carload, truckload, planeload or larger shipments 
of express or freight". "^^ The question, therefore, arises whether the right of 
stoppage in non-insolvency cases should be similarly restricted under the 
revised Ontario Act to larger shipments of freight. Official Comment No. 1 
to UCC 2-705 explains that the restriction was imposed in order to limit 
the hardship to which carriers would otherwise be exposed. Since the 
carrier would be entitled to recover any "ensuing charges or damages" 
incurred by him in following the seller's instructions,"^"* the size of the ship- 
ment is not likely to make much difference to him. We, therefore, recom- 
mend that, unlike the rule in UCC 2-705, the seller's right to stop goods 
in transit should not be limited under the revised Act to larger shipments 
of freight, whether or not the buyer is insolvent. We have accordingly 
eliminated this distinction in our recommended version of UCC 2-705(1 ).''5 

Before leaving UCC 2-705(1), attention should also be drawn to an 
important ambiguity that needs to be resolved. A literal reading of the sub- 
section leads to the inference that the right of stoppage in non-insolvency 
cases only applies where the goods are in the hands of a carrier, and not 
where goods are held by a non-carrier bailee. This is because one does not 
normally associate "larger shipments of express or freight" with a bailee 
who is not a carrier. It seems unlikely, however, that the draftsmen intended 
to draw such a distinction and, in our view, it would be an untenable dis- 
tinction. It seems more likely that the draftsmen intended to confer the 
extended right of stoppage without restriction as to the size of the consign- 

72See, Draft Bill, s. 9.8(1). 
73UCC 2-705(1). 
74See, UCC 2-705(3) (b). 
75See, Draft Bill, s. 9.8(1). 



408 

ment where the goods are held by a non-carrier bailee, and to restrict the 
right of stoppage to cases involving larger shipments where the goods are 
in the hands of a carrier. This would make sense since, from a bailee's point 
of view, it is more troublesome to stop goods in transit than to stop delivery 
of goods that are simply lying in a warehouse. In any event, whether or not 
we are right in our construction of the Code's intention,'^^ we are of the 
view that the extended right of stoppage should apply to all types of bailee, 
and we so recommend. 

(iii) Right of Resale 

UCC 2-706 deals with the seller's right of resale. Subsection ( 1 ) of 
the Code provision reads as follows: 

2-706. ( 1 ) Under the conditions stated in Section 2-703 on seller's 
remedies, the seller may resell the goods concerned or the undelivered 
balance thereof. Where the resale is made in good faith and in a 
commercially reasonable manner the seller may recover the difference 
between the resale price and the contract price together with any 
incidental damages allowed under the provisions of this Article (Sec- 
tion 2-710), but less expenses saved in consequence of the buyer's 
breach. 

UCC 2-706 permits a seller who resells goods in good faith and in a com- 
mercially reasonable manner to measure his damages, not by the market 
price test, but with reference to the difference between the resale price and 
the contract price. The single most important feature, therefore, about the 
seller's right of resale under the Code is that it is not conceived of simply 
as a vehicle for realizing the unpaid seller's lien rights. Rather, the primary 
function of the section is to provide a convenient mechanism for measur- 
ing the seller's damages. "^"^ UCC 2-706 applies"^^ whenever the buyer has 
been guilty of one of the breaches enumerated in UCC 2-703, and the 
seller has not delivered, or is deemed to have resumed possession of, the 
goods.'^^ 

This change in role is to be welcomed. It emphasizes the underlying 
unity of the problems that arise upon the buyer's breach, regardless of the 
particular character of the breach or the locus of title, factors that are 
important under the Ontario Sale of Goods Act. Unlike section 46(3), the 
Code's resale provisions also provide some basic, yet flexible, guidehnes 
for the exercise of the seller's right. The dominant theme is that the seller 
must proceed in a commercially reasonable manner.^^ If he satisfies this 



760nce again, the case law to date throws no light on the question. 

77See, NYLRC Study, ch. 5, footnote 52, supra, at p. (559). 

78UCC 2-706(1), 1st sent. 

79The goods need not be identified to the contract at the time of the buyer's 
breach (see, UCC 2-706(2), 3rd sent.). Hence, UCC 2-706(1) carefully pro- 
vides that the seller "may resell the goods concerned or the undelivered balance 
thereof. There is no specific requirement in s. 2-706 that, in the case of identi- 
fied goods, the goods must be in the seller's possession at the time of resale, but 
this inference is to be drawn from the list of breaches enumerated in UCC 
2-703. The same question arises in construing the seller's right to cancel under 
UCC 2-703 (f). See Nordstrom, Handbook of the Law of Sales (1970), sec. 
165, especially at pp. 498-99. 

80UCC 2-706(1), 2nd sent. 



409 

test and the more particularized rules set forth in the section, the seller is 
entitled to recover any deficiency in the contract price. ^^ He is not, how- 
ever, accountable for any surplus^^ since the draftsmen implicity rejected 
any suggestion that the seller is merely acting as the buyer's agent in ef- 
fecting the resale.^^ 

An important innovation, found in UCC 2-706(2), is that the seller's 
resale right is not restricted to goods identified to the contract, as is the 
case under section 46(3) of The Sale of Goods Act, or indeed even to 
goods in existence at the time of the buyer's breach. The provisions in UCC 
2-706(2) must be read in conjunction with the provisions in UCC 2-704, 
which deal with the various alternatives open to a seller faced with a 
repudiating buyer in cases where the goods are unfinished or have not been 
identified at the time of the contract. Once again, the absence of a require- 
ment that goods be identified to the contract emphasizes the very differ- 
ent conceptual role of the resale provisions in UCC 2-706, from the role 
played by section 46(3) of The Sale of Goods Act, which was traditionally 
viewed as providing a statutory mechanism for the realization of the seller's 
lien interest in the goods. 

We support the principle of UCC 2-706 and, subject to clarification 
of a number of points discussed hereafter, recommend the adoption in the 
revised Act of a comparable provision. ^"^ It should be carefully noted that 
our section indexing the seller's remedies^^ provides that the right of resale 
is available to a seller only where the buyer's conduct amounts to a sub- 
stantial breach. 

The points requiring clarification are as follows. In the first place, 
it is not clear whether the seller is bound by the results of a resale in claim- 
ing damages, or whether he may ignore the resale and elect instead to 
claim damages as measured under the provisions of UCC 2-708, which 
employs a market price test.^^ The commentators are divided^'' on the 



mbid. 

82UCC 2-706(6). The rule does not apply to a "person in the position of a 
seller" exercising his rights under UCC 2-707, or to a buyer exercising his lien 
rights under UCC 2-711(3). They are accountable for any excess. 
83UCC 2-706, Comment 11. The same rule was adopted in s. 60(1) of the 

Uniform Sales Act: see, Williston on Sales (Rev. ed., 1948), sec. 553, n.9. 
84See, Draft Bill, s. 9.9. 
^^Ibid., s. 9.3. 

86UCC 2-708(1) corresponds with section 48(3) of the Ontario Sale of Goods 
Act, and reads as follows: 

2-708.(1) Subject to subsection (2) and to the provisions of this Article 
with respect to proof of market price (Section 2-723), the measure of dam- 
ages for non-acceptance or repudiation by the buyer is the difference be- 
tween the market price at the time and place for tender and the unpaid 
contract price together with any incidental damages provided in this Article 
(Section 2-710), but less expenses saved in consequence of the buyer's 
breach. 
The market price test is further discussed infra, chapter 18, sec. 2, 
87For example, White & Summers, footnote 37 supra, pp. 222-24; Peters, "Reme- 
dies 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, at 
pp. 260-61. A similar question arises with respect to the buyer's right to cover 
under UCC 2-712. See infra, ch. 17, sec. D.3(c). 



410 

issue, although there is substantial historical evidence that the Code drafts- 
men envisaged the right of resale enuring only for the seller's benefit. To 
permit the seller to ignore the results of the resale and to claim damages 
based on the difference between the market price and contract price could, 
however, lead to undesirable consequences. It could provide the seller with 
an unjustifiable windfall, thus violating the general principle in UCC 1-106 
that the object of the Code's remedial provisions is to put an aggrieved 
party in the same position as if the other party had fully performed. It could 
also leave the buyer in an uncertain state. UCC 2-706 requires the seller 
to give the buyer notice of his intention to resell and, in the case of a public 
sale, of the time and place of the sale. It would be pointless for the buyer 
to attend the sale, or to take other protective steps, if he had no assurance 
that the seller would be bound by the results of the sale. 

In the Commission's opinion, where a seller has exercised his right of 
resale, he should be bound by the results of the resale in claiming his 
damages, and we so recommend. To ensure this result, the recommended 
general provision in the revised Act dealing with the computation and 
measure of the seller's damages should provide that, where the seller resells, 
he is not entitled to sue for the difference between the contract price and 
the price that we later recommend for adoption in lieu of the market price, 
if his actual loss is less than this difference. ^^ Some of the implications of 
this restatement of the compensatory principle of contract damages are 
examined later in this chapter; suffice it to say for the moment that it is 
broad enough to answer the problem at hand. Implicit, also, in this recom- 
mendation is our rejection of the concept that the market price test pro- 
vides a liquidated measure of damages which the seller (and, in a con- 
verse case where the seller is in breach, the buyer) should be entitled to 
recover as a statutory minimum. 

A second point requiring clarification arises because UCC 2-706 fails 
to spell out clearly the consequences of non-compliance by the seller with 
the requirements of the section. It emerges from subsection (1) of UCC 2- 
706 that the seller is not entitled to recover the difference between the resale 
price and the contract price, unless the resale is made in good faith and in 
a commercially reasonable manner. These requirements do not, however, 
encompass the effect of breach of the additional duties imposed upon the 
seller in subsections (2) and (3). Official Comment 2 states ambiguously 
that " [f] ailure to act properly under this section deprives the seller of the 
measure of damages here provided and relegates him to that provided in 
Section 2-708". Assuming that the draftsmen's intention was that the 
seller should be denied the benefit of the resale provisions, regardless of 
the importance of the seller's breach of these additional duties or of the 



88See, Draft Bill, s. 9.10(4) (a). Compare, 1977 draft UNCITRAL Convention, 
Article 58, which only entitles a party to claim damages on a market price 
differential basis if he has not made a purchase or resale pursuant to Article 
57. See, also, ch. 18, sec. 2, infra, where we recommend that the revised Act 
adopt a test of 'commercially reasonable purchase or disposition' in lieu of the 
market price test. 



411 

prejudice occasioned to the buyer,^^ this could penalize the seller unfairly 
for trivial violations of the statutory standards. To meet these difficulties, 
we make two recommendations. First, the provision in the revised Act 
comparable to UCC 2-706 should contain simplified resale requirements. 
Secondly, we recommend that the seller should be deprived of his right 
to sue for damages under this provision only when he "does not resell in 
a commercially reasonable manner". ^^ These modifications should avoid 
the literalism that marred the interpretation of the resale provisions in the 
now repealed Conditional Sales Act,^^ and should focus attention on the 
important operational features of the statutory right of resale, 

A number of other matters arising out of UCC 2-706 require dis- 
cussion. We deal at a later stage in this chapter with the seller's right to 
claim additional or alternative damages under UCC 2-708(2), or other- 
wise, where his deficiency claim under UCC 2-706 is not sufficient to put 
him in as good a position as performance would have done. At this junc- 
ture, we discuss three important issues: namely, the buyer's right to cure; 
notice of resale; and, the buyer's entitlement to any surplus proceeds of a 
resale. 

(1) Buyer's Right to Cure 

The question^2 arises whether, where the seller has a right of resale, 
the buyer should be entitled to reinstate the contract upon tendering the 
purchase price. It is not clear whether the mere exercise of the seller's right 
of resale amounts to an automatic cancellation. An actual resale obviously 
must do so, but it is uncertain whether the same consequences will be as- 
cribed to any preliminary steps towards a resale taken by the seller.^^ The 
question is significant because it may affect the buyer's right to purge his 
breach before the resale actually takes place. Should preliminary steps 
amount to a cancellation, presumably the buyer will be too late to purge 
his breach; although it may be that, in a subsequent deficiency claim, the 
buyer might be able to argue successfully that the seller failed to mitigate 
his loss in not accepting the buyer's offer. However, this reasoning will not 
assist the buyer where the seller is not claiming damages. Only a right to 
cure, comparable to the right to cure conferred on the seller under UCC 
2-508 where the seller has delivered non-conforming goods, would provide 
relief to the buyer. No such cure is conferred by UCC 2-706. An obvious 
question is whether the buyer should be afforded the right to cure his 
breach under the revised Act. 

A majority of the Commission has decided not to recommend the 



89The position appears to be unclear. Compare, White & Summers, footnote 37 
supra, at p. 218, and cases there cited in n. 27. 

90Draft Bill, s. 9.9(6). 

9iThe case law is reviewed in Giles, "Conditional Sales Deficiency Notices" 
(1960), 9 Chitty's L.J. 210, 261. 

92Compare, Baer, footnote 1 supra, at pp. 70-71, 77-79, 93-94. 

93A similar question has been much litigated in the conditional sales area where 
a repossessing seller has sought to sue for the balance of the price and the 
buyer has argued that the sale had been rescinded because of the seller's un- 
authorized dealings with the goods after repossession. 



412 

adoption of such a feature in the revised Act. Our reasons are as follows. 
In the first place, no compelling case has been made for a buyer's right to 
cure and, if such a right were to be introduced, it would have to be made 
available not only where a seller intends to resell, but also in other cases 
where the seller has exercised a right to cancel the contract because of the 
buyer's breach. Secondly, the recommended restriction in the revised Act of 
the seller's right to cancel to cases where the buyer has committed a sub- 
stantial breach^'* already affords reasonable protection to the buyer. In 
practice, it would not seem to be in the seller's interest to cancel precipi- 
tously; various warnings will usually be given to the buyer before the seller 
makes his election to cancel. Again, there are important differences be- 
tween a seller's right to cure in the case of non-conforming goods under 
UCC 2-508, and the right sought to be conferred on the buyer. The seller's 
right to cure under the Uniform Commercial Code is heavily circum- 
scribed, and is primarily designed to mitigate the rigours of the perfect 
tender rule. In our remedial scheme, the buyer is not faced with a strict 
performance rule, except where his breach causes significant prejudice to 
the seller. Finally, a non-conforming seller has, as a general rule, a much 
heavier stake in a right to cure than a defaulting buyer. The buyer's duties 
are usually simple and easy to comply with. The seller's duties, on the 
other hand, are much more onerous and subject to many imponderables. 
In particular, defects in goods are often latent, and may not come to light 
until after the goods have been delivered and tested. Hence, there are 
sound commercial reasons for allowing the seller a right to cure, reasons 
that do not obtain in favour of a buyer's right to cure where he has com- 
mitted a substantial breach. Accordingly, we do not recommend^^ that, 
where the seller has exercised a right of resale or cancellation, the buyer 
should be entitled to cure his breach and thereby to reinstate the contract. 

(2) Notice of Resale 

A question that has given us some difficulty is whether a seller who is 
seeking to rely on the results of a resale to quantify his damages, should be 
obliged to give prior notice of his intention to resell. Persuasive arguments 
can be made both in favour of and against such a requirement. UCC 2-706 
imposes such an obligation. A further analogy is provided in Ontario by 
the resale provision in the former Conditional Sales Act^^ and, now, by 
section 58 of The Personal Property Security Act. It is true that section 
46(3) of The Sale of Goods Act also requires the seller to give notice of 
his intention to resell; but it appears that the sole purpose of this require- 
ment is to enable the buyer to cure the default, not to monitor the resale.^*^ 

94See, Draft Bill, s. 9.3(2). 

950ne of the Commissioners, the Honourable Richard A. Bell, does not concur 
in this recommendation. He would accord the buyer a right to cure and rein- 
state the contract. Obviously, if this position were adopted, a notice require- 
ment would be mandatory. 

96R.S.O. 1970, c. 76 as am., s. 9. 

97This is brought out clearly in s. 60 of the Uniform Sales Act. S.60(3) pro- 
vided that notice of an intention to resell was not essential to the validity of the 
resale but that "the giving or failure to give such notice shall be relevant in any 
issue involving the question whether the buyer had been in default an unrea- 
sonable time before the resale was made". 



413 

The objection to a notice requirement in a resale provision of the kind 
contained in UCC 2-706 rests on several grounds. One ground is that 
it is not clear what such a notice is designed to accomplish. It cannot 
be to afford the buyer an opportunity to reinstate the contract because, as 
has been seen, no such right is conferred under UCC 2-706. Presumably, 
its purpose is to allow the buyer to monitor the resale in order to satisfy 
himself that the seller is proceeding in a commercially reasonable manner; 
or alternatively, in the case of a public sale, to participate in the bidding. 
However, this goal cannot readily be accomplished under the Code pro- 
vision. In the case of a private sale, the seller is only required to give 
reasonable notification of his intention to resell; it is not clear that this 
includes a requirement to provide particulars of any prospective private 
sale. Further, it should be noted that no duty of notification is imposed on 
a buyer who seeks to "cover" a seller's failure to deliver under the corres- 
ponding provisions of UCC 2-712, the reason presumably being that no 
viable monitoring role was seen in such circumstances. Moreover, since 
the buyer usually has no "equity" in the goods, and no right under the 
Code provisions to claim any surplus proceeds arising from the resale, his 
incentive to police the resale is negligible. On the other hand, a seller who 
inadvertently fails to give notice of the resale, gives an inaccurate notice, or 
sends it to the wrong address, may find himself deprived of the right to 
rely on the results of the resale. 

In the light of these considerations, a majority of the Commission has 
concluded that there is not a sufficiently cogent case to support a manda- 
tory notice requirement. Accordingly, we do not recommend^^ that the 
revised Act should require the seller to give notice of his intention to resell. 
We should emphasize, however, that deletion of this feature of UCC 2-706 
will not affect the seller's obligation to proceed in a commercially reason- 
able manner; nor, of course, will it preclude the buyer from subsequently 
showing that the seller failed to meet this statutory test. 

(3) Buyer's Entitlement to Surplus Proceeds 

A seller who exercises his right of resale may realize an amount 
greater than the contract price. As we have seen, UCC 2-706 does not 
entitle the buyer to claim the surplus proceeds; nor is such a right conferred 
upon a buyer under Anglo-Canadian law. The question that arises is 
whether this rule should be changed. The question may be viewed from 
two perspectives. The first focuses on the particular equities of the issue. 
The second sees it as part of the larger question of the extent to which the 
rights and remedies of a seller in a cash transaction should be assimilated 
to those of a secured seller.^^ 

Section 59 of The Personal Property Security Act entitles the debtor 
under a security agreement, including, of course, a conditional sale agree- 



98The Honourable J. C. McRuer and Mr. William R. Poole do not concur in this 
recommendation and would support a mandatory notice requirement; and see, 
also, footnote 95 supra. 

99Compare, Baer, footnote 1 supra, at pp. 131c/ seq. 



414 

ment, to receive the surplus proceeds. If the two cases are similar in sub- 
stance, consistency suggests that the buyer in a cash transaction should be 
treated in the same way. However, it is doubtful whether this analogy is 
entirely apt. The debtor in a secured sale is regarded as the beneficial 
owner of the goods, and the interest of the seller is limited to a security 
interest. The debtor, moreover, will usually have made some payments, and 
the surplus rule is one way, albeit not often a successful way, of protecting 
his investment. In a cash sale, on the other hand, if one ignores the 
metaphysics of title, a buyer who is seriously in default before the goods 
have been delivered to him does not usually regard himself as having an 
interest in the goods, and other means are available to prevent the forfei- 
ture of any payments he may have made on account. ^^ In addition, the 
imposition of chattel security rules on cash sales would introduce an unde- 
sirable element of rigidity in a form of transaction that is usually character- 
ized by great informality. We do not, therefore, think that either logic or 
functional considerations dictate that cash and credit sellers should be 
placed on the same footing. 

This conclusion does not, however, entirely dispose of the problem. 
Even if the chattel security analogy is inappropriate, it may still be argued 
that, since the buyer in a cash sale will be liable for any deficiency after a 
resale (or what amounts to the same thing, to a claim for damages to 
cover the seller's loss), the converse should also hold true. But this argu- 
ment proves too much, for it would lead to the conclusion that, whenever 
the seller is better off after a breach than he was before, he should be 
accountable to the buyer. No one has ever suggested such a far-reaching 
rule. On the contrary, the common sentiment seems much more likely to 
be that a defaulting buyer should not benefit from his own wrong. This 
will be particularly true, as it will often be true if our later recommenda- 
tions are adopted, ^^^ where the seller has no right to sue for the price and 
is forced to exercise his real remedies. An alternative argument in favour 
of a surplus rule is that such a rule might discourage the cash seller from 
reselling precipitously where the buyer is in default, in order to take ad- 
vantage of a favourable swing in the market. We do not regard this as a 
serious danger; but, even if we are wrong, this exceptional situation would 
not be sufficient, in our view, to justify a change in the rule. In a rising 
market, the buyer would have every incentive to perform. In addition, the 
prerequisite of substantial breach and the requirement of good faith will 
usually preclude the seller from acting hastily. Our conclusion is, there- 
fore, that the rule adopted in UCC 2-706, and now also obtaining under 
section 46(3) of the Ontario Act as a result of the decision in /?. V. Ward 
Ltd. V. Bignall,^^^ is sound and should not be changed. Accordingly, we 
recommend that a seller who has exercised his right of resale should not be 
accountable to the buyer for any surplus. 

3. Personal Remedies 

The two remedies that will be considered under this heading are the 

ioojnfra, this chapter, sec. 3. 
102[1967] 1 Q.B. 534 (C.A.). 



415 

seller's right to sue for the price and his right to damages. His right to 
cancel has already been considered'^^ in connection with our recommended 
index section of the seller's remedies, '^"^ and need not detain us any 
further. The impact of penalty clauses and the doctrine of forfeiture of 
payments will be considered separately in a later part of this chapter. 

(a) ACTION FOR THE PRICE 

Section 47 of The Sale of Goods Act deals with an action by the 
seller to recover the price of goods sold. This section provides: 

47.(1) Where, under a contract of sale the property in the goods 
has passed to the buyer and the buyer wrongfully neglects or refuses 
to pay for the goods according to the terms of the contract, the seller 
may maintain an action against him for the price of the goods. 

(2) Where under a contract of sale the price is payable on a day 
certain, irrespective of delivery, and the buyer wrongfully neglects or 
refuses to pay the price, the seller may maintain an action for the 
price although the property in the goods has not passed and the goods 
have not been appropriated to the contract. 

Section 47(1) only entitles the seller to claim the price where the property 
in the goods has passed to the buyer. An exception to this rule is made in 
subsection (2) where, under the contract, the price is payable on a day 
certain. This provision, however, mitigates only slightly the theoretical and 
practical objections to the principal rule. 

As has been noted in chapter 11, the emphasis that the Ontario Sale 
of Goods Act places on the location of title can lead to arbitrary results, 
which are equally unsatisfactory from the seller's and buyer's points of 
view. From the buyer's point of view, if the contract involves a sale of 
specific goods and the goods are in a deliverable condition, title will usually 
pass to the buyer without his further assent.^^^ The seller will, accordingly, 
be able to sue for the price, even though the goods are still under his full 
control and could be resold by him without difficulty. The buyer's refusal 
to accept the goods does not deprive the seller of his right to the price. If, 
on the other hand, the contract involves a sale of future or unascertained 
goods, the buyer can effectively frustrate the seller's attempt to transfer 
title by failure to cooperate. ^06 j^^ buyer can thereby deny the seller the 
right to claim the price, even though the goods have been manufactured 
to the buyer's specifications and there is no alternative market for them.^^? 
An equally unsatisfactory result could ensue if a contract for the sale of 



'03See, supra, this chapter, sec. 1. 

l04See, Draft Bill, s. 9.3(2)1. 

105 7/,^ Sale of Goods Act, s. 19, Rule 1. Compare, R. V. Ward Ltd. v. Bignall, 
[1967] 1 Q.B. 534 (C.A.). 

106Compare, Colley v. Overseas Exporters, [1921] 3 K.B. 302. 

^^"^The Sale of Goods Act contains no provision comparable to s. 63(3) of the 
Uniform Sales Act, which entitled the seller to sue for the price, even though 
the property in the goods had not passed, where the goods could not readily be 
resold for a reasonable price. For the history of the provision see, Williston on 
Sales (Rev. ed., 1948), sees. 560 et seq. 



416 

specific goods contains a clause retaining title in the seller until payment, 
and there is no provision in the contract requiring the buyer to make pay- 
ment on a day certain. ^^^ 

The case, therefore, for changing section 47 of the Ontario Sale of 
Goods Act in favour of a functionally oriented rule is very strong, and 
UCC 2-709(1) appears to provide the appropriate solution. Subsection 
(1) reads as follows: 

2-709.(1) When the buyer fails to pay the price as it becomes due 
the seller may recover, together with any incidental damages under 
the next section, the price 

(a) of goods accepted or of conforming goods lost or damaged 
within a commercially reasonable time after risk of their 
loss has passed to the buyer; and 

(b) of goods identified to the contract if the seller is unable 
after reasonable effort to resell them at a reasonable price 
or the circumstances reasonably indicate that such effort 
will be unavailing. 

It will be noted that acceptance of the goods by the buyer is a key concept 
in the application of this section. UCC 2-709(1) only allows the seller to 
sue for the price where (apart from loss of or damage to conforming 
goods within a reasonable time after the risk of loss has passed to the 
buyer) the buyer has accepted the goods, or where, in the case of identified 
goods, the seller is unable to resell the goods at a reasonable price. In all 
other cases, the seller is remitted to a claim for damages. The theory of the 
section is^^^ that the seller is usually in a better position to dispose of 
unwanted goods than the buyer, and that it is economically wasteful to 
force goods on an unwilhng buyer. ^^^ The effect of subsection (l)(b), 
which applies where the goods have not been accepted by the buyer, is to 
recognize an important exception to the rule where there is no reasonable 
alternative market for the goods. In such a case, the seller is entitled to sue 
for the price.iii It will be observed that the effect of UCC 2-709(1) is to 
place the seller's right to sue for the price where the goods have not been 
accepted on the same conceptual footing as the buyer's right to seek specific 
performance of the seller's obHgations:^^^ in each case, the Code remedy is 
restricted to circumstances in which damages would not be an adequate 
remedy. The practical application of UCC 2-709(1) may be tested against 
the examples of the operation of the present position under the Ontario 



i08We do not pause to consider here whether s. 47 of The Sale of Goods Act is 

exhaustive of the seller's right to sue for the price. On this point, see Benjamin's 

Sale of Goods (1974), paras. 1193-94. 
^^Supra, ch. 11, sec. 2(e). 
iiOULIS, Art. 61(2), contains a provision similar to UOC 2-709(1) (b), but it 

has been omitted in the 1977 draft UNCITRAL Convention: see Arts. 43(1), 

44. 
m Compare, supra, footnote 107. 
112UCC 2-716. 



417 

Sale of Goods Act, mentioned earlier. The differences are striking. Under 
the Code rule it no longer matters whether or not the goods are identified 
at the time of contracting, or whether the seller's attempt to pass title has 
been frustrated by the buyer or by some other circumstance. The only 
relevant questions are whether the buyer has accepted the goods and, if he 
has not, whether there is an available market for them. Title considerations 
become irrelevant. 

We support the thrust of UCC 2-709. We appreciate that it can be 
argued that the Code swings the pendulum too far in the buyer's favour, 
and that, at least in some circumstances, the seller should be able to sue 
for the price even though the goods have not been accepted by the buyer. 
For example, there may be concern^^^ about the inadequacy of remitting 
the seller to a claim for damages and the dilemma that may confront him 
where the goods are rejected at a distant place. We believe, however, that 
these apprehensions can be satisfactorily answered. ^^"^ So far as the first 
point is concerned (the inadequacy of damages), at least in theory the 
Code's damage provisions, like those in The Sale of Goods Act, attempt to 
make the seller whole. The real issue is whether it is the seller or the buyer 
who should have the burden of disposing of the goods. The Code answers 
this question in terms of a balance of convenience. It may be argued that 
a wrongly rejecting buyer does not deserve much sympathy; but this proves 
too much. The argument could lead to the seller's being entitled to sue 
for the price even where the goods are still in his possession, and this 
would be even more favourable to him than the present law. So far as the 
second point is concerned (the rejection of goods at a distant place), 
UCC 2-603 comes to the seller's assistance by requiring the buyer's co- 
operation in disposing of the goods where the seller has no agent or place 
of business at the market of rejection. It is also reasonable to expect that, 
in such a case, a court will be more inclined to find that the goods are not 
readily resaleable than would be the case where the goods have never left 
the seller's premises. 

These remarks are not intended to convey the impression that UCC 
2-709(1) has found the complete solution to a difficult problem. We note, 
however, that American commentators do not appear to have opposed the 
Code provisions, ^^5 and our own inquiries lead us to believe that the re- 
action of Ontario businessmen is not likely to be very different. ^'^ We 
believe that the Code scheme is easier to apply than, and probably superior 
to, any alternative rule or rules that may be suggested. Accordingly, we 



ii3See, Crawford, Research Paper No. IV. 1, at pp. 41-42. 
ll^Compare, Baer, footnote 1 supra, at pp. 86-88. 

li5See, for example, the mild and predominantly technical comments in NYLRC 
Study, ch. 5, footnote 52, supra, at pp. (563)-(566). 

J^^The experienced house counsel of a major Canadian manufacturer advised the 
Research Team that his company will normally accept the return of unwanted 
goods of a standard kind, whether the rejection is rightful or not, and this 
practice appears to be confirmed at least to some extent by the results of the 
CMA Questionnaire and Mr. Munson's interviews: Fisher, Research Paper No. 



418 

recommend that the revised Ontario Act should adopt a provision similar 
to UCC 2-709 in place of section 47 of the existing Act.^^'^ 

UCC 2-709 is not, however, free of difficulties. ^^^ It is clear that a 
buyer will not be deemed to have accepted the goods where he has made 
a procedurally "effective", albeit substantively wrongful, rejection. ^^^ This 
result emerges from the definition of acceptance in UCC 2-606(1 )(b) 
and the provisions of UCC 2-709(3) and 2-703. The position of a buyer 
who attempts a wrongful revocation of acceptance is less certain. UCC 
2-709(3) and UCC 2-703 appear to treat this as sufficient to defeat the 
seller's claim for the price, but such a literal reading is inconsistent with 
Comment 5 to UCC 2-709, and with the structure of UCC 2-608. Ameri- 
can commentators have argued'^o on policy grounds that a buyer should 
not be able to revoke his acceptance wrongfully. If this position is accepted 
as sound, as we beheve it is, the Ontario version of UCC 2-709 should 
avoid the ambiguous language of its American source. Accordingly, we 
recommend that the provision in the revised Act comparable to UCC 
2-709 should make it clear that the seller may recover the price due where 
goods have been accepted, unless the buyer has justifiably revoked his 
acceptance. ^2' 

(b) DAMAGES 

The rules governing the seller's right to damages appear in sections 
48 and 52 of the Ontario Sale of Goods Act. These sections read as fol- 
lows: 

48.(1) Where the buyer wrongfully neglects or refuses to accept 
and pay for the goods, the seller may maintain an action against him 
for damages for non-acceptance. 

(2) The measure of damages is the estimated loss directly and 



1.2, pp. 35-44 (variation of terms and cancellation of contracts); Munson, 
Research Paper No. 1.3, pp. 17, 43-47. (These sources do not distinguish be- 
tween cancellation of contract before and after delivery, and the data must 
therefore be treated with caution. What they do appear to show is that a buyer's 
wish to return unsold inventory because he has overbought or to cancel before 
delivery because he cannot finance the purchase, is more important than rejec- 
tion of tendered goods on grounds of alleged non-conformity. Here, as in other 
areas, different groups of businessmen may take different positions. A large 
supplier or retail store concerned about its image, and having an alternative out- 
let for a cancelled order or wrongfully rejected goods, may accept the Code 
rules more readily than a small supplier or retail store. But even in the latter 
case a lawyer is likely to advise his client that a quick settlement will cost him 
less than a protracted and unpredictable law suit.) 

il7See, Draft Bill, s. 9.11(1). 

iissee, White & Summers, footnote 37 supra, at pp. 210-13. 

119/Z,/W., at pp. 211-13. 

120//,/^., at pp. 212-13. 

i2iSee, Draft Bill, s. 9.11(l)(a). 



419 

naturally resulting in the ordinary course of events from the buyer's 
breach of contract. 

(3) Where there is an available market for the goods in ques- 
tion, the measure of damages is prima facie to be ascertained by the 
difference between the contract price and the market or current price 
at the time or times when the goods ought to have been accepted, or, 
if no time was fixed for acceptance, then at the time of the refusal to 
accept. 

52. Nothing in this Act affects the right of the buyer or the seller 
to recover interest or special damages in a case where by law interest 
or special damages may be recoverable, or to recover money paid 
where the consideration for the payment of it has failed. 

Section 48(1) enunciates the seller's right to claim damages for non- 
acceptance of the goods by the buyer. Section 48(2) reproduces the so- 
called first rule in Hadley v. Baxendale,^^^ and section 48(3) adopts the 
market price test as the prima facie measure of damages. These familiar 
provisions have their counterparts in section 49 of the Act, which deals 
with the buyer's entitlement to damages for the seller's neglect or refusal 
to deliver. Section 52 applies to claims by buyers and sellers, and pre- 
serves their right to recover "special damages", where they are recoverable 
by law. Commentators genepally agree^^^ that this section probably em- 
bodies the aggrieved party's right to claim consequential damages under 
the so-called second rule in Hadley v. Baxendale. 

The damage provisions in The Sale of Gods Act, and the important 
pohcy questions raised by these provisions, are examinQd in detail in sub- 
sequent chapters. ^2"^ It is not necessary to discuss here what appears in 
these chapters. Suffice it to say that we reaffirm the soundness of the com- 
pensatory basis for the assessment of damages adopted by The Sale of 
Goods Act. This basis is consistent with general contract law. Some changes 
in wording are, ho\vever, recommended for the sake of greater clarity, 
and to reflect post-1893 jurisprudential developments. We also examine, ^^5 
in connection with our discussion of issues common to seller's and buyer's 
remedies, some of the difficulties associated with the concept of an "avail- 
able market", and recommend, inter alia, the adoption of a new test of com- 
mercially reasonable disposition or purchase in place of the market price 
test. 

At this stage of our Report, we turn to consider the extent to which 
the Code's provisions on the seller's damage remedies contain suggestive 
ideas for improvements in the existing Ontario Act. With the exception of 
UCC 2-706, our conclusion is that the Code's treatment, while linguisti- 
cally different, is not superior in substance. In fact, in some respects the 



122(1854), 9 Exch. 341. 

i23For example, Benjamin's Sale of Goods (1974), para. 1208, 

^^'^Infra, ch. 17, sec. D, and ch. 18, sec. 2. 

^25i,ifra, ch. 18, sec. 2. 



420 

Code's draftsmen appear, unwittingly, to have created new problems. The 
Code's principal damage provisions involving sellers appear in UCC 2-706, 
2-708, 2-710 and 1-106. The resale provisions in UCC 2-706 and their 
strengths and weaknesses have been discussed earlier in this chapter. The 
important provisions in UCC 2-708 are discussed presently. UCC 2-710 
defines the meaning of incidental damages for the purposes of UCC 2-706 
and UCC 2-708, and this provision has its counterpart in UCC 2-715 with 
respect to damage claims by the buyer. There are no exactly corresponding 
provisions in the Ontario Sale of Goods Act, but the right to recover inci- 
dental damages is recognized at common law, and is probably included 
under either section 48(2) or section 52 of that Act.^^^ Finally, UCC 
1-106 is important because of its bearing on the seller's right to recover 
consequential damages. This question will also be examined presently. 

UCC 2-708(1) contains the Code's unremarkable market price 
rule. '2"^ This subsection provides as follows: 

2-708.(1) Subject to subsection (2) and to the provisions of this 
Article with respect to proof of market price (Section 2-723), the 
measure of damages for non-acceptance or repudiation by the buyer 
is the difference between the market price at the time and place for 
tender and the unpaid contract price together with any incidental 
damages provided in this Article (Section 2-710), but less expenses 
saved in consequence of the buyer's breach. 

It is doubtful whether UCC 2-708(1) represents an improvement on the 
provisions in section 48(3) of The Sale of Goods Act. In one respect, the 
Code's formulation is even less satisfactory, since it adopts the time and 
place of tender as the criterion for determining the market price. The rigid- 
ity of this test has attracted unfavourable comment^^^ and is examined 
further in a later chapter.^29 

UCC 2-708(2) is new and represents the draftsmen's attempt to 
catch, inter alia, the type of damage claim presented by a "lost volume" 
seller where the market price rule does not provide adequate compensation. 
A typical example of a "lost volume" claim may arise where a purchaser 
reneges on an order for the purchase of a standard product from a mer- 
chant. The goods are resold by the merchant at the contract price, thus 
ostensibly leaving him without a loss. Nevertheless, the seller argues that 
he has lost the profit on the order since, but for the buyer's repudiation, 
he would have made an additional sale. Subsection (2) of UCC 2-708 
reads as follows: 

2-708.(2) If the measure of damages provided in subsection (1) is 
inadequate to put the seller in as good a position as performance 
would have done then the measure of damages is the profit (includ- 



i26Compare, Benjamin's Sale of Goods (1974), paras. 1215, 1241. Compare also, 
Draft Bill, s. 9.19. We have not thought it necessary to define "incidental dam- 
ages" for the purposes of s. 9.19. 

i27See, White & Summers, footnote 37 supra, at pp. 220 et seq. 

^mbid., p. 222. 

i29infra, ch. 18, sec. 2. 



421 

ing reasonable overhead) which the seller would have made from 
full performance by the buyer, together with any incidental damages 
provided in this Article (Section 2-710), due allowance for costs 
reasonably incurred and due credit for payments or proceeds of 
resale. 

It will be noted that the language of the subsection goes well beyond the 
lost volume case. For this and other reasons, it has been criticized by 
American scholars. ^^^ Three criticisms deserve particular mention. The 
first is that a literal reading of the opening words would nullify the market 
price test in subsection ( 1 ) , since only exceptionally will that test put the 
seller "in as good a position as performance would have done". Presum- 
ably, this is not what the draftsmen intended. Secondly, it is not clear 
whether subsection (2) applies where the market price rule is too favour- 
able to the seller as, for example, where the buyer can show that the 
seller's costs to produce the goods would have exceeded the contract 
price. The internal and historical evidence indicates^^^ that the draftsmen 
did not have this situation in mind. If this is correct, it may be argued that 
UCC 2-708(2) is seriously incomplete. The third criticism is that the 
requirement imposed by the subsection, that the seller must give "due 
credit" for payments or proceeds of resale, could deprive a seller of the 
lost profit that the subsection expressly purports to give him.^^^ \ye regard 
the third criticism as the most serious ;i^3 the first criticism strikes us as too 
refined and as involving a repudiation of the market price test. The second 
criticism, if it is a criticism, raises a broad question of principle, which we 
discuss below. 

The inappropriateness of the market price test where the seller has 
lost a sale has been recognized in a number of Commonwealth cases. ^^"^ 
We think it should also be recognized in the revised Act by the adoption of 
a modified version of UCC 2-708(2). Accordingly, we recommend that, 



I30white & Summers, footnote 37 supra, at pp. 225 et seq.; Harris, "A Radical 
Restatement of the Law of Seller's Damages: Sales Act and Commercial Code 
Results Compared" (1965), 18 Stan. L. Rev. 66; Peters, footnote 87 supra, at 
pp. 258-70. For other analyses of the subsection, see, Speidel and Clay, "Seller's 
Recovery of Overhead under UCC section 2-708(2): Economic Cost Theory 
and Contract Remedial Policy" (1972), 57 Corn. L. Rev. 681; Childres and 
Burgess, "Seller's Remedies: The Primacy of UCC 2-708(2)" (1973), 48 
N.Y.U.L. Rev. 833; and Comments, (1973), 24 Case W. Res. L. Rev. 684 
et seq. 

I3iwhite & Summers, footnote 37 supra, at p. 233. 

132/6/^., at pp. 234-35. 

l33But, see Neri v. Retail Marine Corp. (1972), 285 N.E. 2d 311 (N.Y. Ct.App.), 
in which the Court did not find that it presented insuperable problems. The 
Court held that "with due credit for payments or proceeds of resale" refers to 
the sale of components as scrap value, and not to the sale of a completed 
article. 

l34For example, Re Vic Mill Ltd., [1913] 1 Ch. 465 (C.A.); Hill & Sons v. 
Edwin Showell & Sons Ltd. (1918), 87 L.J.K.B. 1106 (H.L.); W. L. Thompson 
Ltd. V. Robinson (Gunmakers) Ltd., [1955] Ch. 177, dist'd in Lazenby Gar- 
ages Ltd. V. Wright, [1976] 1 W.L.R. 459, [1976] 2 All E.R. 770 (C.A.); 
Charter v. Sullivan, [1957] 2 K.B. 117 (C.A.); Cameron v. Campbell & 
Worthington Ltd., [1930] S.A.S.R. 402; Victory Motors Ltd. v. Bayda, [1973] 
3 W.W.R. 747 (Sask. Dist. Ct.); Benjamin's Sale of Goods (1974), para. 1234. 



422 

subject to our further recommendations in chapters 17 and 18, infra, 
the revised Act should contain a provision that explicitly recognizes the 
inappHcabihty of the market price test as the measure of the seller's dam- 
ages for non-acceptance by the buyer where the measure of damages would 
be inadequate to put the seller in as good a position as performance by the 
buyer would have done.^^^ 

We have touched earlier on one aspect of the problem of overcom- 
pensation in recommending, in the context of UCC 2-706, that the seller 
should not be entitled to invoke the test that we later recommend in lieu of 
the market price test where he has actually resold the goods for a price 
higher than market, but that he should be bound by the results of the 
resale. ^3^ This recommendation is consistent with the reasoning of the 
Privy Council in Wertheim v. Chicoutimi Pulp Co.P'^ which involved a 
claim for damages by a buyer. The question whether a defaulting buyer 
should be able to resist a market price claim, or a similar claim for 
damages, by the seller on the ground that the seller's costs of production 
would have exceeded the contract price appears to be unsettled. ^^^ If the 
compensatory basis of contract damages is taken to its logical conclusion, 
the buyer's defence should succeed unless the market price test is regarded 
as establishing a minimum, liquidated form of measure of damages. The 
reasoning in Wertheim implicitly rejects such a characterization, as does 
our Draft BilLi39 

Before leaving the Code's damage provisions, another significant 
feature of these provisions deserves to be noted. There is no reference to 
the seller's entitlement to recover consequential damages. ^'^^ The Comments 
offer no reasons for this omission ;i'^i nor is it clear whether the draftsmen 
intended to preclude the recovery of such forms of damages. ^"^^ Conse- 
quential damages are expressly allowed in a claim by the buyer,^"^^ and the 



i35See, Draft Bill, s. 9.10(4) (b). 

i36See, supra, this chapter, sec. 2(b) (iii). 

I37[i9ii] A.C. 301 (P.C). See, also, infra, ch. 17. 

l38See, Corbin on Contracts, Vol, 5, sees. 992, 1033; Ogus, The Law of Damages 
(1973), at pp. 351-52; and compare, the important decision of Berger, J., in 
Bowlay Logging Limited v. Domtar Limited, [1978] 4 W.W.R. 105 (B.C. 
S.C), and Baer, Comment, (1979), 3 C.B.L.J. 198. In American law, the prob- 
lem is complicated by the plaintiff's right to elect to sue in restitution rather 
than for damages for breach of contract. See, Palmer, "The Contract Price as a 
Limitation on Restitution for Defendant's Breach" (1959), 20 Ohio State L.J. 
264. 

i39See, Draft Bill, ss. 9.10(4) (a) and 9.16(4). One of the Commissioners, the 
Honourable J. C. McRuer, would prefer a clear statement in the revised Act 
that the seller should not recover more than his actual damages. 

i40Compare, NYLRC Study, ch. 5, footnote 52, supra, at pp. (694) -(695). 

l4lAdmittedly, consequential damage claims by sellers do not arise as often as 
in the case of buyer's claims, but this does not mean that they cannot occur. A 
good example of when they can arise is where a seller is persuaded to erect a 
new plant in partial reliance on a buyer's requirements contract. In such a case, 
breach by the buyer may leave the seller with a plant that is no longer econom- 
ical to operate. 

i42Consequential damages were recoverable under pre-Code law: Williston on 
Sales (Rev. ed., 1948), sec. 589c, and Uniform Sales Act, s. 64(3). 

143UCC 2-715(2). 



423 

omission of a comparable provision in the seller's case could be construed 
as implying the negative. ^'^ This construction gains some support from 
UCC 1-106, which provides, inter alia, that neither consequential or 
special nor penal damages may be had, except as specifically provided in 
the Act or "by other rule of law". Presumably, it could be argued that the 
right to recover consequential damages is covered by "other rule of law"; 
but this reasoning would give rise to new difficulties which need not be 
pursued here. Suffice it to say that the revised Act should explicitly recog- 
nize the seller's right to include in a claim for damages a claim for inci- 
dental or consequential damages, and we so recommend. ^^^^ 

(c) PENALTY CLAUSES AND FORFEITURE OF MONIES PAID 

Penalty clauses are not common in agreements for the sale of goods. 
However, they frequently occur in some types of near-sales transactions, 
such as hire-purchase agreements and equipment leases, and in agreements 
with a sale component, such as construction contracts. Forfeiture clauses, 
on the other hand, are a familiar phenomenon in those types of sale agree- 
ment that require the payment of a deposit or of an instalment of the price 
at the time the agreement is made or prior to delivery of the goods. In view 
of the close conceptual and practical relationship between penalty and 
forfeiture clauses, it seems convenient to deal with them together. At the 
same time, it should be emphasized that the problems raised by the existing 
doctrines are not peculiar to sales law, and one of the questions that needs 
to be considered is whether the revised Act is the appropriate place for 
the introduction of any desirable changes, or whether the reforms should 
be incorporated in a Law of Contract Amendment Act. 

(i) Penalty Clauses 

A clause in a contract may require the payment of a sum of money 
upon breach by one of the contracting parties. In a discussion of penalty 
clauses, it is necessary to determine whether a clause requiring payment of 
such a sum represents a genuine pre-estimate of damages, or whether it 
constitutes a non-recoverable penalty. Lord Dunedin's judgment in Dunlop 
Pneumatic Tyre Co. v. New Garage & Motor CoM^ is generally accepted 
as accurately stating the criteria by which the courts will make this deter- 
mination. In its Working Paper on Penalty Clauses and Forfeiture of 



l44Compare, Petroleo Brasiliero, S.A. v. Ameropan Oil Corp. (1974), 14 U.C.C. 
Rep. 661 (U.S.D.C, E.D.N.Y.), with Z. D. Howard Co. v. Cartwright (1975), 
17 U.C.C. Rep. 123 (Okla. Sup. Ct.). 

i45See, Draft Bill, s. 9.19(1), which is intended to replace s. 52 of the present 
Act. This provision expressly applies to consequential and incidental damage 
claims by sellers and buyers. Since the new section merely continues the exist- 
ing law, it does not resolve the recently re-opened question whether damages 
are recoverable for the failure to pay an agreed sum at the due date. The 
older rule was that only nominal damages were recoverable, but dicta in Trans 
Trust S.P.R.L. v. Daniihian Tradhify Co., [1952] 2 Q.B. 297 (C.A.), at pp. 306, 
307 suggest that the rule may not be rigidly followed in the future. See, Ben- 
jamin's Sale of Goods (1974), para. 1195; Ogus, footnote 138 supra, at pp. 
305-06. 

146[1915] A.C. 79 (H.L.), 86-88. 



424 

Monies Paid,^^'^ the English Law Commission expressed the view that the 
existing penalty doctrine was essentially sound, but that it was deficient, 
or required review, in the following respects. ^"^^ First, the doctrine only 
applies where there has been a breach; it does not apply where the con- 
tractually stipulated sum, though unconscionable, is payable on the hap- 
pening of some other event, for example, upon the voluntary termination 
of the agreement, or where the penalty is disguised as a primary obligation 
that is intended to secure the same end as a penalty payable on breach. ^"^^ 
Secondly, there is the question^^^ whether a valid liquidated damages 
clause should be able to provide not only for those losses that are foresee- 
able at the time of the formation of the contract, but also for the recovery 
of other losses actually suffered by the aggrieved party, but not otherwise 
recoverable at law in the absence of the clause. Thirdly, it is not clear 
under the existing law whether the court can take into consideration the 
damages that may be payable by the aggrieved party to a third party; for 
example, by a head contractor to his employer. ^^^ Finally, the Law Com- 
mission was of the view^^^ that the circumstances in which the courts 
should be entitled to award damages higher than those pre-estimated in the 
contract needed to be reconsidered. 

It will be obvious that none of these points is peculiar to sales law. 
The question therefore arises whether the revised Act should concern it- 
self with the penalty doctrine at all. An affirmative precedent is supplied 
by UCC 2-718(1), which provides as follows: 

2-7 18.(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 nonfeasibility of otherwise 
obtaining an adequate remedy. A term fixing unreasonably large 
liquidated damages is void as a penalty. 

With one important exception, this provision appears to capture accurately 
the scope of the existing Anglo-Canadian doctrine ;^53 but it does not dis- 
pose of the defects criticized by the EngHsh Law Commission. The excep- 
tion involves the court's entitlement to take into consideration the actual 
harm caused by the breach. Leaving aside the desirability of this change, 
which was actually opposed by the Commission,^^'^ there appears to be 
little merit in merely reproducing the existing doctrine in the revised Act 
without, at the same time, deahng with its defects. We do not therefore 



l47Law Commission Working Paper No. 61, Penalty Clauses and Forfeiture of 

Monies Paid (1975). 
'^^^Ihid., "Summary of Proposals", pp. 5\ et seq. 
^^^Ibid., paras. \1 et seq. 
i^oibid., paras. 42-44. 
^5ilbid., para. 45. 
152/ft/J., paras. 46-48. 
i53For the pre-Code position in American law, see, NYLRC Study, ch. 5, footnote 

52, supra, at pp. (703)-(706). 
i54Law Com. W.P. No. 61, para. 30. The Law Commission's reason was that "to 

judge the validity of a penalty clause by reference to circumstances as they 

exist after the breach would mean the introduction of an unacceptable amount 

of uncertainty". 



425 

recommend that the revised Act adopt a provision similar to UCC 
2-718(1) dealing with penalty clauses. 

(ii) Forfeiture of Monies Paid 

The existing rules relating to forfeiture of monies paid would appear 
to be as follows. ^^^ First, monies paid as an earnest or as security to guar- 
antee performance of the buyer's obligations are not recoverable on term- 
ination because of the buyer's breach, whether or not the contract contains 
a retention clause. ^^^ If, however, the seller seeks to recover damages, the 
payment will have to be brought into account. ^^^ Secondly, if the deposit 
constitutes part payment of the price it will be recoverable at common 
law by the party in breach, unless the contract provides otherwise. ^^^ If the 
payment is recoverable, it is subject to any right of set-off that the seller 
may have in respect of damages he has suffered. ^^^ Thirdly, even where 
there is a retention clause, equity has jurisdiction to grant relief from 
forfeiture of the monies paid,^^^ although the extent of this jurisdiction and 
the circumstances in which the court will exercise its discretion are both 
uncertain. 1^1 

The Law Commission's Working Paper criticized^^^ the illogical dis- 
tinction drawn by the existing law between penalty clauses and the doctrine 
of forfeiture, and argued persuasively that in both cases the courts should 
be empowered to prevent overreaching. The Working Paper considered a 
number of alternative proposals for the improvement of the existing law.^^^ 
The proposal most favoured by the Law Commission^ ^"^ was that the fair- 
ness of a forfeiture clause should be tested by the same criteria as are 
applied to determine the enforceability of penalty clauses; that is, whether 
the amount of the deposit represents a "genuine pre-estimate" of the loss 
likely to be occasioned by a breach of the contract. ^^^ The Law Commis- 
sion opposed the adoption of a general test of unconscionability in this 
context as likely to lead to too much uncertainty. The Law Commission 
recognized that the adoption of its preferred test would lead to the invali- 
dation of most types of existing retention clauses. 

UCC 2-718(2) embodies what appears to be a reasonable comprom- 
ise of the conflicting policy considerations. This subsection provides as 
follows: 



^^^Benjamin's Sale of Goods (1974), paras. 1161-63 (forfeiture of deposits), and 
1203-04 (forfeiture clauses in instalment payment contracts); Law Com. W.P. 
No. 61, paras. 50-56. 

^56Howe V. Smith (1884), 27 Ch. D. 89 (C.A.). 

l57Benjamin, footnote 155 supra, paras. 1161-62. 

l58D/>.y V. British & International Mining and Finance Corp. Ltd., [1939] 1 K.B. 
724. 

^^^Stockloser V. Johnson, [1954] 1 Q.B. 476 (C.A.). 

i6iLaw Com. W.P. No. 61, paras. 54-55. 

"^^Vhid., paras. 57 et seq. 

^(>^Ibid., paras. 61 et seq. 

'^^^Ibid., para. 65. 

i65The Law Commission recognized, however, that a special rule might be desir- 
able with respect to deposits on the sale of land: Law Com. W.P. No. 61, paras. 
65-67. 



426 

2-718.(2) Where the seller justifiably withholds dehvery 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 sub- 
section (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. 

It will be observed that paragraph (a) substantially coincides with the 
Law Commission's suggested test, although it is not clear whether the 
statutory provision will apply in the absence of a liquidated damages 
clause, or whether a simple retention clause will suffice. The advantages of 
the minimum retention sum authorized by paragraph (b) are twofold: it 
recognizes that a breach of contract usually involves the innocent party in 
some damages, however difficult they may be to quantify; and, it avoids 
vexatious arguments where small amounts are involved by imposing a 
readily applied, albeit admittedly arbitrary, formula. 

We recognize that a stronger case can be made for the insertion in 
the revised Act of a provision similar to UCC 2-718(2) than can be made 
for a provision similar to UCC 2-718(1) dealing with penalty clauses. 
Nevertheless, we do not recommend that the revised Act adopt a provision 
similar to UCC 2-718(2). The relationship between penalty and forfeiture 
clauses is so close that it seems best to treat them together in any revision 
of the law. We therefore recommend that the whole topic be remitted for 
further study to the Law of Contract Amendment Project. 

4. Lessor's Remedies For Breach of Lease Agreement 

The close relationship between various types of modern leasing agree- 
ments and contracts of sale, and the difficulties encountered under the 
existing law, have been discussed in earlier chapters. ^^^ We there recom- 
mended that certain of the implied warranties in The Sale of Goods Act 
should be formally extended to lease agreements of all types. ^^"^ We further 
recommended that the question whether, and to what extent, statutory 
changes should be made to clarify the quantum of damages recoverable 
by a lessor in a true chattel lease for breach of the agreement by the lessee, 
should be referred to the Advisory Committee on The Personal Property 
Security Act. 

It remains to consider whether additional changes are desirable in 
order to assimilate the remedies of a lessor with those of a seller. It will 
be noted that, even if the default provisions in Part V of The Personal 
Property Security Act were extended to a wide range of lease agreements, 
these provisions would only regulate the remedies of the lessor where the 
goods have been delivered to the lessee and the lessee has defaulted. The 



^^^Supra, ch. 4, sec. 3(f), ch. 9, sec. 5, 
i67Compare, Draft Bill, s. 5.15. 



427 

Personal Property Security Act does not prescribe the lessor's remedies 
where the lessee repudiates before delivery of the goods. These remedies 
are, therefore, governed by common law principles. As a result, a lessor 
would still not have the statutory rights of lien, stoppage in transitu, and 
of resale that are conferred on a seller. However, there appears to be no 
pressing need for a formal assimilation of these rules of law and, in any 
event, the circumstances are not identical. In a lease agreement, the ques- 
tion of lien rights would only arise to the extent that payments are due on 
or before delivery. If payments are so due, the lessor will normally have 
a contractual right to withhold delivery. The right of stoppage has already 
lost most of its practical importance in the sales area, and it is difficult to 
conceive of a situation in which it would confer much benefit on a lessor. 
The unpaid seller's statutory right of resale, as has been noted earlier, is 
not exhaustive of the seller's rights of resale. Further, on general contract 
principles the lessor would seem to have rights of cancellation similar to 
those of a seller, where the lessee has repudiated the agreement. ^^^ The 
same observations would appear to apply with respect to the lessor's 
personal remedies. For obvious reasons, the market price test does not 
apply, ^^9 but the courts do not appear to have experienced much difficulty 
in assessing damages on general foreseeability principles, ^'^^ once the 
hurdles of penalty clauses and the proper characterization of the lessee's 
breach have been overcome. 

The upshot of these cursory remarks is simply to emphasize that the 
appropriateness of applying all the sales rules in a leasing context should 
not be taken for granted, and that further study of the problem is needed. 
What has been said above with respect to the lessor's remedies applies, 
mutatis mutandis, to the lessee's remedies. It may be that a general ana- 
logical rule such as has been previously recommended^"^^ will be found 
sufficient, at any rate in the absence of a separate code of lessor's and 
lessee's remedies. 

Accordingly, we recommend that the revised Act should not apply 
the seller's real and personal remedies to the remedies of a lessor for 
breach of contract by a lessee, and that, until further study of the question 
is undertaken, the revised Act should contain no specific provisions deal- 
ing with a lessor's remedies for breach by a lessee. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should contain an index section of the seller's 
real and personal remedies. This section should, 

(a) refer explicitly to the seller's right to cancel; and 



i68Compare, Bridge v. Campbell Discount Co. Ltd., [1962] A.C. 600 (H.L.). 
l69Although there appears to be no reason why it cannot be applied by analogy 

where there is a ready market for leased goods of the same type. 
l70See, for example, Interoffice Telephones Ltd. v. Robert Freeman Co. Ltd., 

[1958] 1 Q.B. 190 (C.A.); Robophone Facilities Ltd. v. Blank, [1966] 1 

W.L.R. 1428, [1966] 3 All E.R. 128 (C.A.). 
"^l^Supra, ch. 4, sec. 6. 



428 

(b) distinguish between the remedies for substantial and for 
non-substantial breaches of a contract of sale. 

2. (a) In the case of the buyer's late payment or failure to take 

delivery the seller should be allowed to treat the breach as 
a substantial breach, whether or not it would otherwise be 
a substantial breach, where the buyer has failed to cure his 
default after being given reasonable notice by the seller to 
do so. 

(b) The seller should have this right upon the buyer's failure 
to take delivery, notwithstanding that the buyer may have 
paid for the goods in full or in part. 

3. The seller's right to demand cure should not be extended to all 
breaches by the buyer, but should be restricted to cases where 
the buyer fails to make payment or to take delivery of the goods. 
There should, however, be an enlarged construction in the revised 
Act of the meaning of payment and taking delivery, so as to in- 
clude such preparatory steps (for example, the opening of a 
letter of credit or the designation of a vessel or other carrier) 
as may reasonably be considered part of the buyer's obligations 
to make payment and to take delivery. 

4. With respect to the seller's real remedies, the revised Act should 
draw no distinction between those cases in which title has passed 
to the buyer, and those in which it has not. 

5. Following the Code nomenclature, the seller's lien right should 
be described in the revised Act as a right to withhold. 

6. The seller's right to withhold under the revised Act should incor- 
porate the following features. 

(a) The seller should be able to withhold delivery of goods in 
his possession in the following circumstances: 

(i) until the buyer pays any sum due on or before delivery; 

(ii) until payment of the price where the buyer is insol- 
vent; or 

(iii) where the buyer repudiates the contract, until retrac- 
tion of the repudiation as provided in other provisions 
of the revised Act; 

(b) It should be made clear that, where the seller has extended 
credit, he cannot justify withholding the goods on the ground 
of non-payment where he has not met his delivery obliga- 
tions; 

(c) The right to withhold should be affirmed even though the 
seller is in possession of the goods as agent or bailee for the 
buyer; 

(d) The right to withhold where there has been part delivery 
should cover amounts due under an instalment contract as 



429 

well as amounts due under an entire or indivisible contract. 
However, this right should not be enlarged further so as to 
confer a lien in respect of future payments as well as over- 
due payments; 

(e) It should be made clear that a judgment for the price does 
not affect the seller's right to withhold delivery; 

(f ) The right to withhold delivery should include any reasonable 
expenses in relation to the care and custody, transportation 
and stoppage of the goods, and other incidental expenses 
incurred by the seller subsequent to the buyer's breach or 
insolvency. 

7. The revised Act should not confer upon the seller a general statu- 
tory non-possessory lien right; nor should it confer a limited 
statutory non-possessory lien right in a case where the buyer has 
become insolvent after receiving the goods. These recommenda- 
tions are not, however, intended to derogate from the seller's 
right to obtain a consensual security interest in accordance with 
the provisions of The Personal Property Security Act. 

8. The seller's right of stoppage in transitu should be retained in the 
revised Act, subject to the following amendments. 

(a) The right of stoppage should be extended to all cases where 
the goods are in the possession of a carrier or other bailee, 
whether or not for the purpose of transmission to the buyer; 

(b) The right of stoppage should be exercisable not only where 
the buyer is insolvent but also where the buyer has repudi- 
ated, fails to make a payment due before delivery, or if for 
any other reason the seller has a right to withhold or re- 
claim the goods; 

(c) Unlike the position under UCC 2-705, the right of stoppage 
should not be limited to larger shipments of freight, whether 
or not the buyer is insolvent; 

(d) The extended right of stoppage should apply to all types of 
bailee; and 

(e) It should be made clear that a judgment for the price does 
not affect the right of stoppage. 

9. A provision comparable to UCC 2-706 dealing with the seller's 
right of resale should be adopted in the revised Act, subject to the 
following clarifications or amendments. 

(a) The right of resale should be available to a seller only where 
the buyer's conduct amounts to a substantial breach; 

(b) Where a seller has exercised his right of resale, he should 
be bound by the results of the resale in claiming his damages. 
The recommended general provision in the revised Act deal- 
ing with the computation and measure of the seller's damages 



430 

should state that the seller is not entitled to sue for the dif- 
ference between the contract price and the price recom- 
mended in chapter 18, infra, for adoption in lieu of the 
market price, if his actual loss is less than this difference; 

(c) The resale requirements should be simplified, and the seller 
should be deprived of his right to sue for damages under 
this provision only when he "does not resell in a commer- 
cially reasonable manner"; 

* (d) The seller should not be required to give notice of his inten- 
tion to resell. 

**10. Where the seller exercises his right of resale or otherwise cancels 
the contract, the buyer should not be entitled to cure his breach 
and to thereby reinstate the contract. 

11. A seller who has exercised his right of resale should not be ac- 
countable to the buyer for any surplus. 

12. The revised Act should not contain a provision requiring the 
seller to exhaust his real remedies before being entitled to sue for 
the price. 

13. With respect to a seller's action for the price, 

(a) the revised Ontario Act should adopt a provision similar to 
UCC 2-709 in place of section 47 of the existing Ontario 
Sale of Goods Act; and 

(b) the provision in the revised Act comparable to UCC 2-709 
should make it clear that the seller may recover the price 
due where goods have been accepted, unless the buyer has 
justifiably revoked his acceptance. 

14. Subject to further recommendations in chapters 17 and 18, infra, 
the revised Act should expressly recognize : 

(a) the inapplicability of the market price test as the measure of 
the seller's damages for non-acceptance by the buyer where 
the measure of damages would be inadequate to put the 
seller in as good a position as performance by the buyer 
would have done; and 

(b) the seller's right to include in a claim for damages, a claim 
for incidental or consequential damages. 

15. The revised Act should not adopt a provision similar to UCC 
2-718(1) dealing with penalty clauses, nor a provision similar to 
UCC 2-718(2) dealing with forfeiture clauses. These topics 
should be remitted for further study to the Law of Contract 
Amendment Project. 



*The Honourable J. C. McRuer and Mr. William R. Poole dissent from this recom- 
mendation. See, footnote 98, supra. 
**The Honourable Richard A. Bell dissents from this recommendation. See, footnote 
95, supra. 



431 

16. The revised Act should not apply the seller's real and personal 
remedies to the remedies of a lessor for breach of contract by a 
lessee, and, until further study of the question is undertaken, 
the revised Act should contain no specific provisions dealing with 
a lessor's remedies for breach by a lessee. 



CHAPTER 17 

BUYER'S REMEDIES 



A. INDEX OF BUYER'S REMEDIES AND CHARACTERIZATION 
OF SELLER'S BREACHES 

Under existing law, an aggrieved buyer has a variety of remedies, 
not all of which are spelled out in the Ontario Sale of Goods Act. The 
nature of these remedies will vary with the nature of the breach and the 
time it comes to light, the type of goods and the nature of the damages. 
If the seller, prior to the delivery date, notifies the buyer that he will not 
meet his delivery obligation, the buyer is confronted with an anticipatory 
breach which, at his election, he may ignore or accept. If the buyer accepts 
the repudiation, the agreement, subject to the buyer's right to sue for 
damages, is deemed at an end. Where there is no anticipatory repudiation 
but the seller fails to deliver at the proper time, the buyer is usually limited 
to an action in damages for non-delivery. Exceptionally, however, he may 
be entitled to an order for specific performance or to other forms of 
specific relief. If goods are tendered but are non-conforming in character, 
the buyer usually has an option. If the non-conformity involves breach of 
a condition and the contract does not involve a sale of specific goods the 
property in which has passed to the buyer, the buyer may reject and, 
once again, sue for damages for non-delivery or content himself with 
a restitionary claim for the return of any payments he may have made. 
If he elects to retain the goods he does not waive his claim to damages. 
This will be equally true if the non-conformity does not come to light 
until after the buyer is deemed to have accepted the goods; Anglo- 
Canadian law does not recognize a general right to rescind on account 
of a latent defect, except where the seller has been guilty of fraud or, 
possibly, innocent misrepresentation. Where the buyer is entitled to sue 
for damages for breach of the contract of sale, his damages will be 
assessed on the same basis of compensation for loss as in claims by the 
seller in the reverse situation, and subject to the rules of foreseeability 
enunciated in Hadley v. Baxendale. The buyer may also be entitled to 
sue in tort if the defective goods have caused personal injury or damage 
to other property. 

From the foregoing it will be seen that the buyer has a rich and 
generally powerful range of remedies. Nevertheless, they suffer from 
various difficulties, some of which have already been alluded to in earlier 
chapters. These difficulties are the focus of the present chapter.^ For the 
moment it seems appropriate to conclude these introductory remarks with 
a preliminary comparison between the buyer's remedies under Anglo- 
Canadian law and those conferred by Article 2. UCC 2-711, in an index 



ifiut not exclusively so. Several issues common to seller's and buyer's remedies 
are discussed in chapter 18. In addition, this chapter is only concerned with a 
buyer's remedies against a seller from whom he has purchased the goods. With 
respect to his remedies against the manufacturer or other person in the distri- 
butive chain with whom he is not in privity, see, supra, ch. 10. 

[433] 



434 

section comparable to UCC 2-703, ^ lists the buyer's remedies, non- 
exhaustively, as follows: 

2-711.(1) Where the seller fails to make delivery or repudiates or 
the buyer rightfully rejects or justifiably revokes acceptance then with 
respect to any goods involved, and with respect to the whole if the 
breach goes to the whole contract (Section 2-612), the buyer may 
cancel and whether or not he has done so may in addition to recover- 
ing so much of the price as has been paid 

(a) "cover" and have damages under the next section as to all 
the goods affected whether or not they have been identified 
to the contract; or 

(b) recover damages for non-delivery as provided in this Ar- 
ticle (Section 2-713). 

(2) Where the seller fails to deliver or repudiates the buyer may 
also 

(a) if the goods have been identified recover them as provided 
in this Article (Section 2-502); or 

(b) in a proper case obtain specific performance or replevy 
the goods as provided in this Article (Section 2-716). 

(3) On rightful rejection or justifiable revocation of acceptance a 
buyer has a security interest in goods in his possession or control for 
any payments made on their price and any expenses reasonably in- 
curred in their inspection, receipt, transportation, care and custody 
and may hold such goods and resell them in like manner as an ag- 
grieved seller (Section 2-706). 

The above provisions are, as we have stated, non-exhaustive. They must 
be read in conjunction with the provisions in Parts 5 and 6 of Article 2 
on cure, rejection, revocation of acceptance, adequate assurance of per- 
formance, anticipatory repudiation and instalment contracts. The Code's 
remedial approach looks a little unfamiliar at first, but closer examination 
reveals that the essential framework is not a great deal different from 
Anglo-Canadian law. The important differences between the Code reme- 
dies and those existing under Ontario law are the following. Where the 
buyer has reasonable grounds for concern that the seller may not be able to 
perform, he may, just like the seller in the reverse situation, request "ade- 
quate assurance of performance" from the seller and may, if commercially 
reasonable, suspend performance of his own obligations in the mean- 
time. ^ The consequences of acts of anticipatory repudiation are spelled 
out specifically"^ in the Code and differ significantly from those obtaining 
under Ontario law. The buyer's right to reject non-conforming goods^ is, 
in the Code, subject to the seller's circumscribed entitlement to oflfer 



2This section lists the seller's remedies. See, supra, ch. 16, sec. 1. 
3See, UCC 2-609 and, further, infra, ch. 18, sec. 3. 
4UCC 2-610, 2-611. See, further, infra, ch. 18, sec. 4. 
5UCC 2-601. 



435 

"cure".^ On the other hand, the buyer may "revoke" his acceptance'^ (a 
concept previously enshrined in the Uniform Sales Act, but under a differ- 
ent label^) if the non-conformity could not reasonably have been discov- 
ered before acceptance or if discovery has been delayed because of the 
seller's assurances. If the buyer rejects, he is given^ a statutory security 
interest to the extent of any part of the purchase price he has paid. Off- 
setting this gain is his obligations^ ^q t^j^g reasonable care of the goods 
and to follow reasonable instructions of the seller with respect to the dis- 
position of the goods. Corresponding to the remedy of an aggrieved 
seller, ss the buyer may by-pass the uncertainties of the market price test 
and "cover" his loss by making a substitutional purchase. ^^ xhe remedy 
of specific performance is still a matter for the court's discretion, ^^ but it 
has been liberalized in an important respect. ^"^ Finally, but not least im- 
portantly, the buyer's right to reject non-conforming goods or to cancel 
the contract for other breaches does not prima facie turn either on the 
gravity of the breach or on the classification of the obligation breached; 
the seller is generally subject to a "perfect tender" rule. However, as will 
be seen, there are many exceptions to this rule. 

We have previously recommended^^ that the revised Act should 
eschew a priori characterization of obligations, whether they be obliga- 
tions of the seller or buyer, and that, instead, remedies should turn on the 
gravity of the breach and whether or not it is substantial in character. Al- 
though the distinction between the perfect tender rule and our substantial 
breach test is of conceptual importance, the practical differences between 
these two tests will often be small, given the Code's many exceptions to the 
perfect tender rule. However this may be, we think that our new remedial 
regime should be clearly spelled out. Accordingly, we recommend that the 
revised Act should contain an index section of buyer's remedies. This sec- 
tion should distinguish between the remedies for substantial and non- 
substantial breach of a contract of sale.^^ 

It will be convenient, at this stage, to set out our recommended index 
section of buyer's remedies. Our recommended draft provision reads as 
follows i^*^ 

9.12.(1) Where the seller breaches the contract, the buyer may, 

(a) maintain an action for damages; 

(b) seek specific performance, 
as provided in this Act. 



6UCC 2-508. 

7UCC 2-608. 

8S. 69(l)(d), (3), (4) and (5). 

9UCC 2-711(3). 
lOUCC 2-603(1). 
ilUCC 2-706. 
12UCC 2-712. 
13UCC 2-716. 

I'^It is not confined to the sale of specific goods. See, infra, pp. 440-41. 
^^Supra, ch. 6, sec. B. 
i6See, Draft Bill, s. 9.12. 
^Vbid. 



436 

(2) Where the seller's conduct amounts to a substantial breach 
and the seller repudiates, fails to make delivery or to perform an 
act due before delivery, or where the buyer rightfully rejects or re- 
vokes acceptance, the buyer, in addition to his rights under subsec- 
tion 1 and subject to section 7.7, may exercise any one or more of 
the following rights: 

1 . Cover and recover damages as provided in this Act. 

2. Cancel the contract. 

3. Recover so much of the price as has been paid. 

We appreciate that a test of substantiality of breach, in the case of breach 
by the seller, may introduce some uncertainty. It seems desirable that any 
uncertainties that may so arise should be reduced as far as possible. Two 
different situations must be considered. The first involves the seller's fail- 
ure to tender the goods (or, in a documentary shipment, the documents 
of title) by the agreed date. Here, following our earlier recommendation 
with respect to untimely performance by the buyer, ^^ we would allow the 
buyer to treat the seller's default as a substantial breach after reasonable 
notice has been given to the seller, even though the initial breach did not 
amount to a substantial breach. Comparable provisions, it may be noted, 
exist in ULIS^^ and in the draft UNCITRAL Convention.^o The second 
situation involves a tender that is conforming as to time, but non-conform- 
ing in some other respect. The buyer's right to demand cure in such a case, 
even though the non-conformity is only minor in character, raises a much 
more difficult issue and is intimately linked with the seller's right to cure 
where the buyer has rightfully rejected the goods. It will be convenient to 
postpone discussion of both questions to a later section of this chapter.^i 

The organization of the balance of this chapter is as follows. We 
begin with the remedy of specific performance. We then discuss the buyer's 
rights of rejection of non-conforming goods and, ancillary thereto, the 
questions of cure, acceptance, and revocation of acceptance. We then turn 
to discuss the damages remedy. Discussion of restitutionary remedies 
forms the subject matter of the final part of this chapter. As in the case 
of the seller's remedies, we deal in a separate chapter, chapter 18, with a 
number of remedial issues that are common to both parties. 

B. SPECIFIC PERFORMANCE AND OTHER FORMS OF 
SPECIFIC RELIEF 

1. Section 50 of The Sale of Goods Act 

Different legal systems approach the remedy of specific performance 
in different ways.^^ j^ some jurisdictions the remedy is regarded as a pri- 



^^Supra, ch. 16, sec. 1. 

i9Art. 44(2). 

20Art. 29(1). 

21/n/ra, this, ch., sec. C.l(d)(ii). 

22Treitel, "Remedies for Breach of Contracts" in International Encyclopedia of 
Comparative Law, Vol. VII, ch. 16, at pp. 6 et seq.; Dawson, "Specific Per- 
formance in France and Germany" (1959), 57 Mich. L. Rev. 495. 



437 

mary remedy, but subject to various types of exceptions; in other juris- 
dictions it is regarded as an exceptional remedy and available only at the 
discretion of the court. The common law jurisdictions belong to this latter 
group. Some lawyer-economists have begun to question the economic 
efficiency of the restrictive common law attitude,^^ but this raises funda- 
mental issues going well beyond the sales field and we do not pursue them. 
Suffice it to say that we continue to support the discretionary character 
of the remedy. 

Section 50 of the Ontario Sale of Goods Act^"^ contains the existing 
provisions controlling the buyer's entitlement to specific performance. 
This section has an interesting history. It substantially reproduces section 
2 of the U.K. Mercantile Law Amendment Act, 1856,^^ which in turn was 
inspired by a Report of the Mercantile Law Commissioners. ^^ The Com- 
missioners favoured aligning the then English law with the more generous 
rules of Scottish law. It is arguable that section 2 and its successor did 
not fully reflect the Commissioners' recommendations; but this is water 
under the bridge. This is because, since In re Wait^"^ it has generally been 
accepted that section 50 is now the sole source of the buyer's right to an 
order for specific performance. 

As we have stated, we support the discretionary character of the 
remedy of specific performance. Nevertheless, we are of the opinion that 
section 50 of the Ontario Act raises difficulties of substance that merit 
careful consideration. Section 50 provides: 

50. In an action for breach of contract to deliver specific or ascer- 
tained goods, the court may, if it thinks fit, direct that the contract 
be performed specifically, without giving the defendant the option 
of retaining the goods on payment of damages, and may impose such 
terms and conditions as to damages, payment of the price, and other- 
wise, as to the court seems just. 

We now consider three difficulties arising from this section: namely, its 
restriction to "specific or ascertained goods"; the relationship between the 
section and the buyer's right to obtain an order for replevin under The 
Replevin Act'P and, the lack of mutuality of the remedy of specific per- 
formance as between the buyer and the seller. 



23See, for example, Kronman, "Specific Performance" (1978), 45 U. Chi. L. 
Rev. 351. Compare, Posner, Economic Analysis of Law (2nd ed., 1977), pp. 
95-97. 

24The corresponding provision in the U.K. Sale of Goods Act, 1893, is section 52. 

2519 & 20 Vict., c. 97 (U.K.). The section was prolix and provided, inter alia, 
that in an action for breach of contract to deliver specific goods for a price in 
money the court, at its discretion, "shall have power to order execution to issue 
for the delivery ... of the said goods, without giving the defendant the option 
of retaining the same upon paying the damages assessed;". 

^^Second Report of the Commissioners appointed to Inquire and Ascertain how 
far the Mercantile Laws in the different parts of the United Kingdom of Great 
Britain and Ireland may be Advantageously Assimilated (1855), p. A2, See, 
further, Treitel, "Specific Performance in the Sale of Goods", [1966] J.B.L. 211. 

27 [1927] 1 Ch. 606 (C.A.); but see, contra, Treitel, footnote 26 supra, pp. 222 
et seq.; and, compare. Sky Petroleum Ltd. v. V.l.P. Petroleum Ltd., [1974] 
1 W.L.R. 576, [1974] 1 All E.R. 954. 

28R.S.O. 1970, c. 412. 



438 

The first difficulty arising from the section is the fact that the court's 
power is restricted to contracts involving the sale of "specific or ascer- 
tained goods". The term "specific goods" is defined in section l(l)(m) of 
the Ontario Act to mean goods "identified and agreed upon at the time 
the contract of sale is made". It is unsettled^^ whether, for the purposes 
of section 50, future goods may be regarded as specific goods, at any rate 
where nothing further needs to be done once the goods come into exis- 
tence or into the possession of the seller. The Act contains no definition 
of the term "ascertained goods". In Thames Sack and Bag Co. Lim, v. 
Knowles & Co. Lim.,^^ Sankey, J., held that "ascertained" means that "the 
individuality of the goods must in some way be found out, and when it is, 
then the goods have been ascertained". In In re Wait^^ Atkin, L.J., defined 
the expression more succinctly as probably meaning "identified in accord- 
ance with the agreement after the time a contract of sale is made". Which- 
ever of these definitions is correct, each is subject to a limitation of far- 
reaching practical importance. As is well known, in In re Wait the English 
Court of Appeal held that there can be no ascertainment of part of a 
larger bulk of goods until the part has been actually earmarked and segre- 
gated from the bulk. 

The difficulties that flow from the restrictive wording of section 50 
are illustrated by the recent English decision of Sky Petroleum Ltd. v. 
V.I.P. Petroleum Ltd.^^ In this case, the plaintiff, the buyer, sought an 
interim injunction to restrain the defendant, the seller, from breaching its 
obligation under a long term contract to supply the plaintiff with its re- 
quirements of gasoHne and diesel fuel. Because of the Arab oil embargo 
and the related events of 1973, there was little prospect of the plaintiff's 
being able to procure alternative supplies from another source. The Court 
granted the application. Goulding, J., reasoned that there was a serious 
danger that, unless interim relief was granted, the plaintiff company would 
be forced out of business before the case could be tried on its merits. 
Goulding, J., granted the order even though he acknowledged the general 
rule that specific performance will not be granted in respect of a contract 
for the purchase of chattels that are not specific or ascertained, and that 
the interim injunction was tantamount to making an order for specific 
enforcement of the contract for the time being. The Court did not attempt 
to reconcile its decision with that in In re Wait. 

An important — perhaps the most important — category of con- 
tracts, those that involve neither specific nor ascertained goods, is, there- 
fore, excluded from the reach of section 50. The question arises whether 
the section is exhaustive of the buyer's rights. Can the buyer fall back 
on his general equitable remedies, on the assumption that relief in equity 
is not confined to specific or ascertained goods? In a frequently cited pas- 
sage, Atkin, L.J., in In re Wait^^ expressed the firm view that section 50 



29See, Treitel, footnote 26 supra, at pp. 218-19. 
30(1919), 88 L.J.K.B. 585, at p. 588. 
^^Supra, footnote 27, at p. 630. 
32[1974] 1 W.L.R. 576, [1974] 1 All E.R. 954. 
33[1927] 1 Ch. 606 (C.A.), at p. 635. 



439 

codifies the buyer's rights, and, as we have stated, ^'^ this is the view that 
has been generally followed in subsequent decisions. Atkin, L.J., offered 
no explanation why Parliament should have wished to reduce the ambit 
of the remedy of specific performance, and the history of the section does 
not support the thesis. Whatever the merits of the dispute, it seems desir- 
able that the uncertainty should be resolved in the revised Act by deleting 
the confining words "specific or ascertained goods". As will be seen, this 
is also the Code's solution. 

The second difficulty arising from section 50 involves the relation- 
ship between that section and the buyer's right to obtain a replevin order 
under the Ontario Replevin Act.^^ Section 50, as has been noted, only 
confers a discretionary remedy, and it is well settled that an order for 
specific performance will not be granted where damages are an adequate 
substitute. For this purpose it matters not that title to the goods has 
passed to the buyer,^^ and it is equally well established that the buyer 
cannot improve his position by suing in detinue.^'' So it may be said that 
in this respect equity and the common law operate in tandem. 

However, the Ontario Replevin Act appears to contain an exception 
of some importance to this rule. At common law, an action in replevin 
only lay where the person suing for replevin alleged a wrongful seizure of 
his goods. 3^ The restitutionary remedy could not be invoked where the 
seller merely refused to deliver goods that had been in his lawful posses- 
sion all the time. In this respect, The Replevin Act appears to have made 
an important change in the law. Section 2 of the Act permits the owner 
or other person capable of maintaining an action for damages to bring a 
replevin action for the recovery of goods "wrongfully . . . detained", as 
well as for those wrongfully distrained or otherwise wrongfully taken. 
Assuming that title has passed to the buyer, it would appear that he is 
entitled to compel delivery by a recalcitrant seller by following the pre- 
scribed procedure, and it has been so held on a number of occasions. ^^ 

The reason for the extension in Ontario of the common law remedy 
of replevin is obscure,'^ and it is not clear whether the draftsman appre- 
ciated a potential conflict with the rules of specific performance and the 
action in detinue. Presumably, the extension reflects the judgment of the 
legislature that, where the person suing for replevin claims superior pro- 

^"^Supra, this ch., at p. 437. 

35R.S.O. 1970, c. 412. 

^(>Cohen v. Roche, [1927] 1 K.B. 169. 

^Vbid.; and see, also, Whiteley Ltd. v. Hilt, [1918] 2 K.B. 808 (C.A.). The 

same result would obtain in equity if the owner were to seek an order for 

specific restitution: Fleming, The Law of Tort (5th ed., 1977), at pp. 71-73. 
^^Mennie v. Blake (1856), 119 E.R. 1078, 6 E. & B. 842; Holmested & Gale, 

The Judicature Act of Ontario and Rules of Practice, Vol. II, pp. 1662-63 (1977 

Suppl.). 
39For example, O'Rourke v. Lee (1859), 18 U.C.Q.B. 609; Lee v. lanson (1910), 

1 O.W.N. 586; and compare, Van Hull v. Mancer, [1944] 1 W.W.R. 114 

(Man. C.A.). 
'*OThe present Replevin Act traces its ancestry to an Act of 1851, 14 & 15 Vict., 

c. 64, which was entitled "An Act to amend and extend the Law relating to the 

remedy of Replevin in Upper Canada". See, Holmested & Gale, footnote 38 

supra. Vol. II, p. 1663 (1977 Suppl.). 



440 

prietary or possessory rights, the person resisting the order for replevin 
should not be given the option of paying damages. However this may be, 
it appears anomalous that a buyer to whom title has passed should be 
able to obtain relief in a replevin action, and yet not be able to obtain an 
order for specific performance under The Sale of Goods Act. The Reple- 
vin Act does not, however, fall within our terms of reference and we 
refrain from offering any recommendations for its amendment beyond 
drawing attention to this conflict. 

The third difficulty arising out of section 50 involves the principle of 
mutuality. The Sale of Goods Act confers no reciprocal rights of specific 
performance in favour of the seller, and it is not clear to what extent he 
can invoke equitable principles to rectify the statutory omission. We share 
the view"^^ that the doctrine of mutuality has no particular merit, at any 
rate in relation to chattels, and that the seller's entitlement to specific 
performance should stand on its own feet and not be coloured by the 
question whether specific relief would have been available at the suit of 
the buyer. This is the approach adopted in the Code and the approach 
that also appeals to us. 

2. The Uniform Commercial Code Provisions 

Section 68 of the Uniform Sales Act was in substantially the same 
terms as section 52 of the U.K. Act, the forerunner of section 50 of the 
Ontario Act, although the American courts tended to interpret the words 
"specific or ascertained goods" less restrictively than the English courts.'^^ 
In addition, section 66 of the Uniform Sales Act reserved to the buyer, 
when the property in the goods had passed to him and the seller had 
neglected or refused to deliver them, the right to maintain any action al- 
lowed by law to the owner of goods of similar kind when wrongfully con- 
verted or withheld. Both these provisions of the Uniform Sales Act have 
been re-enacted in section 2-716 of the Uniform Commercial Code, albeit 
in a substantially modified form. In addition. Article 2 contains a new 
section, section 2-502, which deals explicitly with the right of a buyer 
to recover goods from an insolvent seller. Each of these provisions must 
be considered separately. 

We first turn to section 2-716. This section provides as follows: 

2-716.(1) Specific performance may be decreed where the goods 
are unique or in other proper circumstances. 

(2) The decree for specific performance may include such 
terms and conditions as to payment of the price, damages, or other 
relief as the court may deem just. 

(3) The buyer has a right of replevin for goods identified to 
the contract if after reasonable effort he is unable to effect cover for 
such goods or the circumstances reasonably indicate that such effort 
will be unavailing or if the goods have been shipped under reserva- 



4iThis is the view of Professor Treitel, footnote 26 supra, at p. 229. 
^2WiUiston on Sales (Rev. ed., 1948), p. 327, n. 11. 



441 

tion and satisfaction of the security interest in them has been made 
or tendered. 

The first two subsections deal with the buyer's right to obtain a decree 
of specific performance. The significant change made here is that the con- 
fining words in section 68 of the Uniform Sales Act, "specific or ascer- 
tained goods", have been abandoned in favour of the double-barrelled test 
of the uniqueness of the goods or the existence of "other proper circum- 
stances". At first sight the reference to uniqueness conveys an 18th cen- 
tury antiquarian flavour; but Comment 2 to UCC 2-716(1) makes it 
plain that this was not the draftsmen's intention. This Comment states 
that the test of uniqueness under section 2-716 must be made, "in terms 
of the total situation which characterizes the contract". The Comment 
continues: 

Output and requirements contracts involving a particular or pecu- 
liarly available source or market present today the typical commer- 
cial specific performance situation, as contrasted with contracts for 
the sale of heirlooms or priceless works of art which were usually 
involved in the older cases. However, uniqueness is not the sole 
basis of the remedy under this section for the relief may also be 
granted 'in other proper circumstances' and inabihty to cover is 
strong evidence of 'other proper circumstances'. 

It is clear, therefore, that the draftsmen's intention was to extend the 
buyer's remedy to a full range of goods, both present and future, and 
whether specific or not. Apart from these points, there does not appear 
to be any difference in substance between the pohcy of the Code and the 
policy of section 50 of the Ontario Sale of Goods Act. 

Section 2-716(3) marks an important departure from prior American 
state law. Under prior American law, a buyer to whom title in the goods 
had passed was entitled to initiate replevin proceedings to recover the 
goods in specie. As noted, this is the position that apparently obtains un- 
der the existing Ontario Replevin Act.'^^ Under the Code provision, the 
right of recovery is restricted to those cases where the buyer is unable 
to effect cover or it is clear that any effort to do so would be futile, or 
to those cases where the seller has only retained a security interest in goods 
that have been shipped. The rationale for these restrictions is given in 
Comment 4, which states that the section "is intended to give the buyer 
rights to the goods comparable to the seller's rights to the price". In a 
more expanded form, what this means is that the draftsmen thought that 
the buyer's right to recover the goods should be no greater than the seller's 
right to sue for the price under UCC 2-709. We have no quarrel with 
subsection (3) and we consider that it reflects a reasonable policy. How- 
ever, subsection (3) has no counterpart in the Ontario Sale of Goods Act, 
and we have previously indicated that we deem replevin remedies to be 
outside our terms of reference. We, therefore, content ourselves with 
drawing attention to this feature of the Code. 

The other provision of Article 2 that we here consider is section 



435«pra, at p. 439. 



442 

2-502. As we have noted, this section deals explicitly with the right of a 
buyer to recover goods from an insolvent seller. UCC 2-716, like section 
50 of the Ontario Act, provides no preferential treatment for the buyer 
who has paid all or part of the price for goods identified to the contract, 
but not delivered to him before the seller's insolvency. Section 2-502 con- 
fers upon the buyer a severely circumscribed priority. The section pro- 
vides as follows i^'^ 

2-502.(1) Subject to subsection (2) and even though the goods 
have not been shipped a buyer who has paid a part or all of the 
price of goods in which he has a special property under the pro- 
visions of the immediately preceding section may on making and 
keeping good a tender of any unpaid portion of their price recover 
them from the seller if the seller becomes insolvent within ten days 
after receipt of the first installment on their price. 

(2) If the identification creating his special property has been 
made by the buyer he acquires the right to recover the goods only if 
they conform to the contract for sale. 

It will be seen that the important requirements are as follows: (a) the 
buyer must have a special property in the goods (that is, the goods must 
have been identified to the contract pursuant to the provisions in UCC- 
2-501); (b) the buyer must have paid all or part of the price; and, (c) 
the seller's insolvency must have occurred within ten days after receipt 
of the first instalment on the price. In practice the last requirement is 
likely to prove fatal in the great majority of cases, even if the buyer's 
claim were not subject to the additional hazards of the competing claims 
of creditors and buyers in ordinary course under UCC 2-402 and 2-403. "^^ 
It will be an unwise buyer, therefore, who relies on UCC 2-502, in the 
event of the seller's insolvency, to protect his progress payments. His pru- 
dent course"^^ would be either to require the seller to be bonded, or to 
obtain a security interest in the goods pursuant to Article 9 or, in Ontario, 
under The Personal Property Security Act. However, the Article 9 and 
Ontario provisions are not properly structured to cope with this type of 
problem."^"^ 



44For general discussions of the provisions of section 2-502, see, inter alia, 
Kennedy, "The Trustee in Bankruptcy Under the Uniform Commercial Code: 
Some Problems Suggested By Articles 2 and 9" (1960), 14 Rutgers L. Rev. 
518, at p. 556; Speidel, "Advance Payments in Contracts for Sale of Manu- 
factured Goods: A Look at the Uniform Commercial Code" (1964), 52 Cal. 
L. Rev. 281; and Gordon, "The Prepaying Buyer: Second Class Citizenship 
Under Uniform Commercial Code Article 2" (1968), 63 N.W.U.L. Rev. 565. 

45UCC 2-501 is discussed in ch. 11, supra. UCC 2-402 and UCC 2-403 are dis- 
cussed in ch. 12, supra. 

"^^Compare, Speidel, footnote 44 supra. 

^7It must suffice to mention two difficulties that arise under The Personal Prop- 
erty Security Act, R.S.O. 1970, c. 344, as am. The first is that in the Act 
"purchase money security interest" (s. l(s)) and the priority it confers do not 
apply to a buyer's security interest. The second is that the default provisions 
in Part V of the Act envisage resale of the collateral as the secured party's 
primary remedy, whereas the buyer presumably would prefer an absolute 
option to retain the goods in satisfaction of the seller's obligations. 



443 

The Canadian position is unclear. There is evidence'^^ that our courts 
may be more generous in granting an order for specific performance where 
the seller is insolvent than where he is solvent. It may also be that, under 
the provisions of the Bankruptcy Act,^^ the buyer will be entitled as of 
right to the release of goods in the bankrupt seller's possession, if he can 
show that he has title to the goods and that there has been compliance 
with the registration requirements of any applicable Bills of Sale legis- 
lation. 

The problem of the buyer's right to recover goods from an insolvent 
seller is no doubt an important one. We do not, however, think that the 
proper answer is to be found in UCC 2-502, even assuming that it would 
be constitutionally competent for Ontario to adopt such a provision. The 
prime issue seems to be one of priority in bankruptcy, and, in our view, 
the issue is best resolved within that context. It may also be that The 
Personal Property Security Act should be reviewed with a view to deter- 
mining whether it should be amended to accommodate more adequately 
the security needs of buyers; but this appears to be a question that falls 
within the domain of the Advisory Committee on that Act. 

3. Conclusions 

In light of the foregoing discussion, we now set out our conclusions 
and recommendations concerning the buyer's right to specific performance 
and to other forms of specific relief: 

(1) Section 50 of the Ontario Sale of Goods Act is, in our view, 
defective. We are, however, of the opinion that its deficiencies 
can be cured without a total recasting of the section. Apart from 
the elimination of the reference to "specific or ascertained 
goods", we do not find UCC 2-716(1) and (2) inherently sup- 
erior; in some respects, indeed, these subsections may be less 
flexible than section 50. We recommend^^ that the provision 
in the revised Act comparable to section 50 of the existing 
Ontario Act should not be confined to contracts for the delivery 
of "specific or ascertained goods", but should read as follows:^' 

In an action against the seller for breach of contract to 
deliver promised goods, whether or not the goods existed or 
were identified at the time of the contract, the court may 
direct that the contract be performed specifically and may 
impose such terms and conditions as to damages, pay- 
ment of the price, and otherwise, as seem just to the court. 



48See, Duncan & Honsberger, Bankruptcy in Canada (3rd ed., 1961), p. 332, 
especially nn. 13-14. 

'^^R.S.C. 1970, c.B-3, S.47, specifies the property of the bankrupt that is in- 
cluded or excluded from his estate and divisible among his creditors. A literal 
reading of the section leads to the conclusion that the trustee is not entitled 
to claim (or presumably retain) property that is not owned by the bankrupt. 
See, further, Duncan & Honsberger, footnote 48 supra, at pp. 288 et seq. 

50The Honourable J. C. McRuer dissents from this recommendation. It is Mr. 
McRuer's position that a contract for the sale of non-existent or unidentified 
goods is not one the performance of which the court can supervise. 

siDraft Bill, s. 9.18. 



444 

It will be observed that the important difference between the 
existing and the recommended section, is that the recommended 
section omits any requirement that the goods must be in exis- 
tence or identified to the contract at the time of the contract. 
As is true of the present section, the recommended section im- 
poses no restrictions on the court's discretion, whether by ref- 
erence to "unique goods" or otherwise. This should allow am- 
ple scope for the development of the remedy of specific per- 
formance in the light of changing circumstances and new per- 
ceptions about the adequacy of damages. 

(2) No attempt should be made in the revised Sales Act to resolve 
an apparent conflict between the buyer's right to compel delivery 
of the goods under The Replevin Act and the discretionary 
remedy of specific performance under The Sale of Goods Act. 
Any change in the Ontario Replevin Act, as applicable to 
contracts of sale, should form part of a comprehensive review 
of replevin law. 

(3) We recommend that the revised Act should not contain a pro- 
vision equivalent to UCC 2-502, dealing with the buyer's right 
to recover goods from an insolvent seller; rather, this issue 
should be resolved within the context of the law of bankruptcy. 
Consideration should also be given to a review of The Personal 
Property Security Act by the Advisory Committee on that Act, 
with a view to determining whether it should be amended to 
accommodate more adequately the security needs of buyers. 

C. REJECTION, ACCEPTANCE AND CURE 

1 . General Considerations 

The concept of the buyer's right to reject non-conforming goods is 
easy to grasp. It is based on the notion that the buyer should not be 
obliged to accept and pay for goods that do not meet the contractual 
specifications. What is much more diflflcult to define are the circumstances 
in which the buyer should be entitled to exercise the right, for it is obvious 
that not every breach can justify this drastic remedy. The possible con- 
siderations that enter into the equation, as seen from the buyer's and 
seller's points of view, will be discussed hereafter. The scheme of this part 
of the chapter is as follows. We shall first consider the present Anglo- 
Canadian position and indicate some of its most important shortcomings. 
This will be followed by a review of the American position and the treat- 
ment of the issues in the Uniform Law on the International Sale of Goods 
and the 1977 draft UNCITRAL Convention. We then offer our own 
recommendations for change in the light of the comparative materials 
and the interests competing for attention. 

(a) THE ANGLO-CANADIAN POSITION 

The buyer's right to reject non-conforming goods is not spelled out 
clearly in any single section of the Ontario Sale of Goods Act, and the 
total picture can only be gleaned from a reading of a variety of sections 



445 

of this Act. The key to the buyer's right is not the gravity of the seller's 
breach but, rather, the characterization of the term that has been breached. 
The seller's conduct may involve a breach of condition; that is, breach of 
an essential term of the contract. In this event, if none of the limitations 
imposed by the Act applies, the buyer will be entitled to reject the goods. 
If, however, the term breached is characterized as a warranty, the buyer's 
remedy will only lie in damages. 

As was noted in an earlier chapter,^^ 19^^ century case law adopted 
a dichotomous classification of the seller's major implied obligations. These 
implied obligations were classified into conditions and warranties, a scheme 
that was carried forward into The Sale of Goods Act. Thus, sections 13 
to 16 of the Ontario Act characterize as conditions the seller's obligations 
with respect to title, description, merchantability, fitness and correspon- 
dence to sample. Only the implied terms of quiet possession and freedom 
from encumbrances are characterized as warranties. ^^ To the enumeration 
of circumstances entitling the buyer to reject must be added the important 
provisions in section 29 concerning the effect of a delivery of goods that 
are defective in terms of quantity and description. The Act^'^ does not 
classify the seller's obligation with respect to time of delivery but, in com- 
mercial transactions, the cases have almost invariably treated this obliga- 
tion as a condition. Only with respect to instalment sales^^ does the Act, 
in section 30, abandon its usual approach; but the exception is more 
apparent than real, because section 30 is really concerned with the impact 
of a present breach on future obligations. 

It will be seen, therefore, that, with minor exceptions. The Sale of 
Goods Act and the courts have adopted a rule of strict compliance with 
respect to performance of the seller's most important obhgations. From 
the seller's point of view, the consequences are serious. As a long line of 
cases demonstrates, this rule means that the buyer may reject a tender, 
even though the non-conformity is minor in character, the buyer is not 
substantially prejudiced, and the seller is wiUing to cure the defect or to 
make an appropriate monetary allowance. If a breach of title is involved, 
it can be argued that this goes so much to the root of the agreement that 
the breach and its severity are inextricably linked together.^^ But the 
same can hardly be said of the other implied terms with their broad 
generic concepts, where great variations in the extent and impact of any 
particular breach are the rule rather than the exception. 

(i) Limitations on the Right to Reject 

As we have indicated, under The Sale of Goods Act the seller is 
required to comply strictly with the obligations characterized as condi- 
tions; otherwise the buyer may reject the goods. To some extent, however, 
the rigidities of this rule of strict compliance have been masked by a 
number of important exceptions. But, these exceptions have not been con- 



^'^Supra, ch. 6, sec. B. 

53See, s. 13(b) and (c) of the Ontario Sale of Goods Act. 

54S. 11. 

5^Infra, ch. 18, sec. 5. 

56Although, even here, as will be seen, a right to cure seems appropriate. 



446 

sistently developed, and they contain some serious anomalies that need to 
be rectified in the revised Act. While their cumulative effect may be to 
provide the courts with a series of useful weapons with which to curb the 
excesses of this rule of strict compliance, they also have the less desirable 
result of preventing the rejection of goods where a substantial breach of 
the seller's obligations has occurred. We turn now to consider the recog- 
nized exceptions to the rule of strict compliance. 

(1) Acceptance of the Whole or Part of a Non-Severable 
Consignment and Sale of Specific Goods: s. 12(3) 

Section 12(3) of the Ontario Sale of Goods Act contains three 
exceptions to the rule of strict compliance. This subsection provides as 
follows: 

12.(3) Where a contract of sale is not severable and the buyer has 
accepted the goods or part thereof, or where the contract is for 
specific goods the property in which has passed to the buyer, the 
breach of any condition to be fulfilled by the seller can only be 
treated as a breach of warranty and not as a ground for rejecting the 
goods and treating the contract as repudiated, unless there is a term 
of the contract, express or implied, to that effect. 

By virtue of this provision, a buyer loses his right to reject in three 
circumstances: first, where a contract of sale is not severable and the buyer 
has accepted the goods; secondly, in the case of a non-severable contract 
where the buyer has accepted part of the goods, the so-called "partial 
acceptance" rule; and thirdly, where the contract is for "specific goods 
the property in which has passed to the buyer". It will be convenient 
to consider separately these three aspects of section 12(3). 

(aa) Acceptance of Goods in a Non-Severable 
Contract 

A very important exception to the rule of strict compliance is found 
in the provision of section 12(3) that, unless otherwise agreed, where a 
contract of sale is not severable and the buyer has accepted the goods, 
breach of any condition by the seller can only be treated as breach of a 
warranty and not as a ground for rejecting the goods. The rationale of 
this exception is obvious and proceeds from the premise that the buyer has 
agreed to retain the goods or has made an election to do so. The diffi- 
culty arises from the concept of acceptance, which we discuss below.^*^ 

(bb) Acceptance of Part of a Non-Severable 
Consignment 

The first part of section 12(3) of the Act codifies the common law 
rule^^ that, in a non-severable contract, the buyer loses his right to reject, 
even if he has accepted only part of the goods. The partial acceptance 
rule raises two difficulties. 

In the first place, the commercial reasonableness of this rule is not 



57//2/ra, sec. C. 1(a) (ii). 

^^Benjamin's Sale of Goods (1974), para. 894, especially n. 73. See, also Frid- 
man, Sale of Goods in Canada (1973), pp. 212-15. 



447 

obvious. -*^^ If a clothing manufacturer delivers 100 dresses to a retailer, 95 
of which conform to the contract and 5 of which are non-conforming, 
there appears to be no adequate reason why the retailer should not be 
able to retain the satisfactory dresses and reject the defective ones. Pre- 
sumably, this course of action would also be in the manufacturer's interest, 
since his losses will be that much greater if the buyer is forced to reject 
the whole consignment. While the Uniform Sales Act did not expressly 
reject the partial acceptance rule,^^ it was substantially undermined by the 
New York Court of Appeals in a leading case, Portfolio v. Rubin,^^ and 
the process has been completed in Article 2. UCC 2-601 provides, inter 
alia, that if the goods or the tender of delivery fail in any respect to con- 
form to the contract, the buyer may (a) reject the whole, (b) accept the 
whole, or (c) accept any commercial unit or units and reject the rest. 
"Commercial unit" is defined^^ to mean "such a unit of goods as by com- 
mercial usage is a single whole for purposes of sale and division of which 
materially impairs its character or value on the market or in use". We 
support the Code's approach and, as will be discussed below, where the 
non-conformity amounts to a substantial breach, favour its adoption in 
the revised Ontario Act.^^ 

The second difficulty arises from the conflict between the provisions 
of section 29 and section 12(3) of the Ontario Sale of Goods Act. Sec- 
tion 29^ clearly confers upon the buyer the right to reject that part of a 
consignment which is non-conforming as to quantity or description. In 
W. Barker (Jr.) & Co. Ltd. v. Edward T. Agius Ltd.,^^ Salter, J., ex- 
perienced great difficulty in trying to reconcile the two provisions, but felt 
that precedent obliged him to give primacy to section 29. Assuming his 
construction is correct, ^^ it leads to the curious result that, if part of a 
consignment is unmerchantable or unfit for its intended use, the buyer 



59Compare, Williston, footnote 42 supra. Vol. 3, sec. 493a, p. 69; Note, "Return 
of Part of the Goods Delivered Under A Sales Contract: Harmonizing Legal 
Theory and Business Practice" (1935), 35 Col. L. Rev. 726. 

60Williston, footnote 42 supra, sec. 493b, p. 71. 

61(1922), 233 N.Y. 439; 125 N.E. 843 (C.A.). 

62UCC 2-105(6), first sentence. See, Draft Bill, s. 1.1(1)6. 

63See, Draft Bill, s. 8.1. 

64Section 29 provides as follovi's: 

( 1 ) Where the seller delivers to the buyer a quantity of goods less than 
he contracted to sell, the buyer may reject them, but if the buyer accepts 
the goods so delivered, he shall pay for them at the contract rate. 

(2) Where the seller delivers to the buyer a quantity of goods larger 
than he contracted to sell, the buyer may accept the goods included in the 
contract and reject the rest, or he may reject the whole, and if the buyer 
accepts the whole of the goods so delivered, he shall pay for them at the 
contract rate. 

(3) Where the seller delivers to the buyer the goods he contracted to 
sell mixed with goods of a different description not included in the contract, 
the buyer may accept the goods that are in accordance with the contract 
and reject the rest, or he may reject the whole. 

(4) This section is subject to any usage of trade, special agreement or 
course of dealing between the parlies. 

65(1927), 33 Com. Cas. 120. 

66The facts were unusual in that the buyer resold and delivered part of the con- 
signment to the sub-buyer before becoming aware of the non-conformity of the 
balance of the consignment. 



448 

must reject the whole consignment, whereas he can reject in part and 
accept in part if the non-conformity goes to quantity or description.^'^ 
Adoption of the Code solution would also eliminate this anomaly, as 
UCC 2-601 does not distinguish between different types of non-conformi- 
ty. This section of the Code permits the buyer to accept or reject the 
whole or any part as he sees fit. The only restriction is that his acceptance 
or rejection must comprise one or more commercial units and be made in 
good faith. ^^ If this approach is adopted in Ontario, as we recommend 
below, it would dispense altogether with the need for the revised Act to 
contain a provision equivalent to section 29 of the existing Act. 



(cc) Sale of Specific Goods 

The second part of section 12(3) of the Ontario Sale of Goods Act 
lays down the astonishing rule that the buyer has no right to reject non- 
conforming goods in the case of a contract for the sale of specific goods 
the property in which has passed to the buyer. The impact of this part of 
section 12(3), if read literally, is much wider than the partial acceptance 
rule because of the frequency and commercial importance of sales of 
specific goods, especially in retail transactions. The denial of the right to 
reject in such circumstances is difficult to justify. The rule has its origins 
in an early decision. Street v. Blay,^^ and is apparently based on the 
reasoning that, once title has passed, the buyer cannot unilaterally revest 
it in the seller. Williston has shown'^^ the unsoundness of this proposition 
and its inconsistency with other branches of contract law, where the buyer 
has long been permitted to rescind unilaterally; for example, because of a 
fraudulent misrepresentation. The doctrine in Street v. Blay was, apparent- 
ly, never adopted in American law. 

This second part of section 12(3) is not often invoked in practice 
in Canada,'''! ^j^^^ j^ j^^s been largely undermined by the controversial de- 
cision of the English Divisional Court in Varley v. WhippJ^ Nevertheless, 
there is every reason why this anomalous restriction on the right to reject 
should be removed from The Sale of Goods Act. In adopting this step, 
Ontario would merely be following the example set in section 4(1) of the 
U.K. Misrepresentation Act 1967 P^ 



67See, Benjamin's Sale of Goods (1974), para. 862, p. 385: "It is difficult to 

justify the application of one policy for quantity and another for quality." 
68The good faith requirement is not expressly imposed in UCC 2-601 but is 

referred to in Official Comment 1. Under our earlier recommendations, supra, 

ch. 7, sec. B. 4, good faith in the exercise of rights and remedies would always 

be implied. 
69(1831) 2 B. & Ad. 456, [1824-34] All E.R. 329 (K.B.). 
70Williston, "Rescission for Breach of Warranty" (1903), 16 Harv. L. Rev. 465, 

and Williston on Sales (Rev. ed., 1948), Vol. 3, sees. 608-8a. 
7iBut, see, Home Gas Ltd. v. Streeter, [1953] 2 D.L.R. 842 (Sask. C.A.), where 

it was successfully invoked. 
72[1900] 1 Q.B. 513, followed in /. /. Case Threshing Co. v. Fee (1909), 10 

W.L.R. 70 (Sask.); and see, further, Fridman, footnote 58 supra, pp. 74-76; 

Atiyah, The Sale of Goods (5th ed., 1975), pp. 146-47. 
731967, c. 7 (U.K.). 



449 

(2) The De Minimis Rule 

This rule, that the law will ignore trifling breaches, is not expressly 
stated in The Sale of Goods Act, but it enshrines a principle common 
to many legal systems. In the sales context, the difficulty is to know when 
the courts will invoke it and what will be deemed to be a deviation of 
microscopic proportions — a deviation not worthy of the law's notice. A 
deviation of less than one percent in the quantity of goods delivered of the 
right description might be thought to satisfy the test, but it has not always 
been so held.'^'^ Again, in I.B.M. v. Shcherhan^^ a broken glass dial in a 
computing scale costing $294, which could have been replaced for 25 or 
30 cents, was held sufficiently significant to make the goods unmerchant- 
able and, therefore, to entitle the buyer to reject. Even if the courts could 
be encouraged to find a larger role for the de minimis rule, its practical 
value as a meaningful restraint on the right to reject would remain 
marginal. 

(3) Some Miscellaneous Restrictions on the Right to Reject 

An important restriction on the buyer's right to reject is imposed by 
section 30 of the Ontario Sale of Goods Act, which deals with instalment 
sales. The provisions of section 30 are considered more fully in a later 
chapter.''^ All that we wish to note at this stage is that, in a technical 
sense, section 30 is concerned, not with the buyer's right to reject a non- 
conforming instalment, but, rather, with the impact of an admitted breach 
on the seller's willingness and ability to fulfil the unperformed part of his 
obligation. Even admitting this, the fact remains that the Act has aban- 
doned the mechanistic approach adopted with respect to entire and in- 
divisible contracts, and instead allows the individual facts to determine the 
consequences of the initial breach on the balance of the seller's obligations. 

Room for flexibility is also present in the concepts of merchantability 
and fitness for purpose. "^"^ The first concept is predicated on the reactions 
of a reasonable buyer and his expectations; the second concept aims not 
towards perfect fitness, but only towards reasonable fitness. Both concepts, 
therefore, allow generous scope for innovative handling of borderline 
cases in which there is non-conformity but the non-conformity is not of a 
sufficiently serious nature to justify rejection. Regrettably, until recently, 
Anglo-Canadian courts have shown little inclination to seize this oppor- 
tunity.*^^ In particular, our courts have failed to develop, as perhaps they 
could have developed, a concept of the seller's right to cure an imperfect 
tender where this would be compatible with the buyer's expectations of 
merchantability and reasonable fitness. Our courts have not developed 
such a concept other than in the case where the time for delivery has not 



^^Wilensko v. Fenwick & Co. {West Hartlepool) Ltd. (1938), 54 T.L.R. 1019, 

[1938] 3 All E.R. 429 (K.B.). 
75[1925] 1 W.W.R. 405 (Sask. C.A.). 
76/n//-a, ch. 18, sec. 5. 
Tl Supra, ch. 9, sec. 3. 
78Lord Denning's judgment in Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., 

[1976] 1 Q.B. 44 (C.A.), at p. 55 suggests new winds of change may be in the 

offing. 



450 

expired. In such a case, the seller has been given a right to cure.'^^ It 
needs to be stressed, however, that mitigating the rigours of the rule of 
strict compliance by such means would not involve, and should not be 
construed as involving, the denial of relief for even minor defects. 

(ii) Acceptance of the Goods 

As we have stated, by virtue of section 12(3) of The Sale of Goods 
Act, where the contract of sale is not severable and the buyer has accepted 
the goods his right of rejection, unless otherwise agreed, is lost. In this 
context, reference must be made to sections 33 and 34 of the Ontario Sale 
of Goods Act. These sections contain important provisions concerning, 
respectively, the buyer's right to examine goods when they are tendered 
or delivered to him, and the buyer's deemed acceptance of goods. These 
sections provide as follows: 

33.(1) Where goods are delivered to the buyer that he has 
not previously examined, he shall be deemed not to have accepted 
them until he has had a reasonable opportunity of examining them 
for the purpose of ascertaining whether they are in conformity with 
the contract. 

(2) Unless otherwise agreed, when the seller tenders delivery of 
goods to the buyer, he shall, on request, afford the buyer a reasonable 
opportunity of examining the goods for the purpose of ascertaining 
whether they are in conformity with the contract. 

34. The buyer shall be deemed to have accepted the goods when 
he intimates to the seller that he has accepted them, or when the 
goods have been delivered to him and he does any act in relation 
to them that is inconsistent with the ownership of the seller, or when, 
after the lapse of a reasonable time, he retains the goods without 
intimating to the seller that he has rejected them. 

These provisions and, in particular, their Code counterparts, will be ex- 
amined more closely in a later part of this chapter.^^ For the moment, 
it will suffice to draw attention to several constructional and conceptual 
difficulties whose collective effect is, once again, to impose severe restric- 
tions on the buyer's right of rejection. 

The first difficulty is that, as judicially construed,^ ^ (and unless other- 
wise agreed) the buyer's right of examination, contained in section 33, is 
prima facie confined to the time and place of delivery of the goods. A 
literal application of this rule would, in many situations, deprive the buyer 
of a meaningful right of examination. The second difficulty is that, ac- 
cording to section 34, the buyer is deemed to have accepted the goods 
when, after delivery, "he does any act in relation to them that is incon- 
sistent with the ownership of the seller". Since many post-delivery acts 

'J9Borrowman, Phillips, & Co. v. Free & Mollis (1878), 4 Q.B.D. 500 (C.A.); 

Scythes & Co. v. Dods Knitting Co. (1922), 52 O.L.R. 475 (App. Div.). 
^^Infra, pp. 467 et seq. 
»^Perkins v. Bell, [1893] 1 Q.B. 193 (C.A.); Benjamin's Sale of Goods (1974), 

para. 874. Supporting Canadian authorities are collected in Fridman, footnote 

58 supra, p. 265, n. 82. 



451 

committed by a buyer could be construed as inconsistent with the seller's 
title (assuming he still has title, which is another source of difficulty) 
it will be appreciated that a strict application of this test could sub- 
stantially undermine the buyer's right to reject non-conforming goods. 
The leading decision of the English Court of Appeal in Hardy & Co. v. 
Hillerns & Fowler^^ went a considerable distance towards doing just that, 
at least where the goods were resold and trans-shipped by the buyer subse- 
quent to their delivery. Subsequent courts have been hard put to distin- 
guish the decision. ^3 The Court of Appeal accentuated the difficulties by 
holding that the reasonable time to examine, seemingly assured in section 
33(1) of the Act, does not take priority over the deemed acceptance 
provisions in section 34.^"^ 

Finally, section 34 also provides that the buyer is deemed to have 
accepted the goods when, "after the lapse of a reasonable time, he retains 
the goods without intimating to the seller that he has rejected them". This 
test must be read in conjunction with the buyer's entitlement under section 
33 to "a reasonable opportunity" of examining the goods to determine 
their conformity. As a result, the buyer's right to reject is severely 
circumscribed in time, even though the defect is latent and cannot 
be ascertained by ordinary examination or testing and does not mani- 
fest itself until a considerable time has elapsed after delivery. We 
pause to note that Anglo-Canadian law has no remedy corresponding to 
the redhibitory action in Roman law for latent defects,^^ the right to 
rescind for breach of warranty in the Uniform Sales Act,^^ or the right 
to revoke an acceptance recognized in Article 2. 

(b) THE AMERICAN POSITION 

The treatment of the right to reject^^ in the Uniform Sales Act shared 
important similarities with the U.K. Sale of Goods Act, but differed from 
it in other important respects. Nineteenth century American common law 
followed the English rule of strict compliance, and this rule was repro- 
duced by Williston in section 69 of the Uniform Sales Act. Indeed, the 
Uniform Act went considerably further than the English approach, since 
the Act did not distinguish between warranties and conditions, but ap- 
parently impressed all the seller's contractual obligations with the same 

82[1923] 2 K.B. 490 (C.A.). 

83See, for example, Kwei Tek Chao v. British Traders and Shippers Ltd., [1954] 
2 Q.B. 459; Hammer <&. Barrow v. Coca-Cola, [1962] N.Z.L.R. 723 (S.C); 
A. J. Frank & Sons Ltd. v. Northern Peat Co., [1963] 2 O.R. 415, (1963), 39 
D.L.R. (2d) 721 (C.A.). 

84This aspect of the decision has now been reversed in the U.K. by s. 4(2) of the 
Misrepresentation Act 1967, c. 7. 

85The remedy is recognized in the Quebec Civil Code, arts. 1522 et seq.', and see, 
Durnford 'The Redhibitory Action and the 'Reasonable Diligence' of Article 
1530 C.C." (1963), 9 McGill L.J., 16. 

86S.69(l)(d); see, Williston on Sales (Rev. ed., 1948), sees. 608 et seq. 

87See, generally, Honnold, "Buyer's Right of Rejection" (1949), 97 U. Pa. L.Rev. 
457; Whaley, 'Tender, Acceptance, Rejection and Revocation — the UCC's 
'Tarr'-Baby" (1974-75), 24 Drake L.Rev. 52; Priest, "Breach and Remedy for 
the Tender of Nonconforming Goods under the Uniform Commercial Code: An 
Economic Approach" (1978), 91 Harv. L. Rev. 960; White & Summers, Hand- 
book of the Law Under the Uniform Commercial Code (1972), ch. 8. 



452 

quality. The Uniform Act^^ also adopted the English concept of acceptance 
and its impact upon the buyer's right to reject non-conforming goods. In 
the case of latent defects, however, the Uniform Act avoided the difficul- 
ties under the U.K. Act by permitting the buyer to rescind the sale even 
after he was deemed to have accepted the goods. ^^ The price the buyer 
was forced to pay for this extended privilege was the abandonment of any 
claim to damages, because rescission was deemed to put an end to the 
contract for all purposes. So far as the right to reject was concerned, the 
Uniform Act also drew no distinction between a sale of specific goods 
and the sale of other goods. 

The concept of a single classification of contractual obligations has 
been retained in Article 2. So also, on a first reading, has the rule of strict 
compliance, generally referred to in American literature as the "perfect 
tender" rule. Section 2-601 provides: 

2-601. Subject to the provisions of this Article on breach in in- 
stallment contracts (Section 2-612) and unless otherwise agreed un- 
der the sections on contractual limitations of remedy (Sections 2-718 
and 2-719), if the goods or the tender of delivery fail in any respect 
to conform to the contract, the buyer may 

(a) reject the whole; or 

(b) accept the whole; or 

(c) accept any commercial unit or units and reject the rest. 

The initial impression is misleading because there are at least seven direct 
and indirect exceptions to the perfect tender rule, as appears from the 
following list: 

(a) Direct Exceptions 

1. Revocation of acceptance.^^ 

2. Instalment contracts.^! 

3. Right to cure an imperfect tender.^^ 

4. Duty to act in good faith. ^^ 

5. Non-materiality of failure to notify of shipment.^"^ 

(b) Indirect Exceptions 

6. Ready implication of acceptance.^^ 

7. Waiver of buyer's objections through failure to particu- 
larize.^^ 



88S.48. 

89Ss. 69(1) (d), 69(3); Williston, footnote 86 supra, sees. 608 et seq. 

90See, UCC 2-608 and infra, sec. C.2. 

9iSee, UCC 2-612 and infra, ch. 18, sec. 5. 

^See, UCC 2-508 and infra, sec. C.l(d)(ii). 

93See, UCC 1-203, 2-103(l)(b) and supra, ch. 7, sec. B. 

94See, UCC 2-504 and supra, ch. 14, sec. A.3(b). 

95See, UCC 2-606 and infra, p. 470. 

96See, UCC 2-605 and infra, pp. 478-79. 



453 

The cumulative effect of these exceptions and restrictions is to draw much 
of the sting from the perfect tender rule.^"^ The American courts have 
shown themselves particularly resourceful in using the Code's fairly com- 
plex acceptance and revocation of acceptance provisions to deny the right 
to reject. But whether the perfect tender rule has been deprived of all 
practical effect is a matter for conjecture. There may still be circumstances 
in which the buyer will be entitled to reject for even minor non-conformi- 
ties, particularly where the right to cure does not apply or the seller 
cannot cure or is not willing to do so. 

We turn now to discuss the seller's right to cure an imperfect tender 
under the Code. Before so doing, we would mention that the Code's 
exceptions to the perfect tender rule appear to be motivated by a variety 
of reasons. ^^ Section 2-608(2) provides that revocation of acceptance 
must occur within a reasonable time after, inter alia, the buyer discovers 
or should have discovered the ground for revocation. The reason for this 
exception appears to be the greater prejudice to the seller, where the buyer 
seeks to reject after a substantial period has elapsed, than the prejudice 
to the seller where the buyer exercises his remedy promptly after delivery. 
In the case of instalment sales, by UCC 2-612, delivery by the seller of a 
non-conforming instalment does not necessarily confer upon the buyer a 
right to cancel the whole contract. The continuing relationship between 
the parties imposed by the contract appears to make the difference, al- 
though the soundness of the distinction may be questioned. Prejudice to 
the seller, on the other hand, underlies the penalty for failure to particu- 
larize under UCC 2-605, and the same reasoning seems to support the 
Code provisions deaUng with lack of good faith. The exception in UCC 
2-504 appears to be based on a lack of prejudice to the buyer. 

The right to cure is based on the seller's reasonable expectations, 
as well as on a presumed lack of prejudice to the buyer. The right plays 
such an arresting role in the Code's treatment of the seller's performance 
obligations and the buyer's right to reject, that it deserves closer examina- 
tion.99 UCC 2-508 provides: 



97"We conclude, and the cases decided to date suggest, that the foregoing changes 
have so eroded the perfect tender rule that little is left of it; the law would be 
little changed if 2-601 gave the right to reject only upon 'substantial' noncon- 
formity": White & Summers, footnote 87 supra, p. 257. It appears that Karl 
Llewellyn, the principal architect of Article 2, also favoured the adoption of a 
substantial performance rule, at least in dealings between merchants, and his 
earlier drafts of what later became Article 2 reflected this philosophy. However, 
his views did not meet with general acceptance, which, in the light of subse- 
quent judicial developments, seems ironic. See, further, Priest, footnote 87 
supra, at pp. 968-71. 

98Honnold, footnote 87 supra, at pp. 472 et seq. 

99For more detailed discussions, see Honnold, footnote 87 supra, at pp. 473 
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, at pp. 210 et seq.; Hawkland, "Curing an Improper Tender 
of Title to Chattels: Past, Present and Commercial Code" (1962), 46 Minn. L. 
Rev. 697; Priest, footnote 87 supra; Comment, "Uniform Commercial Code — 
Sales — Sections 2-508 and 2-608 — Limitations on the Perfect-Tender Rule" 
(1970), 69 Mich. L. Rev. 130. 



454 

2-508. ( 1 ) Where any tender or delivery by the seller is rejected be- 
cause non-conforming and the time for performance has not yet 
expired, the seller may seasonably notify the buyer of his intention 
to cure and may then within the contract time make a conforming 
delivery. 

(2) Where the buyer rejects a non-conforming tender which the 
seller had reasonable grounds to believe would be acceptable with 
or without money allowance the seller may if he seasonably notifies 
the buyer have a further reasonable time to substitute a conforming 
tender. 

The important distinction between the two subsections may be stated 
in this way: by subsection (1), a seller who tenders non-conforming 
goods or documents of title before the time for performance has expired 
has an absolute right to cure;'^^ the right of the seller to cure under 
subsection (2) is, on the other hand, restricted to cases in which he had 
reasonable grounds to believe that his non-conforming tender would be 
acceptable, with or without a money allowance. What then are "reasonable 
grounds" for his belief? Comment 2 to UCC 2-508 explains that such rea- 
sonable grounds can lie "in prior course of dealing, course of performance 
or usage of trade as well as in the particular circumstances surrounding 
the making of the contract". The Comment continues with the following 
caveat: 

The seller is charged with commercial knowledge of any factors in 
a particular sales situation which require him to comply strictly with 
his obligations under the contract as, for example, strict conformity 
of documents in an overseas shipment or the sale of precision parts 
or chemicals for use in manufacture. Further, if the buyer gives 
notice either implicitly, as by a prior course of dealing involving 
rigorous inspections, or expressly, as by the deliberate inclusion of a 
'no replacement' clause in the contract, the seller is to be held to 
rigid compliance. 

It would therefore seem clear that the section does not give carte blanche 
to the seller to offer to cure in order to resist any and all efforts by the 
buyer to reject the goods, and that the seller's actual or imputed know- 
ledge of the buyer's requirements and expectations may militate as much 
against the right to cure as in its favour. 

The Code's guidelines may work well in commercial transactions 
where both parties are professionals and famihar with the usages of the 
trade. However, they offer much less assistance in the large range of 
consumer transactions, and generally in those sales where the goods are 
intended for use and not for resale. The construction of UCC 2-508(2) 
gives rise to other difficulties, of which the following are some of the 
more important : 



lOOThis conforms with the pre-Code rule and Anglo-Canadian law. See, footnote 
79 supra, and infra, sec. C,l(d) (ii) (1). 



455 

(a) Subsection (2) only applies where the seller reasonably believed 
that his non-conforming tender would be acceptable "with or 
without money allowance". It is not clear whether these words 
preclude other forms of adjustment or correction; 

(b) The concluding words of subsection (2) suggest that the seller 
must make a new and conforming tender. Does this mean that 
the seller must tender a new and different item or can the con- 
forming tender comprise the goods originally tendered but now 
put into a conforming condition?^^^ A related question is whe- 
ther a money allowance, or an offer to let the buyer repair the 
goods at the seller's expense, is sufficient. The reference to an 
allowance in the earlier part of the subsection would support 
such an inference, but the concluding words are opposed thereto; 

(c) Does the right to cure apply to any type of defect, however 
serious in nature? The reported cases have mostly involved 
minor defects, but commentators are not agreed whether the 
right to cure should be so confined;^^^ 

(d) It is not clear whether UCC 2-508(2) applies to documentary 
tenders. UCC 2-612(2) distinguishes between non-conforming 
goods and non-conforming documents of title and it has been 
argued^^^ that it would be anomalous to insist on a strict con- 
formity of documentary tender in the case of instalment sales 
and not in the case of an entire contract; 

(e) A similar question arises with respect to the seller's right to cure 
a defective title, or to remove an encumbrance or threatened 
interference with the buyer's quiet possession of his goods. UCC 
2-508 is not in terms confined to physical defects — it speaks 
broadly of a "non-conforming" tender — and there is no good 
reason why it should be so confined. A strong argument has 
been advanced'^"^ in favour of the right to cure a defect in title 
and there is much to be said in its favour; 

(f) Does the subsection apply where the buyer partially accepts and 
partially rejects the tender? Since UCC 2-601 clearly recognizes 



lOlIn Wilson v. Scampoli (1967), 228 A. 2d 848 (D.C.C.A.), the Court, while 
admitting that the construction was not free of difficulty, reached the latter con- 
clusion. 

102'rhe "major-minor" defect test is criticized in Philips, "Revocation of Accep- 
tance and the Consumer Buyer" (1970), 75 Com. L.J., 354, and in Comment, 
footnote 99 supra. A widely accepted test is the so-called "shaken faith" doc- 
trine usually associated with Zahriskie Chevrolet Inc. v. Smith (1968), 240 A. 
2d 195 (N.J.). A third test, involving the determination whether cure would 
cause the buyer "great inconvenience, risk or loss" has been put forward by 
Professor Hawkland, footnote 99 supra, at p. 724, and was adopted by the 
court in Wilson v. Scampoli, footnote 101 supra. 

l03See, Peters, footnote 99 supra, at p. 214. 

l04See, Hawkland, footnote 99 supra. 



456 

the right of partial rejection, the answer presumably is in the 
affirmative; and, 

(g) Finally, it is unclear whether the right to cure also applies to a 
revocation of acceptance. A commentator has pointed out^^^ 
that some courts have acted as if it did, but this conclusion runs 
counter to a literal reading of UCC 2-508. 

None of the above questions is designed to cast doubt on the general 
value of a cure provision. They merely illustrate the need for further 
clarification. As a concept the right to cure provides the seller with an 
important opportunity to remedy his breach without frustrating the reason- 
able expectations of the buyer, or requiring him to assume unbargained- 
for risks. 

(c) THE ULIS AND UNCITRAL APPROACHES 

(i) VLIS 

The buyer's right to reject a non-conforming tender is dealt with 
under several headings in the Uniform Law on the International Sale of 
Goods, 1^^ but a consistent theme runs throughout the remedial provisions. 
Regardless of how the seller's breach arises, and subject to the qualifica- 
tions noted immediately below, the buyer is only entitled to avoid the 
contract where the seller's default amounts to a fundamental breach of his 
obligations. 1^"^ The Uniform Law, therefore, rejects the perfect tender rule 
in its entirety and does not simply hedge it with important exceptions 
and restrictions, as does Article 2. However, the dichotomy between 
fundamental breaches and lesser breaches is not complete. The Uniform 
Law adopts, with important modifications, the German concept of "Nach- 
frist"^^^ and entitles the buyer to avoid the contract where he has afforded 
the seller an additional period of time of reasonable length to cure an 
existing default. ^^^ Article 10 defines fundamental breach as follows: 

For the purpose of the present law, a breach of contract shall be 
regarded as fundamental wherever the party in breach knew, or 
ought to have known, at the time of the conclusion of the contract, 
that a reasonable person in the same situation as the other party 
would not have entered into the contract if he had foreseen the breach 
and its effects. 

The test has been criticized as unworkable, ^^^ and it may be so; but it is 
not irrational. In fact, it bears a remarkable resemblance to the classic 
test of a condition formulated by Bowen, L.J., in Bentsen v. Taylor, Sons 



lOSComment, footnote 99 supra, at pp. 145-47. 

i06See, Arts. 20-32 (breach with respect to date or place of delivery), and Arts. 

33-49 (breach with respect to quantity, description, quality or fitness of goods). 
i07Arts. 26, 30, 43, 45. 
l08As to which see, supra, ch. 16, sec. 1. 
i09Arts. 27(2), 31(2), 44(2). 
llOGraveson, Cohn, & Graveson, The Uniform Laws on International Sales Act 

1967 (1968), pp. 55-57. 



457 

& Co}^^ The sponsors of the Uniform Law appear to have attempted to 
integrate the test to determine the quahty of a breach with the test to 
determine the measure of damages recoverable for breach of the seller's 
obligations.^ ^2 Under the Uniform Law the test of reasonable foreseeability 
applies to each case.^^^ 

A number of other features of the Uniform Law deserve to be 
noted as illustrating possible solutions in relation to other aspects of the 
buyer's right to reject, discussed in earlier parts of this chapter. Article 
37 entitles the seller to cure an imperfect tender, if he has handed over 
the goods before the date fixed for delivery, provided that he can do so 
without causing the buyer "unreasonable inconvenience or unreasonable 
expense". Article 37, therefore, substantially corresponds to UCC 2-508 
(1), but this Article is subject to the qualifications just noted. Article 44 
is the counterpart to UCC 2-508(2) and provides that: 

44. L In cases not provided for in Article 43, the seller shall 
retain, after the date fixed for the delivery of the goods, the right to 
deliver any missing part or quantity of the goods or to deliver other 
goods which are in conformity with the contract or to remedy any 
defect in the goods handed over, provided that the exercise of this 
right does not cause the buyer either unreasonable inconvenience or 
unreasonable expense. 

2. The buyer may however fix an additional period of time 
of reasonable length for the further delivery or for the remedying 
of the defect. If at the expiration of the additional period the seller 
has not delivered the goods or remedied the defect, the buyer may 
choose between requiring the performance of the contract or reducing 
the price in accordance with Article 46, or provided that he does so 
promptly, declare the contract avoided. 

Article 43 deals with the buyer's right to reject for fundamental breaches. 
It will be seen, therefore, that the right to cure after the contractual date 
for delivery is, by Article 44(1), restricted to lesser breaches. Article 44 
also differs from the Code provisions in this respect: the seller's right to 
cure is not contingent on his having reasonable grounds for belief that 
the tender will be acceptable. It is, rather, limited by the same restrictions 
of inconvenience and unreasonable expense as apply in Article 37. 

The buyer's right of examination, and the right to reject for a latent 



111 [1893] 2 Q.B. 274 (C.A.), at p. 281: "In order to decide this question of 
construction, one of the first things you would look to is, to what extent the 
accuracy of the statement — the truth of what is promised — would be likely to 
affect the substance and foundation of the adventure which the contract is 
intended to carry out. There, again, it might be necessary to have recourse to 
the jury. In the case of charterparty it may well be that such a test could only 
be applied after getting the jury to say what the effect of a breach of such a 
condition would be on the substance and foundation of the adventure; not the 
effect of the breach which has in fact taken place, but the effect likely to be 
produced on the foundation of the adventure by any such breach of that portion 
of the contract." 

ii2The damage rules appear in Arts. 82-89. 

ii3Arts. 10, 82, 86. 



458 

defect, are dealt with in Articles 38 and 39. The problems of acceptance 
encountered in the common law are neatly avoided by conferring upon 
the buyer a right of examination that is not confused with questions of 
title and that does not turn on whether the buyer has done an act incon- 
sistent with the ownership of the seller. The buyer is under a duty to ex- 
amine the goods, or to cause them to be examined, promptly.^ '"^ The 
examination, however, may take place, in the case of the carriage of the 
goods, at the place of destination or, if the seller knew or ought to have 
known that the goods might be redispatched without trans-shipment, at 
the new destination. ^^^ This provision resolves, in simple fashion, the issue 
that so much troubled the English Court of Appeal in Hardy & Co. v. 
Hillerns & Fowler. ^^^ So far as the right to reject for latent defects is 
concerned, the draftsmen did not see this issue as posing any special 
problems. Should there be a latent defect, the buyer apparently retains 
his right to declare the contract avoided, provided that he gives the seller 
prompt notice of the defect after its discovery. ^^"^ Since the Uniform Law 
has no concept of acceptance, it also has no need for a doctrine of revo- 
cation of acceptance. Accordingly, the distinction drawn by UCC 2-601 
and UCC 2-608 between the initial right of the buyer to reject non-con- 
forming goods and his right to revoke acceptance forms no part of the 
Uniform Law. It follows, therefore, that under the Uniform Law the 
quality of the breach required to justify avoidance on account of a latent 
defect is no higher than that required in other cases; but this departure 
from UCC 2-608 is more apparent than real. The reason is that under the 
Uniform Law the right of avoidance only arises where there is a funda- 
mental breach, or where the seller has failed to cure when called upon 
to do so by the buyer. 

(ii) Draft UNCITRAL Convention 

The provisions on buyer's remedies in the 1977 draft Convention of 
the United Nations Commission on International Trade Law differ both in 
organization and in many points of detail from the Uniform Law. The 
basic concepts, however, appear to be the same. The definition of funda- 
mental breach in the draft Convention has been substantially modified^^^ 
from the Uniform Law; but the concept of fundamental breach has been 
retained^ ^9 as the touchstone in determining when the buyer may declare 
the contract avoided. Again, as in the Uniform Law, the buyer may fix an 
additional period of time of reasonable length^^^ for "performance" by the 
seller of his obligations, and may avoid the contract, inter alia, if the seller 
has not "delivered" the goods within this period of time.^^^ The seller, 



li4Art. 38(1). 

uSArts. 38(2), 38(3). 

116[1923] 2 K.B. 490 (C.A.). 

li7Art. 39(1). 

llSArt. 8. 

ll9Art. 31. 

l20Art. 29(1). 

121 Art. 31(l)(b). Note, however, the difference between Art. 29(1) and Art. 

31(1) (a). The former applies to "performance by the seller of his obligations"; 

the latter is restricted to failure by the seller to deliver the goods within the 

additional period of time fixed by the buyer. 



459 

too, retains a limited right to cure^^^ jf the buyer has not already avoided 
the contract and if, inter alia, the cure can be effected without such delay 
as will involve a fundamental breach. There would, therefore, appear to 
be important differences between the scope of the buyer's right to demand 
cure and the scope of the seller's right to offer cure. 

(d) CONCLUSIONS WITH RESPECT TO RIGHTS OF REJECTION AND CURE 

( i ) R igh t of R ejection 

From the foregoing recital it will be obvious that, under existing 
Ontario law, there are serious shortcomings with respect to the buyer's 
right to reject. It will also be clear that there are at least two important 
models on which a recasting of the applicable rules may be based. How- 
ever, before canvassing the alternative solutions and offering our own 
recommendations, it may be useful to inquire what interests the law seeks 
to protect in conferring the right to reject and what prejudice may be 
caused to the seller if this right is granted too freely. 

The following interests have been identified^^^ as arguing in favour 
of the right to reject. First, in the case of cash sales, the denial of a right 
of rejection may impose a twofold hardship on the buyer: he would be 
required to become an involuntary creditor of the seller; and, he might 
experience difficulty in recovering damages from a defaulting seller who 
may be a long distance away. Secondly, it may be difficult for the buyer 
to compute damages accurately, even assuming the seller is within the 
jurisdiction or that the buyer has a right of set-off or reduction with respect 
to the unpaid balance of the price. Thirdly, there is the hardship to the 
buyer of requiring him to dispose of goods bought for use and not for 
resale. Finally, there is the danger that sellers will not take their con- 
tractual obligations seriously if there is no right to reject and if they can 
only be liable in damages. 

A liberal right of rejection also poses difficulties from the seller's point 
of view that are at least as significant as, and perhaps more so than, those 
already identified as confronting the buyer. This is particularly true if the 
goods have been manufactured to the buyer's specification, if they have 
been shipped to a distant destination where there is no ready market for 
the goods or, if, in the case of commodities, there has been a substantial 
drop in price since the time of purchase. Even if the goods are of a 
standard type, the seller stands to suffer substantial distributive and 
allocative costs through being required to take back and dispose of goods 
that are no longer new;'^'^ and, if the defect is only of a minor character, 
the loss to him may greatly exceed the diminution in the value of the 
goods in the buyer's hands. Not surprisingly, therefore, commercial sale 



i22Art. 30(1). 

i23Honnold, "Buyer's Right of Rejection" (1949), 97 U. Pa. L. Rev. 457, at pp. 

466-72. Compare, Treitel, "Some Problems of Breach of Contract" (1967), 30 

Mod. L. Rev. 139, at pp. 149 et seq. 

l24See, Priest, footnote 87 supra, at pp. 963-68. 



460 

agreements '^5 frequently contain important restrictions on the buyer's right 
to reject, or even deny this right altogether. 

It will be obvious that the importance of these factors will vary 
greatly from case to case and that the picture will be further clouded by 
considerations such as the character of the buyer or seller, the nature of 
the goods, the terms of payment, and the time when the buyer seeks to 
exercise the right of rejection. It would be a Herculean task for a general 
sales act to be so sensitively calibrated that it could provide the right 
mixture of solutions to meet every possible contingency. An attempt to 
do so would involve the draftsmen in an excessive and self-defeating 
amount of detail. In our view, therefore, the search should be for a 
flexible formula, supported by ancillary rules designed to strike a fair 
balance in the great majority of cases. By "fair balance" we mean a 
balance that minimizes costs to both parties and seeks to save the bargain 
if this can be done on acceptable terms. 

This approach is clearly inconsistent with the adoption or retention 
of a rigid perfect tender rule, however it is expressed. It is sometimes said 
that a perfect tender rule leads to greater certainty and promotes greater 
respect for bargains. While this may be true for some transactions and 
for certain types of obligation, we are not aware of any empirical evidence 
that supports the general proposition. Even if greater certainty could be 
demonstrated, the price would be unacceptably high;^^^ and this is shown 
by the increasing aversion of courts to attempts by buyers to reject for 
minor breacheSj^^"^ and by the frequency with which standard form con- 
tracts restrict the right to reject. A more serious alternative would be an 
Article 2 type solution; that is, the retention of a perfect tender rule 
coupled with exceptions to the rule. We are not, however, attracted by this 
solution either. If American observers are correct in claiming that the 
exceptions have to all intents and purposes destroyed the rule, it seems 
better to recognize realities and not to confuse form with substance. 

Accordingly, we are led to the conclusion that the buyer's right to 
reject a non-conforming tender, in the absence of contrary agreement, 
should be confined to substantial breaches of the seller's obligations and 
we so recommend. ^^^ We consider the desirable definition of "substantial 
breach" in chapter 18 of this Report. We would emphasize, however, that 
our recommendation, which is supported by a similar recommendation in 

l25/„/ra, this ch., Table 1, p. 462. 

i26"We suggest that this is one of the areas of the law where it is impossible to 
escape questions of degree, and any appearance of exactness is an illusion": 
Law Reform Commission, New South Wales, Working Paper on the Sale of 
Goods (1975), para. 13.17, p. 220. 

i27Honnold, footnote 87 supra, at pp. 461-66. Professor Priest, footnote 87 supra^ 
at p. 995, found that in 62 decisions dealing with rejection announced between 
1954 and 1976 rejection was only affirmed in 17 cases, or 27% of the total 
number. Successful rejections were substantially higher in suits by consumer 
buyers (8 out of 18 suits, or 44%) than suits involving merchant buyers (9 out 
of 44 suits, or 20%). He also found (at p. 997), that the percentage of suits 
awarding revocation (55%) was substantially higher than the proportion of 
successful rejection claims (27%). UCC 2-608 only permits revocation where 
the non-conformity substantially impairs the value of the goods to the buyer. 

i28See, Draft Bill, s. 8.1. 



461 

the New South Wales Working Paper,^^^ is consistent with our earlier 
recommendation with respect to the abolition of the existing a priori 
classification of contractual obligations, ^^^ and, subject to what we say 
hereafter about questions of cure, will place breaches by buyer and seller 
on the same footing. We are further of the opinion, as discussed earlier 
in this chapter, that the buyer's right to reject should not turn, as is the 
case under section 12(3) of the existing Sale of Goods Act, on whether, 
in a non-severable contract, the buyer has accepted part of the goods, or 
on whether the contract involves a sale of specific or non-specific goods 
or title has passed to the buyer. Accordingly, we recommend that the buyer 
should not lose his right to reject where he has accepted part of a non- 
severable consignment of goods; rather the revised Act should provide 
that, where the non-conformity amounts to a substantial breach, the buyer 
may accept the whole, reject the whole, or accept one or more commercial 
units and reject the rest.^^^ In light of this recommendation, we recom- 
mend that section 29 of the existing Sale of Goods Act should be omitted 
from the revised Act. The Commission also recommends that the buyer 
should not lose his right to reject where the contract involves a sale of 
specific goods the title in which has passed to the buyer. Finally, a pro- 
vision equivalent to section 12(3) of the existing Act should be omitted 
from the revised Act, and we so recommend. 

(ii) Seller's Right to Cure and Buyer's Right to Demand Cure 

The adoption of a substantial breach test to determine the buyer's 
right to reject a non-conforming tender does not end our inquiry. Two 
related matters need to be considered: namely, whether the seller, even 
after the buyer has exercised a right of rejection, should have an oppor- 
tunity to cure the non-conformity; and, conversely, whether a buyer 
should be entitled to demand cure regardless of the gravity of the breach, 
and to reject the goods if the seller does not cure. While we are fully 
sensitive to the difficulties involved, we have reached the conclusion that 
both types of right should be recognized. 

(1) Seller's Right to Cure 

So far as the seller's right to cure is concerned, it has long been a 
common practice for contracts for the sale of durables and other types 
of goods to contain provisions entitling the seller to repair or replace 
defective goods and imposing corresponding restrictions on the buyer's 
right to reject. Table 1, which is based on an analysis of contract forms 
supplied to us by CM. A. respondents, illustrates the widespread use of 
such provisions among Ontario manufacturers. A right to cure would, 
therefore, merely recognize an existing practice. 



^^^Supra, footnote 126, para. 13.39(c), and Draft Bill, s. 54A(9) 
i30See, supra, ch. 6, sec. B. 
i3iSee, Draft Bill, s. 8.1. 



462 

TABLE P^^ 

VENDOR'S LIABILITY FOR DEFECTIVE GOODS AND 
RIGHT TO CURE: INDUSTRY CLAUSES 

Key to clauses: 10 — Liability limited to cost of goods. 

11 — Liability limited to cost of repair of goods. 

12 — Liability limited to replacement of goods. 

13 — Vendor will at his option repair or replace parts 

proven defective. 

Industries using these clauses: 



Food and Beverage 


10, 


13 




Rubber and Plastic 


10, 


13 




Leather 


10 






Knitting Mills 








Furniture and Fixtures 


10 






Paper 


10 






Printing, Publishing and 








Allied Industries 


10 






Primary Metal 


13 






Metal Fabricating 


10, 


11, 


12, 13 


Non-Electrical Machinery 


10, 


11, 


12, 13 


Electrical Products 


10, 


12, 


13 


Non-Metallic Mineral Products 








Petroleum and Coal Products 








Chemicals 


10 






Miscellaneous Manufacturing 


13 







Again, there are important precedents for conceding such a right, includ- 
ing UCC 2-508, the provisions in ULIS and the draft UNCITRAL Con- 
vention,^^^ and, in Canada,^34 ^j^^ f^j-^^ implements and agricultural mach- 
inery legislation of the Prairie provinces and Prince Edward Island. We 
appreciate that each of these precedents contains restrictions with respect 
to the types of breach, the types of goods, or other circumstances in which 
the right may be invoked. The adoption of a broad right to cure, on the 
other hand, is recommended in the New South Wales Working Paper.^^s 
The real question, it seems to us, is whether the statutory recognition of 
a general right to cure would militate unfairly against the buyer's interests 
and would add an element of uncertainty. We beheve that, with proper 



i32This table is based upon Perell's "Analysis of Contractual Terms and Warranty 
Documents based on Materials received from O.L.R.C.-C.M.A. Questionnaire 
Respondents", Research Paper No. 1.4. It should be emphasized that the 
analysis is based on forms voluntarily submitted to us and, since only a minority 
of the respondents supplied such documents, there is no claim that the analysis 
has any statistical validity. Nevertheless, we have reason to believe that the 
clauses are broadly representative of contractual practices in the industries 
concerned. 

1335'wp/fl, this ch., pp. 454-59. 

i34See, Ontario Law Reform Commission, Report on Consumer Warranties and 
Guarantees in the Sale of Goods (1972), ch. 7, pp. 96-99. 

^^^Supra, footnote 126, paras. 13.20 et seq.; and Draft Bill, ss. 54D and 54E. 



463 

safeguards, the right can be made to serve equitably the interests of both 
the buyer and the seller. Accordingly, subject to the recommendations 
made hereafter, we recommend that the revised Act should confer upon 
the seller a right to cure a non-conforming tender or delivery where the 
buyer has rightfully rejected or revoked his acceptance of the goods. ^^^ 
The safeguards we propose^^"^ are as follows: (i) that the seller must 
seasonably notify the buyer of his intention to cure the non-conformity, 
following the buyer's rejection; (ii) that the non-conformity can be cured 
without unreasonable prejudice, risk or inconvenience to the buyer; and 
(iii) that the type of cure offered by the seller is reasonable in the circum- 
stances. 

If the principle of a right to cure is conceded, then several conse- 
quential questions arise for decision. UCC 2-508, which is set out above, 
is the important provision of the Code that deals with the seller's right 
to cure an improper tender or delivery. In our discussion of these conse- 
quential issues, we make reference to this section. 

(aa) When Does the Right to Cure Arise? 

UCC 2-508(1) governs the right to cure a non-conforming tender 
or delivery that is made before the time for performance has expired. 
Section 2-508(2), on the other hand, confers a separate and more re- 
stricted right to cure when the contractual date for performance has ex- 
pired. We do not think that this is a viable distinction. UCC 2-508(1), 
basing itself on common law precedents, seems to assume that no preju- 
dice can be caused to the buyer by giving the seller an unqualified right 
to cure, provided that the conforming delivery is made within the con- 
tract time. As, however, the draft UNCITRAL Convention rightly per- 
ceives, ^^^ this assumption may not be correct, and we would collapse the 
distinction in UCC 2-508(1) and (2). Accordingly, we recommend that, 
subject to our recommendation made below in respect of a late tender 
or delivery amounting to a substantial breach, the right to cure should 
arise where the buyer rightfully rejects a non-conforming tender or de- 
livery, whether before or after the time for performance has expired. ^^^ 
The safeguards that we have proposed would apply to each case. In prac- 
tice, however, it may well be easier for the seller to discharge the onus 
imposed by the safeguards where the non-conforming delivery is made 
before, rather than at or after, the time for performance has expired; 
but this goes to proof and not to principle. We recommend^'*^ that the 
right to cure should also arise where, in accordance with a later recom- 
mendation, the buyer exercises a right to revoke his acceptance. The right 
to cure in such a case is particularly important because, at the time of 
revocation, the buyer may already have had the goods for a considerable 
period of time. 

We have concluded that the treatment accorded to the seller's right 



i36See, Draft Bill, s. 7.7(2). 

i37/6iVy. 

i38Art. 30(1). 

l39See, Draft Bill, s. 7.7(2) (a), 

i40See, Draft Bill, s. 7.7(2) (b), 



464 

to cure a late tender or delivery should be different from that accorded 
to other non-conformities. We recommend that, if the late tender or de- 
livery amounts to a substantial breach, then the seller, unlike the situation 
with other non-conformities, should not be allowed to cure.^"*^ It is our 
view that in the case of late tender or delivery amounting to a substantial 
breach, the need for certainty as to the position of the parties outweighs 
any other considerations and, therefore, that no right to cure ought to 
be available. 

Later in this chapter, we recommend that the buyer should have a 
right to demand cure and, where the seller fails to cure, that the buyer 
should be able to treat the seller's breach as amounting to a substantial 
breach and to reject the goods. In our view, where the seller has failed 
to cure in response to a demand by the buyer, and the buyer accordingly 
exercises his right to reject, the seller should not be permitted to cure, and 
we so recommend. ^"^2 

(bb) Nature of Non-Conformity 

It will be noted that UCC 2-508 does not restrict the type of 
non-conforming tender that may be the subject of cure. Subject to what 
we have said above concerning late tender or delivery, we believe this 
approach to be the correct one. In particular there is no justification, in 
our view, for restricting the right to cure to physical or mechanical defects. 
The operative test should be, not the nature of the non-conformity, but 
whether the non-conformity can be cured without unreasonable prejudice, 
risk or inconvenience to the buyer. Accordingly, we recommend that, 
subject to our recommendation concerning the effect of a late tender or 
delivery on the seller's right to cure, the revised Act should not restrict 
the type of non-conforming tender that may be the subject of cure. 

(cc) Nature of ''Cure" 

Given that the seller has a right to cure, there is the question of the 
nature or form that any adjustment or correction may take. As we have 
noted,i'^3 UCC 2-508 is vague on this point and it seems desirable that the 
permissible types of cure should be spelled out in some detail. In our view, 
they should be sufficiently flexible to match the broad range of non- 
conformities to which they will be applied. The New South Wales Draft 
BilP"^ contains an illustrative list, and we have adapted it to meet our 
own needs. Accordingly, we recommend that, for the purpose of the cure 
provisions, "cure" should mean:^"^^ 

(a) tender or delivery of any missing part or quantity of the goods; 

(b) tender or delivery of other goods or documents which are in 
conformity with the contract; 



i4iSee, Draft Bill, s. 7.7(2). 

l42See, Draft Bill, s. 7.7(3). 

l43See, supra, this ch., at p. 455. 

144S.54D(2). 

i45See, Draft Bill, s. 7.7(1). 



465 

(c) the remedying of any other defect, including a defect in title; or 

(d) a money allowance or other form of adjustment of the terms 
of the contract. ^"^6 

Although the list seems to err on the side of generosity, we would em- 
phasize that the seller will still be required to show that the proffered cure 
was reasonable in the circumstances. 

(dd) Status of Buyer's Obligations 

Since it is assumed that the buyer has rightfully rejected the tender 
or delivery, he should be entitled to suspend further performance of his 
obligations until the non-conformity has been cured. It is also implicit 
from our earlier recommendations'"^^ that the risk of loss will remain with 
the seller until he makes a conforming tender or otherwise cures his 
default. Likewise, in the absence of contrary agreement, the seller should 
remain liable for damages suffered by the buyer before cure. Accordingly, 
we recommend that, where the seller elects to cure a non-conformity, the 
buyer should be entitled to suspend performance of his obligations until 
the non-conformity has been cured. '"^ We further recommend that the 
seller's election to cure should not affect the buyer's right to recover dam- 
ages in respect of the non-conformity. '"^^ 

(2) Buyer's Right to Demand Cure 

Earlier in this chapter, we recommended that the buyer's right to 
reject non-conforming goods should be confined to substantial breaches 
of the seller's obligations. The question we now consider is whether the 
buyer should be entitled to demand cure regardless of the gravity of the 
breach — that is, whether or not he has an initial right to reject — and 
to reject the goods if the seller does not cure. 

It seems to us difficult to concede the seller's right to cure without 
conferring a corresponding right on the buyer to demand cure. An equally 
persuasive reason in favour of such a right is that it is often difficult for 
the buyer to determine whether he is confronted with a substantial or 
minor non-conformity. Assume that the contract of sale relates to a 
machine that the seller delivers to the buyer. Assume that the machine 
does not work. It may be impossible to determine the cause of the mal- 
function until the machine has been dismantled. Since the seller may be 
assumed to be more familiar with the goods than the buyer, it is not 
unreasonable to place on the seller the onus of correcting the defect or 
suffering the consequences. Accordingly, a majority of the Commission'^^ 



I'^^The Honourable J. C. McRuer would not allow cure in the form of a money 

allowance. 
^^"^ Supra, ch. 11, sec. 2(d). 
i48See, Draft Bill, s. 7.7(7). 

isojwo of the Commissioners, the Honourable G. A. Gale and the Honourable 
J. C. McRuer dissent from this recommendation. In the opinion of Mr. Gale and 
Mr. McRuer, the proposed provision would be unworkable. They would leave 
the question of the buyer's right to demand cure to agreement between the 
parties. 



466 

recommends that, whether or not the non-conformity is such as to entitle 
the buyer to reject the tender or dehvery, the buyer should be able to 
require the non-conformity to be cured within a reasonable time. If the 
seller fails to cure a non-conformity in response to the buyer's demand, 
the buyer should be entitled to reject the tender or delivery and to exer- 
cise the same remedies as if the breach had amounted to a substantial 
breach of the seller's obligations. ^^^ 

Once again it is noteworthy that written agreements and express 
warranties entitling or obliging the seller to repair or replace defective 
goods do not usually distinguish between major and minor defects. How- 
ever, as in the case of the seller's right to cure, we recognize that an un- 
fettered right to demand cure could lend itself to abuse. We, therefore, 
recommend that this right be subject to the same safeguards^ ^^ as recom- 
mended in respect of the seller's right to cure. We further recommend 
that the same definition of cure should apply to the buyer's right to 
demand cure as we have earlier recommended should apply to the seller's 
right to cure. If the buyer cannot or does not wish to assume the onus of 
meeting these requirements, then it is still open to him to exercise his 
right to reject if the breach is substantial, and thus shift to the seller the 
burden of offering cure. 

We have previously recommended that, if a buyer rightfully rejects 
the goods or revokes his acceptance and if the seller elects to cure the 
non-conformity, the buyer should be able to suspend performance of his 
obligations until the non-conformity has been cured. ^^^ Similarly, in the 
case of a substantial breach where the buyer demands cure, we think that 
the buyer should also be able to suspend performance of his obligations 
until the non-conformity has been cured, and we so recommend.^ ^"^ How- 
ever, where the breach is non-substantial but the buyer nevertheless de- 
mands cure, we have concluded that the buyer should still be responsible 
for performing his obligations while awaiting cure. We therefore recom- 
mend that, in such a case, the buyer should not be able to suspend per- 
formance of his obligations pending cure by the seller. 

Earlier in this chapter we discussed the desirability of conferring 
upon the buyer a right to demand cure where the seller fails to tender 
or deliver on the date or within the time provided in the contract. We have 
concluded that separate provisions should govern the buyer's right to 
demand cure in these circumstances. Accordingly, we recommend that, 
where the seller fails to tender or deliver the goods or document of title 
on the date or within the time provided in the contract, the buyer may 
fix a further reasonable period for the performance of either of such 
obligations. If the seller's failure is not cured by the seller within the 
further period, the buyer may treat the breach as a substantial breach. ^^^ 

We have painted what may appear to be a complex picture, but we 



i5iSee, Draft Bill, s. 7.7(5). 
i52See, Draft Bill, s. 7.7(4). 
i53See, Draft Bill, s. 7.7(7). 

i55See, Draft Bill, s. 7.7(8). 



467 

would expect our combined recommendations to encourage a continuation 
of the best current practices; that is, good faith negotiations between the 
parties to reach an acceptable settlement. 

2. Further Consideration of Examination, Acceptance and 
Revocation of Acceptance 

In view of their close interaction, any attempt to revise the rules of 
rejection would be incomplete without a concurrent review of the buyer's 
right to inspect the goods before acceptance, and the related issues of 
acceptance and revocation of acceptance. We have previously noted 
several important defects in the current Anglo-Canadian position and we 
proceed now to discuss what changes are desirable in the light of the 
provisions of the Code and other suitable precedents. 

(a) PLACE OF examination 

Section 33 of the Ontario Sale of Goods Act deals with the rights of 
the buyer as to examination. We think it useful to set out this section once 
more. The section reads as follows r^^^ 

33.(1) Where goods are delivered to the buyer that he has 
not previously examined, he shall be deemed not to have accepted 
them until he has had a reasonable opportunity of examining them for 
the purpose of ascertaining whether they are in conformity with the 
contract. 

(2) Unless otherwise agreed, when the seller tenders delivery 
of goods to the buyer, he shall, on request, afford the buyer a reason- 
able opportunity of examining the goods for the purpose of ascer- 
taining whether they are in conformity with the contract. 

As will be noted, section 33(2) assures the buyer a prehminary right of 
examination at the time of tender of the goods. Section 33(1) confers 
upon the buyer an alternative right of examination after actual delivery. 
The Act does not, however, stipulate in either case where the examination 
must take place. It was settled before 1893^^"^ that, prima facie, the place 
of delivery was also the appropriate place of examination, but important 
exceptions^ 5^ were recognized, both before and under the Sale of Goods 
Act, which turn on the express or implied agreement of the parties, 
the place of delivery, or the nature of the goods. In particular, the prima 
facie rule does not appear to apply to overseas shipments. ^^^ These ex- 
ceptions suggest that the absence of a clear statement in the Act has not 
caused any particular difficulty. This would be true had it not been for 
the decision of the English Court of Appeal in Hardy & Co. v. Hillerns 
& Fowler^^^ which inferentially cast doubt on some of the earlier cases 
involving the place, as well as the time, of examination. '^^ It seems desir- 
able, therefore, to clarify the position in the revised Act. 

i56See, supra, this ch., sec. C.l(a)(ii), for the previous discussion of this section. 

^^TPerkinsw. Bell, [1893] 1 Q.B. 193 (C.A.). 

l5SBenjamin's Sale of Goods (1974), para. 874. 

^^^Ibid., para. 1722 (f.o.b. contracts), para. 1601 (c.i.f. contracts). 

I60[i923] 2 K.B. 490 (C.A.). 

^^iBenjamin's Sale of Goods (1974), p. 898, n. 92. 



468 

UCC 2-513(1) provides as follows : 

2-513.(1) Unless otherwise agreed and subject to subsection (3), 
where goods are tendered or delivered or identified to the contract 
for sale, the buyer has a right before payment or acceptance to in- 
spect them at any reasonable place and time and in any reasonable 
manner. When the seller is required or authorized to send the goods 
to the buyer, the inspection may be after their arrival. 

It will be observed that the prima facie test of the place of delivery has 
been displaced in favour of "any reasonable place". The onus is clearly 
no longer on the buyer to show that his case comes within an exception 
to the common law rule. In a somewhat less favourable formulation 
Article 22 of the 1977 draft UNCITRAL Convention provides: 

22.(1) The buyer must examine the goods, or cause them to be 
examined, within as short a period as is practicable in the circum- 
stances. 

(2) If the contract involves carriage of the goods, examination 
may be deferred until after the goods have arrived at their destina- 
tion. 

(3) If the goods are redispatched by the buyer without a rea- 
sonable opportunity for examination by him and at the time of the 
conclusion of the contract the seller knew or ought to have known 
of the possibility of such redispatch, examination may be deferred 
until after the goods have arrived at the new destination. 

We prefer the Code's more flexible test, and accordingly recommend that 
the revised Act should adopt, in place of section 33 of the existing Sale of 
Goods Act, a provision similar to UCC 2-513(1) to the effect that, un- 
less otherwise agreed and except in the case of documentary sales and 
delivery on C.O.D. or similar terms, the buyer is entitled before payment 
or acceptance of the goods to inspect them at any reasonable place and 
time and in any reasonable manner.^^^ Wg recognize that the Code rule 
may appear unduly favourable to the buyer, and may not appear to take 
adequately into consideration the hardship to the seller of requiring him to 
assume responsibility for goods that are a long distance from the place of 
delivery at the time of the buyer's rejection, or that may be scattered 
among a series of sub-buyers. The problem is not a new one and merely 
reflects the difficulty of reconciling the conflicting interests of buyer and 
seller. It is not, however, correct to assume that the existing rule is really 
more favourable to the seller. Even under existing law, if it is too late for 
the buyer to reject, he should still be entitled^^^ to include in his damages 
the costs of taking back the goods from a sub-buyer and disposing of 
them elsewhere if a sub-sale was within the contemplation of the parties. 
In monetary terms, therefore, and excluding special factors, the ultimate 



i62See, Draft Bill, s. 7.12(1) and (2). There is an exception for documentary 
sales and delivery on C.O.D. or similar terms because payment before inspec- 
tion is consistent with these kinds of sales. UCC 2-513(3) contains a similar 
exception and, see, paragraph 5 of the Official Comment to UCC 2-513. 

i63See, Moiling <& Co. v. Dean & Sons Ltd. (1901), 18 T.L.R. 217 (D.C.). 



469 

result would not be very different than if the seller had to assume respon- 
sibility for the goods at the place of rejection. Finally, it should be noted 
that UCC 2-603 mitigates the hardship to the seller by requiring a mer- 
chant buyer to follow any reasonable instructions from the seller with 
respect to the goods, where the seller has no agent or place of business 
at the market of rejection. As will be indicated later, we support this 
provision. ^^"^ The seller, of course, also retains his contractual right to 
impose restrictions on the buyer's right to reject and he would continue 
to enjoy this right under the revised Act. 

(b) ACCEPTANCE OF GOODS 

The term acceptance appears in several sections of the Ontario Sale 
of Goods Act,i65 but is not defined. However, whatever its meaning, 
there is no ambiguity about the consequences of deemed acceptance of 
the goods by the buyer after delivery: he loses his right to reject. It is 
important, therefore, to determine when such acceptance takes place. 
Section 34, some aspects of which we have earlier discussed, provides 
as follows: 

34. The buyer shall be deemed to have accepted the goods when 
he intimates to the seller that he has accepted them, or when the 
goods have been delivered to him and he does any act in relation to 
them that is inconsistent with the ownership of the seller, or when, 
after the lapse of a reasonable time, he retains the goods without 
intimating to the seller that he has rejected them. 

It will be noted that this section establishes three rules governing the cir- 
cumstances in which the buyer will be deemed to have accepted the goods. 
The first rule (intimation of acceptance) is unobjectionable, but difficul- 
ties arise because of the second and third rules. For the moment we con- 
fine our attention to the second rule, the so called "inconsistent act" rule. 
This rule presents three major problems. First, as we have noted pre- 
viously, it conflicts with the buyer's right under section 33 to a reasonable 
opportunity to examine the goods. Secondly, it is difficult in many in- 
stances to see how the buyer's act can be inconsistent with the seller's 
ownership, since title will usually have passed to the buyer when he 
receives the goods. The terminology has caused the courts much diffi- 
culty.^^ Arguably, this rule should be confined to situations in which 
title has not yet passed to the buyer, although it has not been so restricted 
by the courts. Finally, it is not obvious why title considerations should 
play any role in determining the buyer's right to reject. It cannot be said 
that the seller is prejudiced, because that determination cannot be made 
until the buyer actually purports to reject. Nor can it be said that any act 



164/n/rfl, this ch., sec. C.3(a). 

i65For example, s. 5(1), s. 19, Rule 4, ss. 26, 33, 34, 35, and 48(1). See, Ben- 
jamin's Sale of Goods (1974), para. 672; Williston on Sales (Rev. ed., 1948), 
sec. 482, 

l66See, for example. Hardy & Co. v. Hillerns & Fowler, [1923] 2 K.B. 490 (C.A.), 
per Bankes, L.J., at p. 496 and Atkin, L.J., at pp. 498-99; and compare, Kwei 
Tek Chao v. British Traders & Shippers, [1954] 2 Q.B. 459, per Devlin, J., at 
pp. 487-88. 



470 

of ownership by the buyer amounts to a conscious waiver of his rejection 
rights, because that would clearly be fictitious. 

UCC 2-606 is the provision of the Code that corresponds to section 

34 of the Ontario Sale of Goods Act. Section 2-606 provides as follows: 

2-606.(1) Acceptance of goods occurs when the buyer 

(a) after a reasonable opportunity to inspect the goods signifies 
to the seller that the goods are conforming or that he will 
take or retain them in spite of their non-conformity; or 

(b) fails to make an effective rejection (sub-section (1) of 
Section 2-602), but such acceptance does not occur until 
the buyer has had a reasonable opportunity to inspect them; 
or 

(c) does any act inconsistent with the seller's ownership; but if 
such act is wrongful as against the seller it is an acceptance 
only if ratified by him. 

(2) Acceptance of a part of any commercial unit is acceptance 
of that entire unit. 

Paradoxically, UCC 2-606, in listing the circumstances in which accep- 
tance occurs for the purposes of Article 2, has resurrected some of the 
same difficulties that occur under The Sale of Goods Act, since subsection 
1(c) retains, in substantially similar language, the inconsistent act rule. 
Not surprisingly, the subsection is also causing the American courts much 
difficulty,^^"^ particularly since it contains no rule to determine priority 
between the buyer's right to a "reasonable opportunity" to inspect the 
goods and the inconsistent act rule, as does the amended version of section 

35 of the U.K. Sale of Goods Act.'^^^ The Code's retention of this feature 
of pre-Code law is surprising for two reasons: first, because it is at vari- 
ance with Article 2's philosophy that title rules are irrelevant in determin- 
ing the rights and duties of the parties inter se; and, secondly, because the 
inconsistent act rule does not appear in UCC 2-608 governing the buyer's 
right to revoke his acceptance. 

Our view is, therefore, that neither the Code provisions nor section 
34 of the Ontario Sale of Goods Act are satisfactory in their present form. 
We recommend instead the adoption of the following provisions in the 
revised Act:^^^ 



l67White & Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), sec. 8-2, especially at pp. 251-53. 

i68Section 35, as amended by the words in square brackets, reads: 

The buyer is deemed to have accepted the goods when he intimates to the 
seller that he has accepted them, or [(except where section 34 of this Act 
otherwise provides)] when the goods have been delivered to him, and he 
does any act in relation to them which is inconsistent with the ownership of 
the seller, or when after the lapse of a reasonable time, he retains the goods 
without intimating to the seller that he has rejected them. 

i69See, Draft Bill, s. 8.6. 



471 

8.6.(1) The buyer shall be deemed to have accepted the goods, 

(a) where after a reasonable opportunity to inspect the goods 
he signifies to the seller that the goods are conforming or 
that he will take or retain them in spite of their non-con- 
formity; 

(b) where he fails to make an effective rejection after he has 
had a reasonable opportunity to inspect the goods; or 

(c) where the goods are no longer in substantially the condi- 
tion in which the buyer received them, but this clause does 
not apply to a change in the condition of the goods caused 
by their own defects or to casualty suffered by them while 
at the seller's risk. 

(2) Acceptance of a part of a commercial unit is acceptance of 
the entire unit. 

Subsections (l)(a) and (b) and subsection (2) are copied from UCC 2- 
606. Subsection (l)(c) is derived from UCC 2-608(2)i7o and replaces 
the "inconsistent act" provision of UCC 2-606(1 )(c). It will be observed 
that we have not followed the U.K. precedent in subordinating the incon- 
sistent act rule (contained in section 34 of the Ontario Act) to the buyer's 
right of examination (contained in section 33 of the Ontario Act). In our 
view, three reasons militate against this approach. First, the U.K. amend- 
ment raises difficult points of construction;^'^! secondly, the amendment, 
according to the interpretation of one commentator,!'^^ has not gone far 
enough to protect the buyer's reasonable interests. Finally, we do not see 
what useful purpose is served in retaining the inconsistent act rule. If the 
reasonable time for examination has not yet elapsed, ex hypothesi the 
buyer should not be precluded from rejecting the goods because of some 
alleged inconsistent act; that is, assuming the seller is not prejudiced by 
it and that it does not interfere with the buyer's ability to return the goods 
in substantially their original condition, when he exercises his right of re- 
jection. If, on the other hand, the reasonable time for examination has 
elapsed, the buyer loses his right to reject on this ground alone and there 
is no need to rely on any inconsistent act. 

Our proposed revised version of UCC 2-606 will, we hope, remove 
the difficulties of the inconsistent act rule in cases where the conduct of the 
buyer occurs before he discovers the non-conforming character of the 
goods and exercises his right of rejection. What, however, if the conduct of 
the buyer occurs subsequent to rejection, and before the seller resumes 
possession of the goods? It might be argued that such conduct amounts to 
an affirmation of the contract and nullifies the rejection, and some Ameri- 



170UCC 2-608(2) reads as follows: 

Revocation of acceptance must occur within a reasonable time after 
the buyer discovers or should have discovered the ground for it and before 
any substantial change in condition of the goods which is not caused by their 
own defects. It is not effective until the buyer notifies the seller of it. 

l7iAtiyah, The Sale of Goods (5th ed., 1975), pp. 290 et seq. 

^mbid. 



472 

can courts have so held.^'^^ Subsection (2) (a) of UCC 2-602 provides as 
follows : 

2-602.(2) Subject to the provisions of the two following sections 
on rejected goods (Sections 2-603 and 2-604), 

(a) after rejection any exercise of ownership by the buyer with 
respect to any commercial unit is wrongful as against the 
seller; 

In our view, this approach is too rigid. The buyer may have no inten- 
tion to affirm; he may have invested his savings in an essential item (for 
example, a mobile home or a car) and may not be able to buy a replace- 
ment until his money is return ed.^"^"* We believe that a court should be 
entitled to take such factors into consideration in determining the reason- 
ableness of his conduct. Accordingly, we recommend that the revised Act 
should adopt a provision that is similar to, but more flexible than, UCC 
2-602(2) (a), dealing with the effect, after rejection of the goods, of any 
exercise of ownership by the buyer. This provision should read:^"^^ 

after rejection, use of the goods or other acts of ownership by the 
buyer are prima facie wrongful as against the seller but do not nul- 
lify the rejection unless the seller has been materially prejudiced 
thereby. 

(C) REVOCATION OF ACCEPTANCE 

As we have previously noted, another difficulty about sections 33 
and 34 of the Ontario Sale of Goods Act is that they make no allowance 
for latent defects that come to light after a reasonable period of examination 
has elapsed. This issue raises a difficult policy question, because the longer 
the period of rejection, however it is designated, the greater the potential 
hardship to the seller in being required to take back the goods. ^"^^ On the 
other hand, the hardship to the buyer in maintaining the existing rule is no 
less acute. The reason is that the rule appears to restrict the buyer's reme- 
dies in just those circumstances when a choice of remedies is important. 
Latent defects are often substantial defects. 

A possible solution would be to vest in the court^'''^ the power to 
determine the most efficient remedy in any particular case. This solution 
would, however, generate a new set of costs, and would compel the parties 
to litigate any differences that they may have. Such a solution, therefore, 
can hardly be regarded as a generally suitable approach. Our own view is 



I73white & Summers, footnote 167 supra, p. 252, especially nn. 16-17. 

l74See, Jorgensen v. Pressnall (1976), 545 P. 2d 1382 (Ore. Sup. Ct.); Davis v. 

Colonial Mobile Homes (1975), 220 S.E. 2d 802 (N.C. Ct. App.); Jones v. 

Abriani (1976), 350 N.E. 2d 635 (Ind. Ct. App.). In all these cases use of 

the goods after revocation was held justifiable or unavoidable. 
i75See, Draft Bill, s. 8.2(2) (a). 
i76Hence Williston, footnote 42 supra, sec. 608, p. 344, oversimplifies the issue 

when he claims that the "remedy of rescission, if allowed at all, is allowed on 

broad principles of justice". 
l77As is true of the U.K. Misrepresentation Act 1967, c. 7, s. 2(2), in actions to 

rescind for misrepresentation. 



473 

that, on balance, the greater equities favour the buyer's position. UCC 
2-608 contains the provisions of the Code deaUng with the buyer's right 
to revoke his acceptance in whole or in part. Subject to the comments we 
make hereafter, we recommend^"^^ that a provision comparable to UCC 
2-608 should be incorporated in the revised Act.^'^^ Section 2-608 reads 
as follows: 

2-608.(1) The buyer may revoke his acceptance of a lot or com- 
mercial unit whose non-conformity substantially impairs its value to 
him if he has accepted it 

(a) on the reasonable assumption that its non-conformity 
would be cured and it has not been seasonably cured; or 

(b) without discovery of such non-conformity if his acceptance 
was reasonably induced either by the difficulty of discovery 
before acceptance or by the seller's assurances. 

(2) Revocation of acceptance must occur within a reasonable 
time after the buyer discovers or should have discovered the ground 
for it and before any substantial change in condition of the goods 
which is not caused by their own defects. It is not effective until the 
buyer notifies the seller of it. 

(3) A buyer who so revokes has the same rights and duties with 
regard to the goods involved as if he had rejected them. 

It will be observed that the section imposes a minimum of four conditions 
on the exercise of the remedy. The first condition is that the non-conform- 
ity must be substantial in character or, to be precise, must substantially 
impair the value of the goods to the buyer. This test is, of course, consis- 
tent with the general requirement of substantial breach that we have earlier 
recommended should be adopted for any right to reject, and calls for no 
further comment. A difficulty arises, however, because the section appears 
to measure the substantiality in subjective terms: "substantially impairs its 
value to him'\ This feature has rightly been criticized^^^ and we recom- 
mend that the revised Act should not contain the words "substantially 
impairs its value to him", but should provide that the buyer may revoke 
his acceptance of a lot or commercial unit whose non-conformity "amounts 
to a substantial breach". ^^^ 

The second condition requires the buyer to explain why revocation 
should be granted, and he may do so in one of three ways. The first way, 



I780ne of the members of the Commission, the Honourable J. C. McRuer, has 
reservations concerning the advisability of adopting a provision comparable to 
UCC 2-608. 

l79See, Draft Bill, s. 8.8. 

isowhite & Summers, footnote 167 supra, p. 260; and see, also, Schumaker v. 
Ivers (1976), 238 N.W. 2d 284 (Sup. Ct. S.D.), at p. 287. Professor Priest 
notes, footnote 87 supra, at p. 994, that the subjective standard formed the basis 
of an award in only 2 out of 38 decisions involving the materiality of the defect. 

iSiSee, Draft Bill, s. 8.8(1). 



474 

provided in UCC 2-608(1) (a), has many familiar Canadian precedents^^^ 
and involves a defect discovered by the buyer before acceptance, which the 
seller promises to cure but never does. In such circumstances it may be 
said that the buyer never really lost his right to reject; it was merely sus- 
pended pending the outcome of the seller's undertaking. The difficulty of 
discovering the defect before acceptance, which is dealt with in UCC 2- 
608(1) (b), constitutes the second way. It is this provision that intro- 
duces the really novel element from the point of view of Anglo-Canadian 
law. The third way in which a buyer may explain why revocation should 
be granted is also dealt with in UCC 2-608(l)(b), and relates to the 
"seller's assurances". This ground is more nebulous and, according to 
Official Comment 3, appears to involve inaccurate representations by the 
seller that the goods are conforming and, presumably, includes the familiar 
reassuring language of a seller that a defect is "nothing to worry about". 

The third condition that must be satisfied is that the buyer must re- 
voke his acceptance within a reasonable time after he discovers or should 
have discovered the non-conformity. This condition is as uncontentious as 
the two already discussed. The fourth condition is much more challenging. 
It is that revocation must occur "before any substantial change in condi- 
tion of the goods which is not caused by their own defects". This import- 
ant condition appears to have attracted remarkably little attention in the 
jurisprudence on UCC 2-608.^^^ It seems clear, however, that mere use 
of the goods will not be a bar to the right of revocation; indeed, it could 
hardly be otherwise, since the right to revoke would then be of little value 
in the case of goods bought for use. Our own case law on rescission in 
equity for misrepresentation might provide some useful analogies. However 
this may be, it would be unwise, in our view, to attempt to define the mean- 
ing of "substantial change". So much will depend on a variety of factors, 
including the facts of the particular case, the type of goods, the conduct 
of the parties, and the time when the buyer seeks to revoke. UCC 2-608 
does not expressly entitle the seller to a set-off or counterclaim in respect 
of the value of the buyer's use before revocation and, presumably, this is 
to be determined on general restitutionary principles. We return to this 
question in a later section of this chapter. ^^"^ 

Two further aspects of UCC 2-608 deserve mention. The first aspect 
is the absence of any explicit statement of the seller's right to cure. This 
omission would be rectified by the adoption of our earlier recommenda- 
tion, that the seller should have a right to cure where the buyer revokes 
his acceptance of the goods. ^^^ The right to cure is of particular importance 



l82For example, Lightburn v. Belmont Sales Ltd. (1969), 6 D.L.R. (3d) 692 
(B.C.S.C.); Rafuse Motors Co. v. Mardon Const. Ltd. (1963), 41 D.L.R. (2d) 
340 (N.S.C.A.); Cain v. Bird Chevrolet-Oldsmobile Ltd. (1976), 12 O.K. (2d) 
532 (H.CJ.). 

l83The only case apparently cited in Duesenberg and King, Sales and Bulk Trans- 
fers Under the Uniform Commercial Code, Bender's Uniform Commercial 
Code Service, Vol. 3(A), (1978 Supp, to p. 14-20), is U.S. v. Crawford (1971), 
8 U.C.C. Rep. 1210 (5th Cir.). White & Summers, footnote 167 supra, p. 255, 
mention the requirement, but do not pursue it. 

iS4jnfra, sec. E. 

i85See, Draft Bill, s. 7.7(2) (b). 



475 

when the buyer has had the goods for a substantial time, and it represents 
a desirable trade-off for the newly conferred right in the buyer's favour. 
The second aspect of UCC 2-608 raises a more difficult question. Since 
we have recommended the adoption of a substantial breach test to deter- 
mine the buyer's right to reject, the right to revoke may appear redundant. 
The two rights, it may be thought, could be collapsed into a single right to 
reject, a right that would be exercisable after the buyer discovers or should 
have discovered the non-conformity, and that would be subject to the 
various safeguards recited in UCC 2-608. We have considered this pos- 
sibility but, regretfully, have had to abandon it because of the important 
role of acceptance in determining the seller's entitlement to the price. Even 
if there were an integrated right to reject, it would still be necessary to 
establish rules to indicate the time of the seller's right to payment. The end 
result, therefore, would be the same as it is at present under the Code, 
unless the Code's price provisions were abandoned, which is a step that 
we do not recommend. 

3. Some Consequential Problems Following the Exercise of 
Rejection Rights; and Buyer's Duty to Give Notice of 
Breach After Acceptance 

We now turn to consider some consequential problems that arise once 
the buyer has exercised his right of rejection. We consider first the buyer's 
powers and obligations in respect of goods that he has rightfully rejected. 
We then discuss the buyer's duty to state the grounds of his rejection. We 
contrast the position of the buyer with his duty, after he has accepted the 
goods, to give notice of breach or notice of suit by a third party. There- 
after, we comment on the lien rights that the buyer has in respect of 
goods that he rightfully rejects. Finally, we express our opinion as to the 
extent to which the Code provisions should apply to wrongfully rejected 
goods. 

(a) buyer's powers and obligations with respect to goods 

The Sale of Goods Act, like the common law it replaced, is parsi- 
monious in spelling out the buyer's rights and obligations with respect to 
goods in his possession after they have been rightfully rejected by the 
buyer. Section 35 of the Act deals with the effect on the buyer of his refusal 
to accept goods. This section provides as follows: 

35. Unless otherwise agreed, where goods are delivered to the 
buyer and he refuses to accept them, having the right so to do, he is 
not bound to return them to the seller, but it is sufficient if he inti- 
mates to the seller that he refuses to accept them. 

This provision is more noteworthy for its omissions than for what it says. 
Section 35 fails to provide answers to important questions. It may be 
asked whether the buyer, if he has no obligation to do so, is at liberty to 
return or store the goods at the seller's expense, and whether he can act 
as agent of necessity and sell the goods if they are perishable in nature or 
subject to rapid price fluctuations. Further, is the buyer under an obliga- 
tion to follow the seller's reasonable instructions with respect to the disposi- 



476 

tion of the goods? These are some of the questions that are left unanswered. 
Other consequential issues that arise will be considered hereafter. 

The Code is substantially more forthcoming in providing answers to 
many of these questions. The Code's treatment begins with section 2-602 
(2)(b) which obliges the buyer, after rejection, to hold the goods with 
reasonable care at the seller's disposition for a time sufficient to permit 
the seller to remove the goods. This substantially codifies both the com- 
mon law position^^^ and the ruie adopted in section 69(l)(d) of the Uni- 
form Sales Act. We recommend that a provision equivalent to UCC 2-602 
(2) (b) should be incorporated in the revised Act.^^*^ 

The important departures from the existing Anglo-Canadian position 
commence in UCC 2-603. This section, which deals with the position 
where goods have been rightfully rejected, provides as follows: 

2-603.(1) Subject to any security interest in the buyer (subsection 
(3) of Section 2-711), when the seller has no agent or place of busi- 
ness at the market of rejection a merchant buyer is under a duty after 
rejection of goods in his possession or control to follow any reason- 
able instructions received from the seller with respect to the goods 
and in the absence of such instructions to make reasonable efforts to 
sell them for the seller's account if they are perishable or threaten to 
decline in value speedily. Instructions are not reasonable if on demand 
indemnity for expenses is not forthcoming. 

(2) When the buyer sells goods under subsection (1), he is 
entitled to reimbursement from the seller or out of the proceeds for 
reasonable expenses of caring for and selling them, and if the ex- 
penses include no selling commission then to such commission as is 
usual in the trade or if there is none to a reasonable sum not exceed- 
ing ten per cent on the gross proceeds. 

(3) In complying with this section the buyer is held only to good 
faith and good faith conduct hereunder is neither acceptance nor 
conversion nor the basis of an action for damages. 

It will be noted that section 2-603 only applies to a merchant buyer and 
obliges him to follow any reasonable instructions from the seller, where 
the seller has no agent or office at the place of rejection and, in the absence 
of such instructions, to make reasonable efforts to sell the goods for the 
seller's account, if they are perishable or threaten to decline rapidly in 
value. 1^^ Predictably, if the buyer sells the goods he is entitled to recover 
his storage and selling expenses, and a sales commission corresponding to 
what is usual in the trade or, if there is no usual commission, to a reason- 



l86Williston, footnote 42 supra, sec. 497. 

i87See, Draft Bill, s. 8.2(2) (b). 

l88williston, footnote 42 supra, sec. 498; NYLRC Study, ch. 5, footnote 52, supra, 

pp. (517)-(518): "Under present law, the perishable nature of goods may give a 

wronged party a privilege of immediate resale which otherwise might not arise. 

However, the existence of a duty to dispose of defective rejected goods for seller 

is doubtful." 



477 

able commission not exceeding ten percent. ^^^ With UCC 2-603 should 
be read UCC 2-604. This latter section confers upon a buyer options as to 
salvage of rightfully rejected goods. UCC 2-604 provides as follows: 

2-604. Subject to the provisions of the immediately preceding sec- 
tion on perishables if the seller gives no instructions within a reason- 
able time after notification of rejection the buyer may store the re- 
jected goods for the seller's account or reship them to him or resell 
them for the seller's account with reimbursement as provided in the 
preceding section. Such action is not acceptance or conversion. 

This section clarifies the uncertain common law^^ by entitling the buyer, 
whether or not he is a merchant, to store the goods, reship them to the 
seller or resell them, all at the seller's expense, even though the buyer is 
under no obligation to take such measures under UCC 2-603. Both these 
sections strike us as containing sensible and pragmatic rules. Accordingly, 
we recommend that the revised Act should contain provisions comparable 
to UCC 2-603 and UCC 2-604.i9i 

Difficulties may, however, arise where the parties are not agreed as 
to the buyer's right to reject. In this situation either party may be afraid 
to act for fear of compromising his position. It will be noted that UCC 
2-603(3) provides that the buyer is held only to good faith, and that good 
faith conduct under the provisions of the section "is neither acceptance 
nor conversion nor the basis of an action for damages." Under our recom- 
mended version of UCC 2-603(3), the buyer is placed under a duty to act 
in good faith and with reasonable care.^^^ Though the merit of this provi- 
sion seems readily apparent, it would not, by itself, provide a solution to 
the difficulty. Accordingly, in order to avoid such an impasse, we recom- 
mend that the revised Act should contain, in addition to provisions com- 
parable to UCC 2-603(3) requiring that the buyer act in good faith and 
with reasonable care, a provision to the effect that, where the parties do not 
agree as to the buyer's right to reject the goods, any instructions given to, 
or action taken by, the buyer pursuant to the provision in the revised Act 
comparable to UCC 2-603(1) do not affect any other rights of the 
parties. ^93 

(b) DUTY TO STATE GROUNDS OF REJECTION AND COMPARISON 
WITH buyer's duties TO GIVE NOTICE OF BREACH 
OR SUIT BY THIRD PARTY 

We now discuss the buyer's duty to state the grounds of his rejection, 
and compare it with his duties after he has accepted the goods to give 
notice of breach or notice of suit by a third party. 



189UCC 2-603(2). 

i^OCompare, Williston, footnote 42 supra, sees. 496-97 with Benjamin's Sale of 

Goods (1974), para. 875. 
l9iSee, Draft Bill, ss. 8.3 and 8.4. 
l92See, Draft Bill, ss. 8.3(5) and 8.3(6). 
i93See, Draft Bill, s. 8.3(4). 



478 

(i) Duty To State Grounds of Rejection 

UCC 2-605 focuses upon a problem that attracted considerable 
judicial attention in the period preceding the adoption of the Uniform 
Commercial Code, but had not been dealt with in the Uniform Sales Act. 
Two questions arose: first, to what extent was a buyer obliged to give 
reasons for his refusal to accept goods; and, secondly, if the buyer had 
given reasons, could he add to the list at a later date? The Anglo- 
Canadian case law^^"^ apparently answers both questions in the buyer's 
favour. American judicial opinion was divided, ^^^ but at least agreed that 
the buyer would be estopped from raising unstated objections if his silence 
had prejudiced the seller's position. UCC 2-605(1) proceeds from the 
same premise and also confers affirmative rights of disclosure in favour 
of the seller. Subsection (1) provides as follows: 

2-605.(1) The buyer's failure to state in connection with rejection 
a particular defect which is ascertainable by reasonable inspection 
precludes him from relying on the unstated defect to justify rejection 
or to establish breach 

(a) where the seller could have cured it if stated seasonably; or 

(b) between merchants when the seller has after rejection made 
a request in writing for a full and final written statement of 
all defects on which the buyer proposes to rely. 

Subsection (2) adopts a more stringent rule and provides as follows: 

(2) Payment against documents made without reservation of rights 
precludes recovery of the payment for defects apparent on the face 
of the documents. 

Subsection (2) is supported by the recent decision of the English Court 
of Appeal in Panchaud Freres S.A. v. Etab. General Grain Co}^^ and we 
also support the subsection. Accordingly, we recommend that the revised 
Act should contain a provision comparable to UCC 2-605(2). We also 
recommend the adoption in the revised Act of a provision comparable to 
subsection (l)(a).i^'^ The justification for clause (b) of subsection (1) 
is less obvious and we do not recommend its adoption. It has been con- 
jectured^^^ that UCC 2-605(1) (b) may be a novel type of pre-trial dis- 
covery device but, if this is so, the objection may be made that, whereas 
UCC 2-605(l)(b) refers to a "full and final written statement of all de- 
fects on which the buyer proposes to rely", pleadings can usually be 



194" [It] is clear . . . that [parties] are not, by their rejection of the tender on an 
insufficient ground, precluded from supporting the rejection on other and valid 
grounds": McCardie, J., in Manbre Saccharine Co. v. Corn Products Co., 
[1919] 1 K.B. 198, at p. 204, quoted in Williston, footnote 42 supra, sec. 
494b, p. 79. 

l95Williston, footnote 42 supra, sees. 494a-95; Restatement of the Law of Contracts 
(1932), sec. 304; NYLRC Study, ch. 5, footnote 52, supra, pp. (520) et seq. 

196[1970] 1 Lloyd's Rep. 53 (C.A.). 

i97See, Draft Bill, s. 8.5. 

i98This is the conjecture of Professor Honnold. See, NYLRC Study, ch. 5, foot- 
note 52, supra, pp. (522)-(523). 



479 

amended. A further difficulty about clause (b) is that it does not require 
the seller to show that he has been prejudicially affected by the buyer's 
failure to particularize. Again, since UCC 2-605(1 )(b) only applies to 
defects discoverable by inspection of goods, it would not preclude a buyer 
from subsequently raising other defences; for example, that there was no 
binding contract because of conflicting terms in the parties' writings. The 
reported cases suggest that this type of defence is much more likely to arise 
in practice than a defence based on uncommunicated defects in the goods 
themselves. 

(ii) Comparison With Buyer's Duties To Give Notice of 
Breach After Acceptance, or to Give Notice of Suit By 
Third Party 

The buyer's duty to particularize his grounds of rejection under UCC 
2-605 should be compared with his duties under UCC 2-607. Under UCC 
2-607(3) a buyer has a duty to give notice, after the goods have been 
accepted, of any alleged breach of the seller's obligations, and has the 
additional duty to give notice of any action brought against the buyer for 
infringement of patent rights and the like. UCC 2-607(3) provides as 
follows: 

2-607.(3) Where a tender has been accepted 

(a) the buyer must within a reasonable time after he discovers 
or should have discovered any breach notify the seller of 
breach or be barred from any remedy; and 

(b) if the claim is one for infringement or the like (subsection 
(3) of Section 2-312) and the buyer is sued as a result 
of such a breach he must so notify the seller within a rea- 
sonable time after he receives notice of the litigation or be 
barred from any remedy over for liability established by the 
litigation. 

Clause (a) continues the policy embodied in section 49 of the Uniform 
Sales Act', clause (b) is new and was added in 1955, apparently at the 
request of the New York Patent Law Association. ^^^ Clause (a) is of 
particular importance and requires further consideration. 

The provision has a curious history. The common law imposes no 
obligation on a buyer to give notice to the seller of a breach within any 
particular time after it first comes to his attention. Of course, the buyer 
still has to commence his action within the period provided by the legisla- 
tion relating to the limitation of actions ;2^ but that is a different matter. 
The notice requirement was first introduced in the United States by section 
49 of the Uniform Sales Act. Williston^^^ ascribes its introduction to the 
fact that, before the Act, the states were strongly divided with respect to 



199/6/^., pp. (529)-(530), (709)-(713). 

200Normally six years in the Canadian common law jurisdictions. See, The Limita- 
tions Act, R.S.O. 1970, c. 246, s. 45(l)(g). 
20iWilliston, footnote 42 supra, sec. 484a, pp. 37-38. 



480 

the effect of the buyer's acceptance on his right to sue for breach of con- 
tract. Some courts held that acceptance of title necessarily involved a re- 
lease of the seller's liability for certain of his contractual obligations; others 
denied this effect, unless there was an intent to surrender the seller's ob- 
ligations. According to Williston, section 49 was designed to reUeve this 
uncertainty. Its purpose was, on the one hand, to prevent the hardship 
to the buyer of holding that acceptance involves surrender of his rights 
and, on the other hand, to avoid the hardship to the seller "of allowing a 
buyer at any time within the period of the Statute of Limitations to assert 
that the goods were defective, though no objection was made when they 
were received". ^^^ "With this in mind", adds Williston, "the positive re- 
quirement of prompt notice was inserted in the statute".^^^ 

The notice requirement did not escape criticism under the Uniform 
Sales Act, and it continues to be a centre of controversy in Article 2. The 
New York courts refused to apply the uniform provision in consumer 
cases. ^^ Since the enactment of the Code, a large number of courts^^^ 
have held that the notice requirement does not apply to a third party who 
claims to have been injured by the goods, although it is fairly clear that 
the Code draftsmen intended it to do so in a qualified form.^^ 

These old and new reservations squarely raise the question whether 
a notice requirement should be adopted in the revised Ontario Act. In 
favour of the seller it may be argued that an unreasonable delay in notifi- 
cation prejudices his position. Such a delay would deprive the seller of an 
opportunity to verify the bona fides of the buyer's claim, and would en- 
courage specious claims by debtors attempting to force a compromise or 
to postpone the payment of just debts. In favour of the buyer, especially 
the consumer buyer, it may be argued that he frequently would not be 
aware of the notice requirement, or not become aware of it until it is too 
late for him to comply, and that the introduction of the requirement could 
defeat meritorious claims on a minor technicality. 

We are, therefore, of the view that, whatever conclusion may be 
reached with respect to the duty of notification by merchant buyers, it 
should not apply to consumer buyers. It appears to us that this position is 
consistent with the common law's antipathy towards disclaimer clauses in 
consumer transactions, and with the growing number of statutes that 
follow this lead. It is not necessary to consider separately the status of 
third parties who may wish to bring products liability claims, because it is 



202/^/^., p. 38. 
203/^/^. 

204NYLRC Study, ch. 5, footnote 52, supra, p. (530), n. 340; Williston, footnote 
42 supra, sec. 484b, p. 42. 

205For example, Fischer v. Mead Johnson Laboratories (1973), 341 N.Y.S. 2d 
257 (Ct. App.); Bengford v. Carlem Corp. (1968), 156 N.W. 2d 855 (Iowa Sup. 
Ct.); Chaf^in v. Atlanta Coca-Cola Bottling Co. (1972), 194 S.E. 2d 513 (Ga. 
Ct. App.). 

206UCC 2-607, Comment 5. For further discussions of the Code provisions and 
the judicial reaction, see Epstein, "Products Liability: Defenses Based on Plain- 
tiff's Conduct" (1968), Utah L. Rev. 267, and Lidman, "Time Limitations on 
Warranties: Application and Validity under the U.C.C." (1970), 11 Boston 
College Industrial and Commercial Law Review 340. 



481 

generally agreed that claims of this nature should sound primarily in tort, 
rather than in contract. Such persons would, therefore, automatically be 
excluded from any notice requirement unless it w<^re specifically extended 
to them. We do not favour such a step. 

So far as merchant buyers are concerned, admittedly a much stronger 
case can be made in favour of a notice requirement. ^^"^ Nevertheless, we 
have decided not to recommend a change in the existing position. We have 
three reasons for our conclusion. In the first place, we have lived without 
a notice rule for many years and no pressing case has been made for a 
change. The commercial community itself has not pressed for adoption 
of such a rule. Secondly, it is common for sales contracts to contain their 
own provisions with respect to time limitations for the making of com- 
plaints by buyers. It may be that some of the provisions are vulnerable 
on the ground of unconscionability,^^^ and that others give rise to problems 
of interpretation. But at least they indicate that sellers are quite capable 
of protecting their own interests. Finally, whether the buyer is a consumer 
or merchant buyer, the seller should be able to invoke the new statutory 
doctrine of good faith, as well as common law and equitable principles of 
laches, waiver and estoppel, where the buyer has behaved unreasonably in 
delaying his complaint and the seller has been prejudiced as a result. 

As noted above, UCC 2-607(3) (b) also obHges the buyer to notify 
the seller of any action for infringement "or the like" commenced against 
the buyer on pain of his being barred from any remedy over for liability 
established by the litigation if he fails to do so. Subsection (5)(b) further 
provides that, where such an action has been brought, the seller may 
demand that the control of the litigation be turned over to him. It will be 
observed that these provisions are restricted to infringement proceedings, 
and that they do not embrace other forms of claim against the buyer that 
may entitle him to seek indemnity from the seller. We are not aware of 
any need in Ontario to copy these features of UCC 2-607,^^ and we do 
not recommend their adoption in the revised Act. 

We have reached the same conclusion with respect to UCC 2-607 
(5) (a) which gives statutory recognition to the "vouching in" procedure 
apparently first developed under the common law of the states. ^^o Sub- 
section (5) (a) provides that where the buyer is sued for breach of a war- 
ranty or other obligation for which his seller is answerable over, he may 
require the seller to come in and defend the action. If the seller fails to 
do so, he will be bound in any action against him by the buyer "by any 
determination of fact common to the two litigations". We see no advant- 



207Both ULIS, Art. 39, and the 1977 draft UNCITRAL Convention, Art. 23(1), 

contain such a requirement. 
208See, for example, R. W. Green Ltd. v. Cade Bros. Farms, [1978] 1 Lloyd's 

Rep. 602 (Q.B.). 
209Fox, The Canadian Law and Practice relating to Letters Patent for Inventions^ 

f4th ed., 1969), p. 410, does not refer to the Code provisions; nor does he 

express dissatisfaction v^ith the existing rules. 
210NYLRC Study, ch. 5, footnote 52, supra, pp. (709)-(713); and see, James and 

Hazard, Civil Procedure (2nd ed., 1977), pp. 593-95. (The latter work does 

not discuss the Code provisions.) 



482 

age, and considerable disadvantage, in adopting this provision in Ontario 
and we do not recommend its incorporation in the revised Act. We have 
two reasons for this recommendation. The first reason is that the rules of 
court on third party actions^^^ already cover the ground much more ade- 
quately. We see no point in introducing a second-tier procedure for con- 
tracts of sale. Our second reason is that the Code's vouching in procedure 
is seriously lacking in detail and confers few benefits on the buyer.^^^ UCC 
2-607(5) (a), it is true, dispenses with the need for the buyer to commence 
a formal third party action, but it does not give him the benefit of a judg- 
ment; nor does it resolve any issues between him and his seller, other than 
those issues of fact common to the two sets of claims. If the seller is un- 
cooperative it seems all too likely that sooner or later the buyer will be 
forced to sue him after all. The buyer might as well resort from the begin- 
ning to a third party notice. 

(c) buyer's lien rights 

Article 2 of the Uniform Commercial Code again departs from Anglo- 
Canadian sales law^i^ in conferring upon the buyer a lien right in respect 
of goods in his possession that he rightfully rejects or in respect of which 
he justifiably revokes his acceptance. UCC 2-711(3) provides as follows: 

2-711.(3) On rightful rejection or justifiable revocation of accep- 
tance a buyer has a security interest in goods in his possession or con- 
trol for any payments made on their price and any expenses reason- 
ably incurred in their inspection, receipt, transportation, care and 
custody and may hold such goods and resell them in like manner as 
an aggrieved seller (Section 2-706). 

This provision substantially re-enacts section 69(5) of the Uniform Sales 
Act, but differs from it in extending the buyer's lien to cover certain of 
his expenses in relation to the goods, as well as to secure the recovery of 
any payments made by him to the seller. It is difficult to gauge the practi- 
cal importance of a buyer's lien right. It may well be of value to a merchant 
buyer who has storage facilities, who knows his rights, and knows where 
to find a market to enforce his lien if this becomes necessary. It seems less 
likely that a non-merchant buyer would often avail himself of the lien 
right: consumers as a group are usually only too happy to return to the 
seller goods that have proved unsatisfactory. However, it is generally 
agreed that the law should be evenhanded in conferring lien rights on 
buyers and sellers, and it seems equally reasonable to expect that the con- 
ferral of the buyer's lien right should not depend on the frequency with 
which this right is likely to be invoked by the buyer. We, therefore, recom- 
mend that a provision comparable to UCC 2-711(3) should be incorpor- 
ated in the revised Ontario Act.^^"^ 



2nSee, Rule 167 of the Supreme Court of Ontario Rules of Practice, R.R.O. 

1970, Reg. 545, as am.; Holmested and Gale, Ontario Judicature Act and Rules 

of Practice, Vol. 2, pp. 1224 et seq. (Rel. 3, Jan. 1976). 
2i2Compare, NYLRC Study, ch. 5, footnote 52, supra, pp. (712)-(713). 
213/.L. Lyons & Co. v. May & Baker Ltd., [1923] 1 K.B. 685. 
2i4See, Draft Bill, s. 9.13. 



483 

(d) TO WHAT EXTENT DO THE CODE PROVISIONS APPLY TO 
WRONGFULLY REJECTED GOODS? 

A question that is not answered in Article 2 is the extent to which 
the provisions involving the buyer's rights and obligations with respect to 
rejected goods apply to wrongful rejections. In some contexts the answer 
is fairly clear. It seems obvious, for example, that a buyer in breach should 
not have lien rights. 

The answer to this question is not, however, clear with respect to the 
provisions in sections 2-602, 2-603, and 2-604 of the Code. The cap- 
tions to all three sections refer to "Rightful Rejection" or to "Rightfully 
Rejected Goods" although, with the exception of section 2-602(2) (c), 
the texts themselves are not restricted to such cases. In principle, it is dif- 
ficult to see why a buyer who rejects effectively, but wrongfully,^!^ should 
be in a better position than a buyer who has rejected rightfully. It may 
be that the captions do not accurately reflect the draftsmen's intentions 
but, whether this is so or not, we think that the text should be amended^^^ 
to avoid any misunderstanding. The issue is of considerable importance 
because, as we have seen, under Article 2,^17 a buyer is not, generally 
speaking, liable for the price unless he has accepted the goods. The seller 
can no longer elect, as he could under the Uniform Sales Act,'^^^ between 
suing for the price once title has passed or suing for damages for refusal 
to accept. As a result, the seller is obliged to accept the return of even 
wrongfully rejected goods and will, therefore, want to know to what extent 
he can require the buyer's cooperation with respect to their custody, re- 
shipment, and disposition. 

It may be objected that a wrongfully rejecting buyer should not be 
entitled to claim reimbursement of expenses and a selling commission, 
pursuant to UCC 2-603(2), if he follows the seller's instructions with 
respect to the disposition of the goods; for that would be to reward him 
for his wrongful act. The short answer to this objection would appear to be 
that the seller is not obliged to use the buyer's services. Moreover, in 
many cases the parties may disagree as to the rightfulness of the buyer's 
rejection, and it seems best not to delay the disposition of the goods until 
the merits of their respective positions have been established. If the seller 
is right, he will be entitled to recover, as part of his damages, any payments 
made by him to the buyer.^^^ 

The question whether the provisions of UCC 2-605 should apply 
where goods have been wrongfully rejected raises issues that are not easy 
to resolve. It would appear, prima facie, that a seller would not be prejud- 
iced by the buyer's failure to particularize under this section. However, the 
lack of prejudice may only emerge after a lengthy court battle; and it is 



2i5As to the importance of this distinction under the Code, see, White & Summers, 

footnote 87 supra, at pp. 211-12. 
2i6See, Draft Bill, s. 8.2(3). 
217UCC 2-709(1). 

2l8Ss. 63(1), 64(1), 65; and see, The Sale of Goods Act, ss. 47 and 48. 
2i9See, Draft Bill, s. 8.3(4). 



484 

arguable, indeed, that the seller could be prejudiced. An earlier receipt of 
particulars might expedite the litigation and, in some instances, enable the 
seller to obtain a more speedy judgment. While we recognize that there is 
no obvious solution to this question we support the application of UCC 
2-605 to cases of wrongful rejection. 

In light of this discussion, we recommend that the provisions in the 
revised Act corresponding to UCC 2-602, UCC 2-603, UCC 2-604, and 
UCC 2-605 should also apply to goods wrongfully, but effectively, rejected 
by the buyer. 

D. THE BUYER'S CLAIM FOR DAMAGES 

1. General Principles of Liability — Has the Pendulum Swung 
Too Far? 

Whether or not the buyer has a right to reject non-conforming goods, 
and whether or not he chooses to exercise it, he is also entitled to claim 
damages. The Sale of Goods Act only concerns itself with damage claims 
sounding in contract, but section 57(1) preserves the rules of the common 
law except insofar as they are inconsistent with the express provisions of 
the Act. Although the right of a buyer to maintain an action for damages 
against the seller is conferred by two sections of the Act, the enumeration 
of contractual rights is not complete. Section 49 of the Ontario Sale of 
Goods Act deals with damage claims arising out of the seller's failure to 
deliver. This section provides as follows : 

49.(1) Where the seller wrongfully neglects or refuses to de- 
liver the goods to the buyer, the buyer may maintain an action against 
the seller for damages for non-delivery. 

(2) The measure of damages is the estimated loss directly and 
naturally resulting in the ordinary course of events from the seller's 
breach of contract. 

(3) Where there is an available market for the goods in ques- 
tion, the measure of damages is prima facie to be ascertained by the 
difference between the contract price and the market or current price 
of the goods at the time or times when they ought to have been de- 
livered, or, if no time was fixed, then at the time of the refusal to 
deliver. 

Section 5 1 of the Act is concerned with damage claims involving a breach 
of the seller's warranties or conditions where the buyer elects, or is obliged, 
to retain the goods. This section provides as follows: 

51.(1) Where there is a breach of warranty by the seller, or 
where the buyer elects, or is compelled, to treat a breach of a condi- 
tion on the part of the seller as a breach of warranty, the buyer is not 
by reason only of such breach of warranty entitled to reject the goods, 
but he may, 

{a) set up against the seller the breach of warranty in diminu- 
tion or extinction of the price; or 



485 

(b) maintain an action against the seller for damages for the 
breach of warranty. 

(2) The measure of damages for breach of warranty is the esti- 
mated loss directly and naturally resulting in the ordinary course of 
events from the breach of warranty. 

(3) In the case of breach of warranty of quality, such loss is 
prima facie the difference between the value of the goods at the time 
of delivery to the buyer and the value they would have had if they 
had answered to the warranty. 

(4) The fact that the buyer has set up the breach of warranty 
in diminution or extinction of the price does not prevent him from 
maintaining an action for the same breach of warranty if he has suf- 
fered further damage. 

The Act thus fails to deal explicitly with the right to claim damages fol- 
lowing the rejection of non-conforming goods. A tender of non-conforming 
goods not accepted by the buyer is equivalent to no delivery at all and such 
a tender should, therefore, attract the provisions of section 49. Further, 
only by implication does the Act deal with the effect of a delayed delivery. 
It may also be noted that delayed deUvery, breach of which is not waived, 
involves at least the breach of a warranty giving rise to a claim under 
section 51.^^^ 

The circumstances, therefore, that will trigger the buyer's contractual 
damage claims may differ widely. The measurement of damages is, how- 
ever, governed by a unifying principle that has been part of sales law for 
well over a century. The aim of a damage award, it has frequently been 
said,22i is to put the innocent party in the same position as if the contract 
had been performed. It may be contended that the language of this pre- 
cept suggests a preoccupation with the protection of the innocent party's 
expectation interests; but the precept is open to an even more serious 
objection. It leaves the impression that the guilty party may be liable for 
an unlimited amount of damages so long as the award is necessary to 
make the innocent party whole. Of course, this is not the law. The seller is 
only liable for those damages that satisfy the foreseeability test as enunci- 
ated in Hadley v. Baxendale^^'^ and more recently refined by the House 
of Lords in Koufos v. C. Czarnikow Ltd., also referred to as The Heron 
11.^^^ In addition, the buyer has a duty to mitigate. 



220Compare, Benjamin's Sale of Goods (1974), para. 1296, p. 635. 

221 See, for example, British Westinghouse Electric & Manufacturing Co. Ltd. v. 
Underground Electric Railways Co. of London Ltd., [1912] A.C. 673 (H.L.), 
at p. 689; Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation and 
Baud Corporation N.V. (1978), 23 N.R. 181, at p. 194 (S.C.C). 

222(1854)^ 9 Exch. 341. It will be observed that the rules in Hadley v. Baxendale 
combine the quantification of damages with questions of remoteness. Compare, 
Ogus, The Law of Damages (1973), at pp. 71-72. Depending on the context, 
"measure of damages" as used hereafter in the text may refer to either of these 
components in a damages issue. 

223[1969] 1 A.C. 350 (H.L.). 



486 

The formulation of the test in its application to different circum- 
stances will be examined presently. For the moment, suffice it to say that 
the two limbs of the test have been faithfully reproduced in the Ontario 
Sale of Goods Act. Section 49(2) tells us that in the event of non-delivery 
the measure of damages is the "estimated loss directly and naturally re- 
sulting in the ordinary course of events from the seller's breach of con- 
tract". Precisely the same test reappears in section 51(2) as the measure 
of the seller's prima facie liability for breach of warranty. Then section 52 
completes the statutory reproduction by preserving the buyer's (and, equal- 
ly the seller's) right to claim "special damages" where by law special 
damages may be recoverable. This is a reference to the so-called second 
rule of Baron Alderson in Hadley v. Baxendale. 

Whatever reservations one may have about the terminology of gen- 
eral and "special damages" in this context,^24 j^ jg abundantly clear that 
within generous limits the law seeks to protect the buyer's reliance, expecta- 
tion and restitutionary interests. In practical terms this means that the 
seller may be liable for damages amounting to many times the price of the 
goods, and many more times the profit he could hope to derive from the 
transaction. The law reports are replete with examples of such awards. 
Equally serious from the seller's point of view is the fact that this potenti- 
ally oppressive liability is not predicated on any form of moral culpability. 
Breach of a warranty or condition is a species of strict liability.^^^ The 
seller cannot exonerate himself by showing that the breach could not have 
been prevented by the exercise of reasonable care on his part^^^ and, in- 
deed, that the breach could not even have been anticipated given the ex- 
isting state of knowledge at the time that the contract was made.^^? ^ot 
surprisingly, sellers have an intense dislike for these principles of liability 
and seek to exclude or restrict them whenever they deem the danger of 
heavy damages sufficiently serious. 

Has the pendulum swung too far in the buyer's favour? To put the 
issue on a broader footing, has the law erred in combining principles of 
strict liability for breach of contract with a concept of damages aimed at 
making the innocent party substantially whole? The answer to this ques- 
tion would involve an elaborate inquiry into society's reasons for enforc- 
ing contracts and the rationale of contract damages,^^^ an inquiry that is 



224For the multiple meanings of "special damages", see, McGregor on Damages 
(13th ed., 1972), paras. 16-20. In the rules of pleading special damages denote 
out-of-pocket expenses which must be specially pleaded and itemized in the 
statement of claim. This distinguishes them from general damages which need 
not be specially pleaded and are deemed to be at large. The Code uses the 
term "consequential damages" in place of special damages in the contractual 
context; see, for example, UCC 2-715(2). In view of the ambiguity surround- 
ing the latter term the Code usage is preferable and we have adopted it in the 
Draft Bill. See, Draft Bill, s. 9.19. 

^^^Randall v. Newson (1877), 2 Q.B.D. 102(C.A.). 

226Frost V. Aylesbury Dairy Co., [1905] 1 K.B. 608(C.A.); Buckley v. Lever 
Bros. Ltd., [1953] O.R. 704, [1953] 4 D.L.R. 16 (H.C.J.). 

22lHenry Kendall & Sons v. William Lillico & Sons Ltd., [1969] 2 A.C. 31 (H.L.). 

228 As to which, see, Cohen, "The Basis of Contract" (1933), 46 Harv. L. Rev. 
553; and Fuller & Perdue, "The Reliance Interest in Contract Damages: 1" 
(1936), 46 Yale L.J. 52, at pp. 57 et seq. 



487 

beyond the scope of this Report. It must suffice to indicate some of the 
relevant factors and some of the difficulties that are raised by this issue. 
It is frequently said that a modern economy could not function without 
the assurance that promises seriously made will be honoured and that the 
contract breaker will be held accountable in damages, or otherwise, if he 
violates his undertaking.-^^ In economic terms, the legal norm is but- 
tressed by the argument that enforceable promises lead to a more efficient 
allocation of resources^^^ and reduce transaction costs. There are obvious 
weaknesses in these Hues of reasoning. There is no necessary correlation 
between the enforceability of promises and the measure of damages 
awarded under the Hadley v. Baxendale principles. Nor is it true to say 
that an award of damages always promotes economic efficiency, or that 
such an award reflects a proper allocation of risks. In fact, the reverse may 
be true. If a small manufacturer is confronted with a large damage award 
in respect of a liability for which he is not insured, he may be forced into 
bankruptcy and his employees may lose their positions. It may be ques- 
tioned whether such a result would necessarily promote economic effici- 
ency or reflect proper allocation of risk. By the same token, resort to 
insurance principles as the basis for justifying heavy damage awards will 
not, for two reasons, pick up all the slack. The first reason is that insur- 
ance is not readily available for many types of pure economic losses. The 
second reason is that, at least in some instances, it may be easier and 
cheaper for the buyer to insure than for the seller. 

Some of the early comments on the damage principles enunciated in 
Hadley v. Baxendale sought to allay these misgivings by arguing^^i that 
the party in breach must be deemed to have assumed the risk of foreseeable 
damages. Indeed, there have been intermittent suggestions^^^ that the seller 
will not be held liable unless this assumption can be made. It is doubtful 
whether this is still the law,^^^ and the tacit agreement test has been clearly 
rejected in Article 2^34 of the Uniform Commercial Code. However, an 
attenuated form of the test can be discerned in the Code's requirement 
that the damages sought to be recovered must have been within the con- 
templation of the parties as a substantial possibility,^^^ the suggestion being 
that since the damages were foreseeable the party sought to be held liable 
could have refused to assume the risk. The notion that the seller's liability 



229Compare, Fuller & Perdue, footnote 228 supra, at pp. 59-60. 

230posner, Economic Analysis of Law (2nd ed., 1977), especially sec. 4.9; Barton, 

'The Economic Basis of Damages for Breach of Contract" (1972), I. J. Leg. 

Studies 277. 
23iSee, Gilmore, The Death of Contract (1974), pp. 50-51. 
2327/;^ British Columbia and Vancouver's Island Spar, Lumber and Saw Mill Co. 

Ltd. V. Nettleship (1868), L.R. 3 C.P. 499, per Willes, J., at p. 509; Elbinger 

A.G. V. Armstrong (1874), L.R. 9 Q.B. 473, per Blackburn, J., at p. 478; 

Holmes, J., in Globe Refining Co. v. Landa Cotton Oil Co. (1903), 190 U.S. 

540; contra, Lord Upjohn in The Heron II, footnote 223 supra, at p. 422. 
^^^McGregor on Damages (13th ed., 1972), para. 194; and compare, Diplock 

L.J.'s description of the modern position in The Heron II, [1966] 2 All E.R. 

593, at p. 603 (C.A.). 
234UCC 2-715(2), and Comment 2. 
2350ne of the tests favoured by several of the Law Lords as the test of foreseeability 

in The Heron II. See, further, infra, sec. D.3. 



488 

is based upon an implied assumption of risk raises difficult issues, but there 
is a more serious concern about the foreseeability tests. A seller can read- 
ily foresee that a defective machine will result in various types of loss to 
the buyer: what he cannot predict is the quantum of the prospective loss, 
a feature that, for legal purposes, is generally regarded as irrelevant.^^^ 
Unless the seller has this information, it will be difficult for him to absorb 
the potential hability as part of the cost of his operations. The difficulties 
are compounded when the product is mass produced and mass distributed. 

The broad principle of liability enshrined in the Hadley v. Baxendale 
formula is, therefore, vulnerable to criticism on important grounds. It is, 
however, easier to expose the weaknesses of the formula than to suggest 
alternatives that are not open to even greater objections. This appears to be 
true of the following solutions that suggest themselves as alternatives to 
the present scope of damage awards. 

(a) To disallow damage claims for breach of executory contracts, 
other than claims of a restitutionary character. Clearly, such a 
solution would be a regressive step in the evolution of contract 
law and would do nothing to encourage the observance of con- 
sensual obligations. 

(b) In the case of executed contracts, to restrict recovery to restitu- 
tionary and reliance losses, and to disallow all expectation losses 
save possibly where the seller has been guilty of negligence or 
wilful breach. This solution has a double weakness. It presup- 
poses that an easy line can be drawn between reliance damages 
and expectation losses, and this is an assumption that does not 
correspond to the facts. ^^^ This solution also assumes that ex- 
pectation losses constitute the most important component in a 
typical damage claim arising out of an executed contract, and 
this too is probably an overgeneralization. 

(c) To restrict the maximum recoverable damages to the value of 
the price or a multiple thereof unless the parties have agreed 
to a higher figure. This approach finds a precedent in many dom- 
estic and international contracts of carriage. It is also reflected 
in many sales contracts for manufactured goods that restrict the 
seller's liability to the repair or replacement of the defective 
goods, or to the return of the purchase price. The objection to 
this solution is that it may leave the buyer with ruinous conse- 
quential losses that he is ill-equipped to absorb. 

(d) To distinguish between consumer and commercial contracts 
and, on the ground that business buyers may be assumed to be 
capable of protecting their own interests, to allow a higher level 
of recovery for contracts of the former type. It is true that a 
distinction between consumer and non-consumer transactions has 
been widely drawn in recent consumer protection legislation. 
But this is done for the purpose of conferring additional protec- 



236f^ro//i V. Tyler, [1974] Ch. 30, 61. 

237See, Fuller & Perdue, footnote 228 supra, at pp. 73-75. 



489 

tion on consumers, and not for the purpose of cutting down the 
rights that non-consumer classes enjoy under existing law. 

(e) To distinguish between economic losses and claims arising from 
injury to persons or damage to property, and to disallow the 
former losses and to accept the latter claims. There may, for 
various purposes, be good reasons for distinguishing between 
these two types of claim. To disallow economic claims alto- 
gether, unless expressly agreed to by the seller, would, however, 
be a solution that is open to even more serious objections than 
the preceding alternatives. 

Having regard to the difficulty of finding an acceptable substitute, our 
conclusion is that the revised Act should continue to hold the seller liable 
for all substantially foreseeable damages falling within the Hadley v. Bax- 
endale formula and we so recommend. We have also concluded that this 
formula should apply to the buyer's liability for damages. Whether any 
changes are desirable in the statutory reproduction of the formula will be 
considered hereafter. 

The effect of this recommendation is to maintain the status quo and 
to impose on the seller the onus of disclaiming or restricting his liability 
within the limits permitted by the new law contained in the revised Act. 
Though this is an imperfect solution, it seems to us to be fairer than im- 
posing on the buyer the onus of bargaining for the recovery of damages for 
the occurrence of which, ex hypothesi, he was in no way to blame. This is 
particularly true where the seller is a merchant selling goods to a non- 
merchant and is, therefore, more likely to be conversant with potential 
defects and risks of loss than the buyer. In reaching our conclusion we 
have also been influenced by the consideration that a change in basic 
damage principles, not applied uniformly across the contractual field, 
would disturb the existing equilibrium and would create serious anoma- 
lies. It should be clear from the preceding discussion that, under the 
scheme we propose, it would not be disreputable for a seller to seek to 
limit his liability and, provided it is not procured by unconscionable means, 
such allocation of risks should be respected by a court. 

2. Damage Claims In Private Sales 

The existing law in respect of the assessment of damages does not 
distinguish between different types of seller. Prima facie, it may seem ano- 
malous that the law should place damage claims against a private seller on 
the same footing as damage claims against a merchant seller. It may be 
thought that a persuasive case could be made for restricting the hability 
of a private seller to restitutionary damages, or, at any rate, to protecting 
him against claims for consequential damages in the absence of wilful 
breach of the contract, fraud or negligence. We have recommended in an 
earlier chapter^^^ an expanded definition of express warranty. We noted 
that a representor (including a private seller) could be liable for expecta- 
tion and reliance losses, and for consequential, as well as direct damages, 



^^^Supra, ch. 6, sec. A. 



490 

should there be a breach of an express warranty as so expanded. We con- 
sidered the imphcations of this change of definition in the case of repre- 
sentations made by a private seller and the possibility of drawing a dis- 
tinction between commercial and private sales. For reasons stated, we 
decided not to recommend an adoption of this distinction. We pointed out, 
however, that it may be that a different rule of damages should be adopted 
generally in non-commercial sales, and that we would explore this pos- 
sibility at a later stage of this Report. We have reached that stage of the 
Report and we now turn to consider this more general issue. 

The possibility that a private seller may be held liable for expecta- 
tion and other non-restitutionary claims is not confined to breaches of 
an express warranty. The possibility also exists where he is sued for breach 
of any other contractual obligation, such as late delivery or breach of the 
implied conditions of title and description. The suggestion that a distinc- 
tion should be drawn between the measure of the damages recoverable from 
a merchant seller and non-merchant seller is not novel since, with respect 
to latent defects in the goods sold, such a distinction already appears to 
exist in substance, if not in form, in various civil law systems.^^^ 

There are, however, persuasive reasons against the adoption of such 
a distinction in the revised Act. First, to the best of our knowledge, no 
other common law jurisdiction has so far introduced the distinction in its 
sales legislation and, in the context of express warranties, it was not sup- 
ported in the New South Wales Working Paper.^'*^ Secondly, there is little 
evidence that the problem is a significant one. Most of the heavy damage 
claims appear to involve breaches of the conditions of merchantability and 
fitness, and these implied terms do not apply to private sales. Again, in so 
sensitive an area as damages, a flexible approach is preferable to a rigid 
distinction between different types of sale. Finally, it may be thought that 
if different damage rules are to be applied to private transactions the dis- 
tinction should be drawn across a wider contractual area and not con- 
fined to sales law. 

We are ourselves divided^^i about the merits of introducing the dis- 
tinction in the revised Act, but we agree that this problem warrants further 



239Treitel, "Remedies for Breach of Contract", in International Encyclopedia of 
Comparative Law, Vol. VII, ch. 16, pp. 16-57 to 16-60. The distinction arises 
because the Codes frequently provide that consequential damages for latent 
defects are not recoverable unless the seller knew or is deemed to have 
known of the defect. See, for example, Code Civil (France), art. 1645, and 
Quebec Civil Code, art. 1527. There is a presumption that manufacturers and 
other professional vendors are deemed to know of the defect; hence a private 
or other non-professional vendor will ordinarily not be responsible for conse- 
quential damages. See, further, Samson & Filion v. The Davie Shipbuilding 
& Repairing Co., [1925] S.C.R. 202; Touchette v. Pizzagalli, [1938] S.C.R. 
433. 

240Law Reform Commission, New South Wales, Working Paper on the Sale of 
Goods (1975), pp. 250-53. 

24lDr. D. Mendes da Costa, the Honourable G. A. Gale, and Mr. W. R. Poole, 
would favour a section in the Draft Bill that addresses this issue. The Honour- 
able J. C. McRuer, Mr. W. G. Gray, and the Honourable R. A. Bell do not 
favour the matter being dealt with in the Draft Bill. 



491 

examination. Accordingly, we recommend^'^^ that it be remitted for this 
purpose to the Law of Contract Amendment Project. 

3. The Computation of Damages Under The Rules in Hadley v. 
Baxendale: Some Particular Problems 

The existing damage principles in the Ontario Sale of Goods Act 
apply to claims both by a seller^'^^ and a buyer. ^"^ A striking feature of 
these principles is that they are cast in such broad and flexible language 
that the courts have been given great discretion to apply and adjust them, 
as they see fit, to the exigencies of particular circumstances. Substantially 
the same was true of the comparable provisions in the Uniform Sales 
Acf-'^^ and is true, at least in terms of the buyer's damages, of the provi- 
sions in Article 2 of the Uniform Commercial CodeP-^^ This phenomenon 
raises two important questions. These questions are, to a large extent, 
common to claims by both a seller and a buyer and, for this reason, were 
not canvassed in our earlier discussion of seller's remedies in chapter 16. 
The first question is whether the revised Act should continue to leave the 
particularization of damage rules to the courts. The second question is 
whether there are significant shortcomings or ambiguities in the case law 
that require statutory reform or clarification. The following discussion 
focuses on some of the most important areas in which these questions arise 
for decision. 

(a) the foreseeability test 

In the classic test propounded by Baron Alderson in Hadley v. Bax- 
endale,'^^'^ the types of recoverable damages were said to be such "as may 
fairly and reasonably be considered either arising naturally, i.e., accord- 
ing to the usual course of things, from such breach of contract itself, or 
such as may reasonably be supposed to have been in the contemplation of 
both parties, at the time they made the contract, as the probable result of 
the breach of it". In Victoria Laundry (Windsor) Ltd. v. Newman Indus- 
tries Ltd., Asquith, L.J., in his second proposition neatly collapsed the 
two rules into one so as to produce the following felicitous formulation i^^s 

. . . the aggrieved party is only entitled to recover such part of 
the loss actually resulting as was at the time of the contract reason- 
ably foreseeable as liable to result from the breach. 

Asquith, L.J., in his sixth proposition, also elaborated the meaning of fore- 
seeability in the following passage i^"^^ 



242xhe Honourable G. A. Gale dissents from this recommendation. In his opinion 
the matter should be dealt with in the Draft Bill and there should be a distinc- 
tion drawn between a merchant seller and a private seller. 

243Sections 48 and 52. 

244Sections 49, 51 and 52. 

245Sections 64, 67, 69-70. 

246UCC 2-713 to 2-715. See, Table 2, infra, pp. 494-96. 

247(1854), 9 Exch. 341, at p. 354. 

248[1949] 2 K.B. 528 (C.A.), at p. 539. 

249//,/^., at p. 540. 



492 

Nor, finally, to make a particular loss recoverable, need it be 
proved that upon a given state of knowledge the defendant could, as 
a reasonable man, foresee that a breach must necessarily result in that 
loss. It is indeed enough if he could foresee it was likely so to result. 
It is enough, to borrow from the language of Lord du Parcq . . . , if 
the loss (or some factor without which it would not have occurred) is 
a 'serious possibility' or a 'real danger'. For short, we have used the 
word 'liable' to result. Possibly the colloquialism 'on the cards' indi- 
cates the shade of meaning with some approach to accuracy. 

As has been noted, the first rule in Hadley v. Baxendale is reproduced al- 
most verbatim in the Ontario Sale of Goods Act^^^ with respect to both 
the seller's and the buyer's recovery of damages. The second rule has been 
elliptically compressed in section 52 with the unhelpful observation that 
nothing "in this Act affects the right of the buyer or the seller to recover 
interest or special damages in a case where by law interest or special 
damages may be recoverable, . . .". It is not clear why Chalmers dealt 
with the second rule in such a negative way and we are of the opinion that 
the revised Act should state the parties' rights to recover special damages 
(that is, consequential damages) in more affirmative language, as is done 
in UCC 2-715(2) and other provisions of Article 2.2^^ 

It remains to be considered whether the formula for the recovery of 
damages is itself satisfactory. In The Heron 11,^^^ Lord Reid thought that 
the first rule of Baron Alderson was unsatisfactory and could not be taken 
literally. In Lord Reid's view it was obvious that Baron Alderson had not 
intended that every type of damage that was reasonably foreseeable by the 
parties when the contract was made, should either be considered as aris- 
ing naturally (that is, in the usual course of things) or be supposed to 
have been in the contemplation of the parties. Lord Reid was also un- 
happy,253 as were several of the other law lords,^^'^ with the reference by 
Asquith, L.J., to the test of foreseeability in the second of the propositions 
enunciated by him in the Victoria Laundry case. Lord Reid thought that 
this reference was calculated to confuse the measure of recovery in tort 
claims with those sounding in contract. Lord Reid also disagreed^^^ with 
the second half of the sixth proposition of Asquith, L.J., wherein Asquith, 
L.J., measured the intensity of foreseeable losses necessary to satisfy the 
test as losses that were a "serious possibility", a "real danger", or "on 
the cards". Lord Reid felt these expressions were dangerously wide and 
extended the scope of the Hadley v. Baxendale principles as previously 
understood. In the opinion of Lord Reid^^s the test sanctioned by the jur- 
isprudence, including in particular the earlier House of Lords decision of 
Re R. & H. Hall Ltd. and W. H. Pirn (Junior) & Co.'s Arbitration, '^^'^ was 



250See, ss. 48(2) and 49(2). 

25iSee, Draft Bill, s. 9.19. 

252[i969] 1 A.C. 350, at p. 384. 

253/^/j., at p. 389. 

254The other Law Lords who decided the case were Lord Morris of Borth-Y-Gest, 

Lord Hodson, Lord Pearce and Lord Upjohn. 
255 [1969] 1 A.C. 350, at p. 390. 

'^^Hbid., at p. 388. Compare, Lord Morris of Borth-Y-Gest, at p. 406. 
257(1928), 33 Com. Cas. 324, [1928] All E.R. 763 (H.L.). 



493 

that an event was not too remote if it was not "unlikely to occur" or if 
there was "a very substantial degree of probability" that it might occur, 
even though the probability fell short of an even chance. The other Law 
Lords favoured such tests as "serious possibility", "real danger", "liable 
to result", or "not unlikely to result".^^^ 

It seems desirable that the test of foreseeability be amended in the 
revised Act, to take into account the refinements added by The Heron 11, 
and we so recommend. Accordingly, with respect to buyer's damage claims, 
our Draft Bill contains the following reformulation of sections 49(2) and 
51(2) of the present Ontario Sale of Goods Act 1^59 

9.16(2) The measure of damages is the estimated loss which, 
having regard to the seller's knowledge of all the circumstances, he 
ought to have foreseen as likely to result from his breach of contract. 

Likewise, with respect to damage claims of the seller for breach by the 
buyer the revised Act should contain a comparable reformulation of sec- 
tion 48(2) of the present Act.^^o 

The Heron // did not deal with an important issue that arose for 
decision in the recent English Court of Appeal case of H. Parsons (Live- 
stock) Ltd. V. Uttley Ingham & Co. Ltd.^^^ The issue is whether the test 
of substantial foreseeability adopted by the House of Lords in The Heron 
// also applies where a plaintiff, in a claim for breach of warranty, seeks to 
recover damages for injury to person or property caused by defective 
goods. In the Parsons case the English Court of Appeal was divided in its 
views. Lord Denning, M.R., adopted the position^^^ ^i^^i where physical 
damages are involved the tort test of foreseeability should be applied 
whether the claim sounds in tort or in contract, and that The Heron II test 
should be confined to cases where only economic losses have occurred. 
Scarman, L.J., on the other hand,263 did not feel that the cases justified a 
distinction in law between loss of profit and physical damage; nor did he 
think it necessary to develop the law judicially by drawing such a distinc- 
tion. Orr, L.J., in a brief judgment, agreed with the reasoning of Scarman, 
L.J. Nevertheless, all three judges reached the same conclusion on the facts. 
The harmonization came about because Scarman, L.J., approved of the 
following statement in McGregor on Damages :'^^ 

... in contract as in tort, it should suffice that, if physical injury 
or damage is within the contemplation of the parties, recovery is not 
to be limited because the degree of physical injury or damage could 
not have been anticipated. 



258 [1969] 1 A.C. 350. See, Lord Morris of Borth-Y-Gest at p. 406; Lord Hodson 
at pp. 410-11; Lord Pearce at pp. 414-15; and Lord Upjohn at p. 425. 

259See, Draft Bill, s. 9.16(2). 

260See, Draft Bill, s. 9.10(2). 

26i[1977] 3 W.L.R. 990, [1978] 1 All E.R. 525 (C.A.); and see. Note, (1978), 94 
L.Q.R. 171. See, also, Asamera Oil Corporation Ltd. v. Sea Oil & General 
Corporation and Baud Corporation N.V., footnote 221 supra, at pp. 195-96. 

262[i977] 3 W.L.R. 990, at pp. 996-99, [1978] 1 All E.R. 525 (C.A.), at pp. 
531-34. 

263/^/^., especially at [1978] 1 All E.R. 535. 

264(i3th ed., 1972), para. 188. 



494 

On the facts before the Court, Scarman and Orr, L.JJ., agreed that the 
trial judge was justified in finding that there was a serious possibiUty of 
physical injury occurring, even though the magnitude of the injury or its 
precise character might not have been within the parties' contemplation. 

The draftsmen of Article 2 of the Uniform Commercial Code antici- 
pated the problem. UCC 2-715(2) (b) provides: 

2-715.(2) Consequential damages resulting from the seller's breach 
include . . . 

(b) injury to person or property proximately resulting from any 
breach of warranty. 

It would appear that this test coincides with the approach of Lord Denning, 
and it is the test that also appeals to us. We, therefore, recommend that 
the revised Act should make it clear, as does UCC 2-715(2) (b), that 
where injury to person or property is alleged it is sufficient to show that the 
injury resulted proximately from breach of warranty. ^^^ 

(b) COMPARISON WITH ARTICLE 2 PROVISIONS 

Table 2 shows, at least in form, that the provisions of the Uniform 
Commercial Code have departed substantially from The Sale of Goods Act 
model with respect to the buyer's recoverable measure of damages. 



TABLE 2 
BUYER'S DAMAGE REMEDIES 

Comparison of Sale of Goods Act and Article 2 Provisions 

Sale of Goods Act Article 2 

§.2-712. "Cover"; Buyer's Pro- 
curement of Substitute Goods 

(1) After a breach within the 
preceding section the buyer may 
"cover" by making in good faith 
and without unreasonable delay 
any reasonable purchase of or 
contract to purchase goods in 
substitution for those due from 
the seller. 

(2) The buyer may recover from 
the seller as damages the differ- 
ence between the cost of cover 
and the contract price together 
with any incidental or conse- 
quential damages as hereinafter 
defined (Section 2-715), but less 
expenses saved in consequence of 
the seller's breach. 



265See, Draft Bill, s. 9.19(2). 



495 



Sale of Goods Act 



Buyer may 49. — (1) Where the seller wrong- 
action for fully neglects or refuses to de- 
liver the goods to the buyer, the 
buyer may maintain an action 
against the seller for damages for 
non-delivery. 



non- 
delivery 



Measure 

of 

damages 



(2) The measure of damages is 
the estimated loss directly and 
naturally resulting in the ordin- 
ary course of events from the 
seller's breach of contract. 



Difference (3) Where there is an available 
market for the goods in ques- 
tion, the measure of damages is 
prima facie to be ascertained by 
the difference between the con- 
tract price and the market or 
current price of the goods at the 
time or times when they ought 
to have been delivered, or, if no 
time was fixed, then at the time 
of the refusal to deliver. 



Article 2 

(3) Failure of the buyer to effect 
cover within this section does not 
bar him from any other remedy. 

§.2-713. Buyer's Damages for 
Non-Delivery or Repudiation 

(1) Subject to the provisions of 
this Article with respect to proof 
of market price (Section 2-723), 
the measure of damages for non- 
delivery or repudiation by the 
seller is the difference between 
the market price at the time 
when the buyer learned of the 
breach and the contract price 
together with any incidental and 
consequential damages provided 
in this Article (Section 2-715), 
but less expenses saved in conse- 
quence of the seller's breach. 

(2) Market price is to be deter- 
mined as of the place for tender 
or, in cases of rejection after ar- 
rival or revocation of acceptance, 
as of the place of arrival. 



Breach of 
warranty 



Measure 

of 

damages 



51. — (1) Where there is a breach 
of warranty by the seller, or 
where the buyer elects, or is 
compelled, to treat a breach of 
a condition on the part of the 
seller as a breach of warranty, 
the buyer is not by reason only 
of such breach of warranty en- 
titled to reject the goods, but he 
may, 

(a) set up against the seller the 
breach of warranty in dim- 
inution or extinction of the 
price; or 

(b) maintain an action against 
the seller for damages for 
the breach of warranty. 

(2) The measure of damages for 
breach of warranty is the esti- 
mated loss directly and naturally 
resulting in the ordinary course 
of events from the breach of 
warranty. 



§.2-714. Buyer's Damages for 
Breach in Regard to Accepted 
Goods 

( 1 ) Where the buyer has ac- 
cepted goods and given notifica- 
tion (subsection (3) of Section 
2-607) he may recover as dam- 
ages for any non-conformity of 
tender the loss resulting in the 
ordinary course of events from 
the seller's breach as determined 
in any manner which is reason- 
able. 

(2) The measure of damages for 
breach of warranty is the differ- 
ence at the time and place of 
acceptance between the value of 
the goods accepted and the value 
they would have had if they had 
been as warranted, unless special 
circumstances show proximate 
damages of a different amount. 

(3) In a proper case any inci- 
dental and consequential damages 
under the next section may also 
be recovered. 



Breach of (3) In the case of breach of 

warranty , r i- . . 

as to warranty of quality, such loss is 

quality prima facie the difference be- 



§.2-717. Deduction of Damages 

From the Price 

The buyer on notifying the seller 



496 



Right of 
action 



Other 
rights of 
buyer 
pre- 
served 



Sale of Goods Act 

tween the value of the goods at 
the time of delivery to the buyer 
and the value they would have 
had if they had answered to the 
warranty. 

(4) The fact that the buyer has 
set up the breach of warranty in 
diminution or extinction of the 
price does not prevent him from 
maintaining an action for the 
same breach of warranty if he 
has suffered further damage. 

52. — Nothing in this Act affects 
the right of the buyer or the 
seller to recover interest or 
special damages in a case where 
by law interest or special dam- 
ages may be recoverable, or to 
recover money paid where the 
consideration for the payment of 
it has failed. 



Article 2 

of his intention to do so may 
deduct all or any part of the 
damages resulting from any 
breach of the contract from any 
part of the price still due under 
the same contract. 



§.2-715. Buyer's Incidental and 
Consequential Damages 

(1) Incidental damages resulting 
from the seller's breach include 
expenses reasonably incurred in 
inspection, receipt, transportation 
and care and custody of goods 
rightfully rejected, any commer- 
cially reasonable charges, ex- 
penses or commissions in con- 
nection with effecting cover and 
any other reasonable expense in- 
cident to the delay or other 
breach. 

(2) Consequential damages re- 
sulting from the seller's breach 
include 

(a) any loss resulting from gen- 
eral or particular require- 
ments and needs of which 
the seller at the time of con- 
tracting had reason to know 
and which could not reason- 
ably be prevented by cover 
or otherwise; and 

(b) injury to person or property 
proximately resulting from 
any breach of warranty. 



In the case of non-delivered or rejected goods, including goods rejected 
under a revoked acceptance, the first rule in Hadley v. Baxendale has, 
by UCC 2-713, been abandoned in favour of an apparently inflexible 
market price test, but subject to two qualifications: first, the buyer's right 
to elect to cover conferred by UCC 2-712; and, secondly, his entitlement 
to claim incidental and consequential damages under UCC 2-715. UCC 
2-715(2) appears to merge the two rules in Hadley v. Baxendale into a 
single formula, but a formula that departs significantly from the test of 
foreseeability propounded in The Heron H in at least one and possibly 
two respects. First, read literally, clause (a) seems to suggest that, if the 
seller was aware at the time of contracting of the buyer's particular needs 
and requirements, he is liable for any loss, however improbable or unlikely. 



497 

There is nothing in the accompanying Comment to the section to indicate 
whether the draftsmen intended this wide a reading, although it seems 
unHkely. Secondly, in the case of injury to person or property, the seller's 
knowledge of special circumstances or foreseeability of risk of damage 
appears to be immaterial provided that such injury "proximately" results 
from the breach. We have already discussed the latter problem and it need 
detain us no further. 

UCC 2-714 deals with the buyer's claim for damages in respect of 
accepted goods. The formula for measuring the buyer's consequential 
damages is the same as in the case of non-accepted goods; but the measure 
of direct damages is more flexible than in the case of undeHvered or 
rejected goods. UCC 2-714(1) corresponds to section 51(2) of the On- 
tario Sale of Goods Act, except that the former embraces all damage 
claims for non-conforming tenders and is not confined to warranty claims. 
UCC 2-714(2) appears to be a fusion of the principles underlying sections 
51(2) and (3) and 52 of The Sale of Goods Act. This reasoning is based 
upon the assumption that the words "unless special circumstances show 
proximate damages of a different amount" that appear in UCC 2-714(2) 
involve a substantial foreseeability test. 

So far as its treatment of the Hadley v. Baxendale principles is con- 
cerned, there appear to be no obvious advantages in adopting the Article 
2 provisions, UCC 2-713 and 2-715, in preference to sections 49 and 51 
of the Ontario Sale of Goods Act. We, therefore, favour retaining the 
essential structure of sections 49 and 51,^^^ subject to the two changes 
already recommended, and subject also to a number of other changes, not 
affecting the Hadley v. Baxendale principles, to be mentioned hereafter. 
Following UCC 2-714(1) we also recommend^^'^ that section 51 should be 
expanded to cover all claims for non-conforming tenders involving ac- 
cepted goods, and that it should also incorporate the best features of UCC 
2-714. 

So far as the seller's or buyer's right to claim consequential damages 
is concerned, we believe that this right should be stated in more affirma- 
tive language as is done in UCC 2-715(2). However, Part 7 of Article 2 
is excessively replete with references to the buyer's and to the seller's right 
to claim incidental and consequential damages. We think a single provision 
should suffice and we recommend^^^ the adoption in the revised Act of the 
following provision to take the place of section 52 of the existing Sale of 
Goods Act and in preference to UCC 2-7 15(1) and ( 2 ) ( a ) : 

(1) A seller's or buyer's claim for damages may include a claim 
for incidental or consequential damages. 

It will be recalled that we have already recommended that the revised 
Act should contain a provision corresponding to UCC 2-715(2) (b), to 
the effect that consequential damages include injury to person or property 



266See, Draft Bill, ss. 9.16, 9.17. 
267See, Draft Bill, s. 9.17. 
268See, Draft Bill, s. 9.19(1). 



498 

proximately resulting from a breach of warranty. ^^^ Except in the case of 
claims arising out of physical damage, we do not deem it necessary to 
spell out the circumstances in which consequential or incidental damages 
are recoverable, since they are already adequately covered by our recom- 
mended version of the Hadley v. Baxendale formula. Our draft provision 
makes no reference to a buyer's restitutionary claim, because this type of 
claim is covered separately in the Draft Bill.^"^^ 

(C) THE RIGHT TO COVER 

An important innovation^"^^ introduced by Article 2 of the Uniform 
Commercial Code is the buyer's right to "cover" the seller's failure to 
perform. By UCC 2-712, the buyer may "cover" by making in good faith 
and without unreasonable delay any reasonable purchase of or contract to 
purchase goods in substitution for those due from the seller, and may use 
the cover price in lieu of the traditional market price test to measure his 
damages. The full text of UCC 2-712 provides as follows: 

2-712.(1) After a breach within the preceding section the buyer 
may 'cover' by making in good faith and without unreasonable delay 
any reasonable purchase of or contract to purchase goods in substi- 
tution for those due from the seller. 

(2) The buyer may recover from the seller as damages the differ- 
ence between the cost of cover and the contract price together with 
any incidental or consequential damages as hereinafter defined (Sec- 
tion 2-715), but less expenses saved in consequence of the seller's 
breach. 

(3) Failure of the buyer to effect cover within this Section does 
not bar him from any other remedy. 

The extent of the departure of UCC 2-712 from existing law must 
not, however, be exaggerated. If there is no available market,^'^^ tj^g Anglo- 
Canadian courts have generally been willing in assessing damages to accept 
evidence of the actual price paid by the buyer for the same or substantially 
similar goods.^'^^ This form of cover is, therefore, already recognized. Our 
existing law is defective insofar as it does not appear to permit the buyer 
to base his damages on a covering transaction where there is an available 
market for the goods. The price he paid may be admissible as evidence 
of a prevailing market price, but it is not conclusive. Moreover, if a 
significant delay has occurred between the time of the seller's breach and 
the date of the buyer's cover, the evidence may not be admissible for 
even this limited purpose. It is in the context of an available market that 
UCC 2-712 serves its most useful office. 



2695'Mpra, this ch., at p. 494; and see, Draft Bill, s. 9.19(2). 

270See, Draft Bill, s. 9.12(2)3 and s. 9.14, and infra, Part E. 

27iProfessor Peters, footnote 99 supra, at p. 267, describes it as "one of Article 

2's most significant achievements". 
272The concept of "available market" and the existing statutory provisions relating 

to it are discussed infra, ch. 18, sec. 2. 
^'^^Hinde v. Liddell (1875), L.R. 10 Q.B. 265; Casswell v. Mathew Moody & 

Sons Company, [1926] 1 W.W.R. 113 (Sask. C.A.). Compare, The Arpad, 

[1934] P. 189 (C.A.). 



I 



499 

Accordingly, we recommend that a provision corresponding to UCC 
2-712(1) should be adopted in the revised Act permitting the buyer to 
cover his loss by making in good faith and without any unreasonable delay 
any reasonable purchase of or contract to purchase goods in substitution 
for those due from the seller where the seller's conduct amounts to a 
substantial breach and the seller repudiates, fails to make delivery or to 
perform an act due before delivery, or where the buyer rightfully rejects 
or revokes acceptance. ^"^"^ We further recommend that, where the buyer has 
elected to cover, he should be entitled, as in UCC 2-712(2), to recover 
as damages the difference between the cost of cover and the contract price 
less expenses, if any, saved in consequence of the seller's breach, but 
failure to cover should not bar the buyer from any other remedy.^''^ 

Our recommendation would not confer upon the buyer an unfettered 
right to elect between covering and basing his claim for damages on the test 
that we later recommend should be adopted in lieu of the traditional market 
price test.^"^^ If the buyer seeks to rely on the results of a covering purchase 
he is obliged to act in good faith and without unreasonable delay.^"^"^ The 
concept of good faith requires that both the decision to cover and the terms 
of the substitutional contract must be honestly made, and that reasonable 
standards of fair dealing must be observed. ^^s 

An uncertainty that is not resolved in Article 2 is whether a buyer is 
bound by his election to cover. As we have previously noted, the same 
question arises with respect to a seller's resale under UCC 2-706 and 
we have earlier recommended that a seller should be bound by the results 
of the resale in claiming his damages.^'^^ We are of the view that the same 
principle should obtain in each case. Accordingly, we recommend that a 
buyer who elects to cover should be bound by the results of his election in 
claiming his damages. To ensure this result, the recommended general 
provision in our Draft Bill dealing with the computation and measure of 
the buyer's damages provides that the buyer is not entitled to sue for the 
difference between the contract price and the price that we later recom- 
mended for adoption in lieu of the market price, if his actual loss is 
less than this difference. ^^^ 

(d) SUB-CONTRACTS, THE FORESEEABILITY TEST, AND MITIGATION 
PRINCIPLES 

Under this heading we deal with two distinct questions, the answers 
to which remain uncertain. The first question is concerned with the situa- 
tion where the buyer has entered into a sub-contract for the resale of 
the goods. The second question arises where the buyer actually resells 
the goods or enters into a compensating purchase. 



274See, Draft Bill, s. 9.12(2) and s. 9.15(1). 

275See, Draft Bill, s. 9.15(2) and (3). 

276in chapter 18, sec, 2, we recommend that a test of 'commercially reasonable 

disposition or purchase' be substituted in the revised Act for the traditional 

market price test. 
277See, Draft Bill, s. 9.15(1). 
278See, Draft Bill, s. 1.1(1)15. 
2795wpra, ch. 16, sec. 2(b) (iii). 
280See, Draft Bill, s. 9.16(4). 



500 

The first question is whether a disappointed buyer can claim en- 
hanced damages on the ground that the seller's failure to perform caused 
him to lose a profitable sub-contract or on the ground that the seller's 
breach has involved him in damage claims brought by his sub-buyer. In 
Williams Brothers v. Ed. T. Agius Ltd?-^^ the House of Lords approved the 
rule enunciated by the Court of Appeal in Rodocanachi Sons & Co. v. 
Mllburn Brothers^^^ that "the law does not take into account in estimating 
the damages anything that is accidental between the plaintiff and the defen- 
dant". This rule has been reaffirmed and followed in subsequent cases with 
the exception of the much discussed decision^^^ of the House of Lords in 
Re R. & H. Hall Ltd. and W. H. Pirn (Junior) & Co.'s Arbitration. '^^^ The 
controversial judgments in the Hall case discussing the test of foreseeability 
under the rules in Hadley v. Baxendale were quoted with approval in The 
Heron //, although in the latter case Lord Reid^^^ was careful to reserve 
his opinion with respect to whether a different test of foreseeability applies 
in sales cases than applies in contracts for the carriage of goods and other 
branches of contract law. 

This, indeed, is the critical issue. It appears to be well accepted that 
if the seller knows that the buyer needs the goods to meet an existing com- 
mitment,^^^ or intends to resell them under a string contract,^^^ he will be 
held responsible for the buyer's enhanced damages. Further, in Patrick v. 
Russo-British Grain Export Co. Ltd.'^^^ Salter, J., stated that it was suffici- 
ent if both parties contemplate that the buyer will "probably" resell on 
terms that will not enable the buyer to go into the market and replace the 
goods if the seller defaults, "and the seller is content to take the risk". On 
this basis it seems that the issue is narrowed to a choice between the test 
of "probable" resale and the broader test of "serious possibility", "real 
danger", "not unlikely occurrence" favoured by the members of the House 
of Lords in The Heron H.^^^ It is understandable that the courts should be 
reluctant to saddle the seller with aggravated damages in the absence of 
compelling evidence that he appreciated the risk. At the same time it is 
difficult to justify a stricter test to measure the seller's Hability for damages 
of this nature, than to measure his liability where other forms of damages 
are being claimed. Be that as it may, we are of the view that the discrep- 
ancy is one that is best left for judicial resolution. Accordingly, we recom- 
mend that the revised Act should not attempt to specify the circumstances, 
if any, in which the buyer may be entitled to recover enhanced damages on 
the ground that the seller's failure to perform has caused him to lose a 



281[1914] A.C. 510(H.L.). 

282(1886), 18 Q.B.D. 67 (C.A.), at p. 77. 

283See, for example, the discussion and authorities cited in McGregor on Dam- 
ages (13th ed., 1972), paras. 569 et seq.; and Atiyah, footnote 171 supra, pp. 
307-09. 

284(1928), 33 Com. Cas. 324, [1928] All E.R. 763 (H.L.); Benjamin's Sale of 
Goods (1974), paras. 1288-91. 

285[1969] 1 A.C. 350 (H.L.), at p. 393. 

'^^^Household Machines Ltd. v. Cosmos Exporters Ltd., [1947] K.B. 217. 

28lKwei Tek Chao v. British Traders & Shippers Ltd., [1954] 2 Q.B. 459, at p. 489. 

288 [1927] 2 K.B. 535, especially at p. 540. 

289[1969] 1 A.C. 350 (H.L.). 



501 

profitable sub-contract or on the ground that the seller's breach has in- 
volved him in damage claims brought by his sub-buyer. 

The second question is the extent to which the seller can take advan- 
tage of the buyer's actual resale or compensating purchase, as the case 
may be, in order to show that the buyer's actual loss was less than the 
figure that would otherwise be arrived at by the market price formula. ^^o 
The rule in the Rodocanachi case, just referred to, does not furnish an 
automatic answer to this question, because it fails to take into account the 
buyer's general obligation to mitigate his damages, which arises aiter he 
has learned of the seller's breach. ^^i The point does not appear to be cov- 
ered by authority ,2^2 but textwriters generally take a negative view.^^^ We 
have earlier recommended that a provision equivalent to UCC 2-712, 
which confers upon the buyer a right to "cover", should be incorporated 
into the revised Act.294 if this recommendation is accepted, then the miti- 
gation issue will resolve itself in cases where the buyer has made a com- 
pensating purchase. The reason is that the covering price will measure the 
extent of the buyer's damages, whether the price is lower or higher than 
the prevailing market price. 

Our recommended right to cover does not, however, provide a com- 
plete answer to the broad policy issue presented by the question under dis- 
cussion. The right to cover is by its nature hmited to a post-breach event 
and does not relate to events that occur prior to breach. To what extent 
should evidence of such pre-breach events be admissible? Our response to 
this policy issue is contained in our Draft BilP^^ which, following the con- 
troversial decision of the Privy Council in Wertheim v. Chicoutimi Pulp 



'^^McGregor on Damages (13th ed., 1972), paras. 238 et seq. 

29iHowever, in McGregor's view, ibid., para. 249, the duty to mitigate only arises 
if the plaintiff is claiming consequential damages and not where he is suing for 
ordinary market value arising out of a case of non-delivery, delayed delivery, 
or the delivery of defective goods. 

292/^. Pagnan & Fratelli v. Corbisa Industrial Agropacuaria Limitada, [1970] 
1 W.L.R. 1306 (C.A.) did not involve a second purchase by the buyer from a 
new source, but the purchase of the same goods from the seller at a sub- 
stantially reduced price after the buyer had initially rejected the goods. It was 
held that the second contract was part of a continuous course of dealing be- 
tween the parties and not a wholly new and independent event. Consequently, 
in assessing the buyer's loss, the court brought into account the profit made by 
the buyer on the second purchase. As Professor Atiyah notes, footnote 171 
supra, at p. 280, "While it is not wholly clear whether the result would have 
been the same if the second purchase had not been from the sellers the case 
does illustrate a modern reluctance to award damages for a 'loss' which in one 
sense is purely notional". 

293See, for example, Benjamin's Sale of Goods (1974), para. 1277; McGregor on 
Damages (13th ed., 1972), para. 249; and compare, Atiyah, footnote 171 
supra, pp. 279-80. Benjamin distinguishes between a resale by a seller following 
the buyer's failure to accept delivery and a covering purchase by the buyer 
following the seller's default. In the latter situation the learned authors would 
deny the seller the benefit of the buyer's lower actual damages, except in the 
situation as in the Pagnan case, footnote 292 supra, but they concede that in the 
former situation the seller's damages may be reduced if he resells promptly and 
had no other supplies in hand. The distinction is a difficult one. 

^^'^Supra, this ch., at p. 499. 

295See, Draft Bill, s. -9.16(4). 



502 

Co.P^ limits the aggrieved party to such damages as he has actually suf- 
fered without distinguishing between events occurring before or after the 
date of breach. We have adopted this position because, in our view, the 
criticism of the Wertheim case^^'' confuses two separate issues. If the ques- 
tion is whether the aggrieved party should be entitled to recover enhanced 
damages because of loss of, or liability under, a sub-contract, the foresee- 
ability of such damages is a relevant issue. But foreseeability has nothing 
to do with the question whether damages higher than those actually suf- 
fered should be recoverable. We agree with the Privy Council that the 
compensatory purpose of damages should be as applicable here as in other 
branches of contract law. Admittedly, this may lead to a lesser award than 
would otherwise be the case, but, in our view, this possibility is irrelevant. 
What is relevant is that the judgment leaves the aggrieved party in ap- 
proximately the same position as if the contract had been performed, and 
this is what a damage award is supposed to do. We recognize that a market 
price test is easier to apply and that it has the appearance of being even- 
handed. However, its equitable nature disappears once it is conceded that 
the buyer's damages may be based on the results of a covering purchase. 
The question then becomes whether only post-breach factors may be taken 
into account, or whether the admissible evidence may also include ante- 
cedent events. For the reasons we have given we prefer the rule that is 
more generous to the seller. Accordingly, we recommend that the buyer 
should be limited to such damages as he has actually suffered without 
distinguishing between events occurring before or after the date of breach. 

(e) IMPECUNIOSITY 

In two comparatively recent Ontario cases, R. G. McLean Ltd. v. 
Canadian Vickers Ltd.^^^ and Freedhoff v. Pomalift Industries Ltd.,^^^ the 
question arose whether the buyer could claim aggravated damages, or 
could excuse his failure to mitigate, by reason of his impecuniosity. In 
both cases this argument was rejected with little hesitation on the ground 
of remoteness. It may be that these cases stand only for the proposition 
that the loss ascribable to the buyer's impecuniosity was not substantially 
foreseeable at the time of the making of the contract. On this reading the 
decisions were based on findings of fact, or mixed conclusions of law and 



296[i9ii] A.C. 301 (P.C.), distinguished in Williams Brothers v. Ed. T. Agius 
Ltd., [1914] A.C. 510 (H.L.). 

297See, for example, Benjamin's Sale of Goods (1974), para. 1297, pp. 636-38. The 
principle enunciated in the Wertheim case has been applied or referred to 
approvingly in a substantial number of subsequent Canadian decisions although 
the facts of these cases often were very different from those in the Wertheim 
case. See, for example, Sommerfeldt v. Petrovitch and Harnsey, [1949] 4 D.L.R. 
825 (Sask. C.A.); Cotter v. General Petroleums Ltd. & Superior Oils Ltd., 
[1951] S.C.R. 154; Dolly Varden Mines Ltd. v. Sunshine Exploration Ltd. ] 

(1968), 69 D.L.R. (2d) 209 (B.C.C.A.); Bezanson v. Kaintz (1967), 61 D.L.R. jj 

(2d) 410 (N.S.S.C.); and Asamera Oil Corporation Ltd. v. Sea Oil & General V 

Corporation and Baud Corporation N.V., footnote 221 supra. The Wertheim 
case was distinguished in Sharpe v. White (1911), 25 O.L.R. 298 (C.A.). At j, 

p. 309, Meredith, J. A., reaffirmed the market price rule, though he admitted that |' 

it could lead to a windfall for the aggrieved party. i' 

298[1971] 1 O.R. 207, (1970), 15 D.L.R. (3d) 15 (C.A.). f 

299[i97i] 2 O.R. 773, (1971), 19 D.L.R. (3d) 153 (C.A.). i 



503 

fact, and are of limited precedential value. If, however, the cases are con- 
sidered to express a general proposition of law, they appear to be incon- 
sistent with other authorities.^^ Thus, in Trans Trust S.P.R.L. v. Danubian 
Trading Co. Ltd.,^^^ Denning, L.J., observed :302 

It was also said that the damages were the result of the impecuniosity 
of the sellers and that it was a rule of law that such damages are too 
remote. I do not think there is any such rule. In the case of a breach 
of contract, it depends on whether the damages were reasonably fore- 
seeable or not. In the present case they clearly were. 

American law seems to adopt a similar position. ^^^ 

So, once again, the road leads back to the construction and applica- 
tion of the rule in Hadley v. Baxendale, a task which, as we have sug- 
gested earlier, is best left to the courts. We do not think that the revised 
Act should contain an inventory of possible losses that will or may be re- 
garded as foreseeable, or that are always to be deemed as non-recoverable 
because they are too remote. We see no virtue, and much danger, in this 
approach. Accordingly, we recommend that the revised Act should not 
attempt to regulate the circumstances in which a claim for enhanced dam- 
ages based on the buyer's impecuniosity or inability to mitigate his damages 
may be recoverable. 

(f) GOODS FOR use: THE "REMA" PROBLEM 

In our view, the value of leaving the rule in Hadley v. Baxendale to 
judicial development is admirably illustrated by the history of the problem 
that presented itself in Cullinane v. British "Rema" Manufacturing Co. 
Ltd?^ As we interpret the majority judgments in that case, Evershed, 
M.R., and Jenkins, L.J., laid down the following proposition: that in the 
case of the loss of a profit-making machine the buyer can elect between 
recovering the capital value of the machine or suing for prospective loss of 
profits but that he cannot do both. It is now clear that this proposition 
cannot be taken at face value. 

The elective principle is subject to the buyer's duty to mitigate^^^ and, 
ordinarily, he will be expected to replace the machine once its unsuitability 



^OOMulmmmad Issa el Sheik Ahmad v. All, [1947] A.C. 414 (P.C); Trans Trust 
S.P.R.L. V. Danubian Trading Co. Ltd., [1952] 2 Q.B. 297 (C.A.). See, also, 
Wroth V. Tyler, [1974] Ch. 30, followed in Metropolitan Trust Co. of Canada 
V. Pressure Concrete Services Ltd., [1973] 3 O.R. 629, (1973), 37 D.L.R. (3d) 
649, affirmed (1975), 9 O.R. (2d) 375, 6 D.L.R. (3d) 431 (C.A.), with respect 
to the assessment of damages in equity and the relevance of the plaintiff's impec- 
uniosity where a decree of specific performance is refused. 

301[1952] 2 Q.B. 297 (C.A.). 

^^^Ibid., at p. 306. For a similar view see the judgment of Romer, L.J., at p. 307. 

303McCormick, Handbook on the Law of Damages (1935), Rule 38, p. 140; and 
see. Lake Village Implement Co. v. Cox (1972), 478 S.W. 2d 36 (Ark. Sup. 
Ct.), especially at p. 42. 

304[i954] 1 Q.B. 292 (C.A.). 

305Street, Principles of the Law of Damages (1962), p. 245; R. G. McLean Ltd. 
V. Canadian Vickers Ltd., footnote 298 supra; Sunnyside Greenhouses Ltd. v. 
Golden West Seeds Ltd. (1972), 27 D.L.R. (3d) 434 (Alta. S.C, App. Div.). 
See, also, Baer, "The Assessment of Damages for Breach of Contract — Loss 
of Profit" (1973), 51 Can. Bar Rev. 490. 



504 

ought to be clear. But since the defect, or its incurable nature, may not 
become obvious immediately, and since in any event replacement is bound 
to take some time, the buyer is entitled to claim for loss of profits during 
the interim period. Such claims, as recent decisions have indicated, ^^ are 
not inconsistent with a concurrent claim for the return of the purchase 
price, provided that the profits are calculated on a net basis and make a 
fair allowance for the depreciation of the equipment during the period for 
which loss of profit is being claimed. 

Further refinements of these rules can no doubt be expected. We do 
not believe that any statutory statement of the applicable principles would 
improve the position, or make it easier to solve particular problems. It 
could have the reverse effect. Accordingly, and subject to our earlier 
recommendation with respect to the formulation of the test of foresee- 
ability of damages and the buyer's entitlement to claim consequential 
damages, we do not recommend that the revised Act should attempt to 
codify the common law principles either with respect to the measure of 
damages recoverable by the buyer where the goods bought are intended 
for use or with respect to his right to elect between recovery of his reliance 
and of his expectancy damages. 

E. RESTITUTIONARY REMEDIES 

Where a buyer claims damages, he seeks compensation for the 
losses he has sustained as a result of the seller's breach of contract. Should, 
however, the buyer have conferred a benefit upon the seller in anticipation 
of the seller's performance of his contractual obligations, and should the 
seller default, the buyer may seek, by way of a restitutionary remedy, the 
return of this benefit. 

Only one form of restitutionary remedy appears to be of particular 
significance from the buyer's point of view. This remedy is the buyer's 
right to recover payments made by him under the doctrine of total failure 
of consideration. His right to do so is expressly reserved in section 52 of 
the Ontario Sale of Goods Act. This section provides as follows: 

52. Nothing in this Act affects the right of the buyer or the seller 
to recover interest or special damages in a case where by law interest 
or special damages may be recoverable, or to recover money paid 
where the consideration for the payment of it has failed. 

The Code's counterpart of section 52 is UCC 2-711(1) which, inter alia, 
establishes and specifies the circumstances in which the buyer can recover 
so much of the price as has been paid. In practice the buyer is only likely 
to invoke the restitutionary remedy where he has no reliance or expectancy 
losses, or where the restitutionary award would be greater than such re- 
coverable losses. The restitutionary remedy has, however, evidentiary ad- 
vantages insofar as it saves the buyer the trouble of having to prove his 
actual damages. 



306/^/i/. See, also, T. C. Industrial Plant Pty Ltd. v. Robert's Queensland Pty. Ltd., 
[1964] A.L.R. 1083 (Aust. C.A.). 



505 

The question then arises under what circumstances should the resti- 
tutionary remedy be available? There is no difficulty in situations where 
the seller has never delivered the goods, or where the buyer has promptly 
rejected non-conforming goods. In both instances, in contemplation of 
law, the buyer has received no consideration for his payment. Under 
existing law,^^'^ however, any use or retention of the goods by the buyer, 
beyond the period reasonably necessary to determine their conformity, will 
be deemed to involve an acceptance. Once this event has occurred, it will 
be too late for the buyer to invoke his restitutionary remedy. It is true that 
under our previous recommendations the period of rejection may be sub- 
stantially extended where the seller has encouraged the buyer to retain 
the goods while efforts are being made to cure the defect; but in principle 
this should not affect the buyer's restitutionary claim if, in law, he is 
deemed never to have accepted the goods. 

Greater difficulties may be experienced if, as has been previously 
recommended, the revised Ontario Act incorporates a provision equivalent 
to UCC 2-608, with respect to the buyer's right to revoke his acceptance. 
American decisions under UCC 2-608, and under the preceding provisions 
in the Uniform Sales Act, show^^^ that when a buyer revokes his accept- 
ance and seeks the return of payments made he will be required to account 
for any benefits derived from the goods. If a similar approach were 
adopted by the Canadian courts it could mean that the buyer would lose 
his restitutionary remedy altogether. The reason is that an essential in- 
gredient of the action for money had and received has frequently been said 
to be the absence of received benefits, other than benefits that are purely 
nominal: or, quaere, the ability to return any such benefits in specie?^'^ 
American restitutionary theory has never been confined by this arbitrary 
rule, and apparently permits^^^ the buyer to rescind the contract of sale and 
recover any payments made by him subject to a deduction in respect of 
benefits derived from the goods. We support this approach. Accordingly, 
we recommend that the revised Act should entitle the buyer to recover so 
much of the price as he has paid where the seller's conduct amounts to a 
substantial breach and the seller repudiates, fails to make delivery or to 
perform an act due before delivery, or where the buyer rightfully rejects 
or revokes acceptance. ^^^ We further recommend that where the buyer has 
received the goods any claim by a buyer to recover so much of the price 



'^'^Supra, this ch., sec. C.l(a)(ii). 

308For example, Orange Motors of Coral Gables Inc. v. Dade County Dairies Inc. 
(1972), 258 So. 2d 319 (Fla. Ct. App.): Baton v. Hotel & Restaurant Supplies 
Inc. (1967), 433 P. 2d 661 (Ariz. Ct. App.). 

^09 Hunt V. Silk, [1803-13] All E.R. Rep. 655; Treitel, The Law of Contract (4th 
ed., 1975), at pp. 698-99; Goff and Jones, The Law of Restitution (2nd ed., 
1978), pp. 372 et seq. Goff and Jones, at p. 374, take the position that benefits, 
if in the form of enjoyment of goods or land, must be of a "reasonably sub- 
stantial nature to defeat such a claim [in quasi-contract]"; but see, contra. The 
Canadian Encyclopedic Digest (Ontario) (3rd ed., 1974), Vol. 5, p. 32-309, 
para. 562 and cases noted therein. 

^^^Restatcment of the Law of Restitution (1937), sees. 144, 159, and Restatement 
of the Law of Contracts (1932), sees. 347-54, 356. 

3nSee, Draft Bill, s. 9.12(2)3. Section 9.12(2)3 has its counterpart in UCC 
2-711(1). It will be observed that the buyer's right to reject is subject to the 
provisions on the seller's right to cure. 



506 

as has been paid should be subject to such a reduction on account of any 
benefits derived by him from the use or possession of the goods as is just 
in the circumstances. ^^^ 

Adoption of this solution may not, of itself, resolve the conundrum 
posed by Rowland v. DivalP^^ which has so troubled some English com- 
mentators. ^^"^ The problem is this. If it transpires that the seller never 
had title to the goods that he purported to deliver in fulfillment of his 
contract of sale, or that his title was defective in some other respect, should 
the buyer be accountable for the use he has derived from the goods? 
It is sometimes assumed that this question only arises in the context of a 
buyer's claim for the return of the purchase price, but this does not appear 
to be correct. The same question arises if the buyer claims damages for 
breach of the condition of title, assuming he has rescinded the contract or 
that the goods have been taken from him by their true owner. 

In Rowland v. Divall, mentioned above, the plaintiff-buyer had, in 
good faith, purchased a motor vehicle from the defendant-seller. It trans- 
pired that the motor vehicle had been stolen and that the defendant did 
not have a good title. The car was taken by the police and the buyer 
brought an action to recover the purchase price he had paid on the 
ground of total failure of consideration. All members of the Court^^^ were 
agreed that the buyer had derived no benefits under the contract of sale 
that would defeat his restitutionary claim. He obviously had not received 
the title and, equally obviously, he had not obtained lawful possession. It 
was true that he had had the use of the car for several months but, as the 
judgments observed, ^^^ it was not a lawful use. It is, therefore, difficult to 
see how the decision could have been different unless it is argued that the 
lawfulness or unlawfulness of the derived benefits is immaterial for the 
purpose of adjusting restitutionary claims. An example has been given of 
a buyer who purchases a crate of whisky that turns out to be stolen. In the 
meantime the buyer has consumed the liquor. It has been argued that it 
would be unjust that the buyer should be able to avoid paying the price, 



3i2See, Draft Bill, s. 9.14. Section 9.14 has no express counterpart in the Code 
but the principles of law and equity are preserved in UCC 1-103. A precedent 
for s. 9.14 is to be found in the 1977 draft UNCITRAL Convention, Article 
55 of which provides: 

(1) If the seller is bound to refund the price, he must also pay interest 
thereon from the date on which the price was paid. 

(2) The buyer must account to the seller for all benefits which he has de- 
rived from the goods or part of them: 

(a) if he must make restitution of the goods or part of them; or 

(b) if it is impossible for him to make restitution of all or part of the 
goods or to make restitution of all or part of the goods substanti- 
ally in the condition in which he received them, but he has never- 
theless declared the contract avoided or required the seller to 
deliver substitute goods. 

313[1923] 2 K.B. 500 (C.A.). 

3l4See, for example, Atiyah, The Sale of Goods (5th ed., 1975), pp. 51-52; and 

Treitel, "Some Problems of Breach of Contract" (1967), 30 Mod. L. Rev. 139, 

at pp. 146-49. 
3l5Bankes, Scrutton, and Atkin, L.JJ. 
316[1923] 2 K.B. 500 (C.A.) per Bankes, L.J., at p. 504, and per Atkin, L.J., at 

p. 506. 



507 

or be entitled to recover the price if it has already been paid; but, as has 
been pointed out, much will depend on what the true owner decides to 
do.^^"^ If he elects to sue the seller in conversion and the seller pays him, 
the buyer's position looks weak. If it is the buyer who has been sued, 
or is being threatened with suit by the true owner, it is difficult to see why 
he should not be entitled to be fully indemnified by the seller; although, 
presumably, he cannot claim both an indemnity and the refund of the pay- 
ments made by him. The difficulties will be most acute where the true 
owner has not yet determined whom he will sue, or where the identity of 
the true owner is unknown. However, there is much to be said for the 
argument accepted by Finnemore, J., in Warman v. Southern Counties Car 
Finance Corp. Ltd?^^ that the buyer should not have to wait to be sued 
before being entitled to exercise his rescissionary remedy. Alternatively, 
he should at least be entitled to demand that the seller cure the defect in 
his title. 

Leaving aside these difficulties, and assuming that the buyer has re- 
ceived some benefit from the use of the goods, there is still the difficult 
question of valuing the benefit. In the Warman case, Finnemore, J., re- 
jected the contention^^^ that the hirer who had agreed "to rent" a car 
under a hire-purchase agreement should be subject to a set-off in respect 
of the rental value of the car while it was in his possession. Finnemore, J., 
observed that if the hirer had simply wanted to rent a car he would have 
done so. Similar difficulties arise^^^ if other criteria are adopted such as 
depreciation or profits made through the use of the goods. 

These problems have been the subject of study and recommendations 
both in the New South Wales Working Paper^^i g^d in a Working Paper 
on Pecuniary Restitution on Breach of Contract^^^ published by the Eng- 
lish Law Commission in 1975. The New South Wales Working Paper 
made two recommendations: first, that the seller should be given a rea- 
sonable time to perfect his title before the buyer can rescind for breach of 
warranty of title; and, secondly, that if the seller fails to perfect his title 
within a reasonable time, the buyer should be entitled to claim a refund 
of the purchase price. However, it would be a condition of the buyer's 
right to recovery that he join the true owner as a party to the action, and 
that he offer to pay the true owner reasonable compensation for his use 
and enjoyment of the goods. The buyer should also have the alternative 
remedy of damages. The English Working Paper offered the following 
provisional recommendations -.^^s 

(a) If he has conferred a valuable benefit on the buyer by the de- 
livery of possession of the goods, the seller should be entitled 



3i7Atiyah, The Sale of Goods (4th ed., 1971), p. 46; and Atiyah, The Sale of 

Goods (5th ed., 1975), pp. 51-52. 
318 [1949] 2 K.B. 576. This case involved a hire-purchase agreement. 
^^^Ihid., at pp. 581-82. 
320Treitel, "Some Problems of Breach of Contract" (1967), 30 Mod. L. Rev. 139, 

at pp. 146-49. 
^'^^Supra, footnote 240, Summary of Recommendations, paras. 15.66, 15.67. 
322Law Com. Working Paper No. 65, Pecuniary Restitution on Breach of Contract 

(1975). 
^^^Ibid., pp. 66-67. 



508 

to be paid (or as the case may [sic], to retain) the value of the 
benefit so conferred. 

(b) The seller should be regarded as having conferred a valuable 
benefit on the buyer for the purposes of (a) where — but only 
where — a suitable replacement for the goods delivered may 
reasonably be obtained by the buyer at less than the original 
contract price, in which event the value of the benefit should be 
the difference between the original contract price and the price 
of the replacement or the amount by which the market price of 
the goods in question has fallen during the period of the buyer's 
possession, whichever may be the less. 

(c) The seller's entitlement under (a) should be conditional upon 
the satisfaction of the true owner's claims against the buyer. 

(d) Proposal (a) should not apply where the seller has sold stolen 
goods knowing or believing them to be stolen. 

We do not find either set of recommendations completely satisfac- 
tory. We support the New South Wales recommendation that the seller 
should have an opportunity to cure the defect in title because it is con- 
sistent with the seller's general right to cure that we have recommended 
for adoption earlier in this chapter. However, in our opinion there is no 
justification for imposing on the buyer, if he seeks to recover the purchase 
price from the seller, the onus of joining the owner as a third party. We 
find two difficulties with the English proposals for measuring the value of 
the benefits conferred on the buyer: first, they are too rigid and, secondly, 
for obvious reasons, they do not concern themselves with the valuation of 
benefits where the buyer revokes his acceptance. In all cases we would 
prefer to leave the assessment of benefits to the discretion of the court, and 
not to draw a distinction between different types of restitutionary claim. 

In our opinion, restitutionary claims for defects in title should be put 
on the same footing as claims arising out of other defects that entitle 
the buyer to claim the return of the price. We have previously recom- 
mended that where the buyer has received the goods any claim by a 
buyer to recover so much of the price as has been paid should be subject 
to such a reduction on account of any benefits derived by him from the use 
or possession of the goods as is just in the circumstances. In our view 
this recommendation should also apply to a buyer's claim to recover the 
purchase price where there is a defect in the seller's title and we so recom- 
mend. In addition, following our earlier recommendations the seller will 
have an opportunity to cure the defect in title if he satisfies the require- 
ments generally applicable to a seller's right to cure a non-conforming 
tender or delivery. 

We would anticipate that, to the extent that the seller is given an 
opportunity to cure the defect in his title, and exercises it, the need for 
the court to exercise its discretion in quantifying the benefits conferred 
upon the buyer will be greatly diminished in practice. To a lesser extent 
this will also be true in other cases where the seller has a right to cure 
other forms of defective performance. On the other hand, where the court 



509 

is called upon to exercise its discretion in quantifying the benefits con- 
ferred, there is no reason why it may not take into consideration the good 
faith of each of the parties. It should, however, be clearly understood that 
the buyer is not obliged to pursue his restitutionary remedy and that, as 
under existing law, he should continue to have the option of suing for 
damages. We so recommend. ^24 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should contain an index section of buyer's 
remedies. This section should distinguish between the buyer's 
remedies for substantial and non-substantial breach of a con- 
tract of sale. 

2. With respect to the buyer's right to obtain an order for speci- 
fic performance: 



* 



(a) The provision in the revised Act comparable to section 50 
of the existing Sale of Goods Act dealing with specific 
performance should not be confined to contracts for the 
delivery of "specific or ascertained goods", but should 
read as follows: 

In an action against the seller for breach of con- 
tract to deliver promised goods, whether or not the 
goods existed or were identified at the time of the 
contract, the court may direct that the contract be 
performed specifically and may impose such terms 
and conditions as to damages, payment of the price, 
and otherwise, as seem just to the court. 

(b) No attempt should be made in the revised Sales Act to 
resolve an apparent conflict between the buyer's right to 
compel delivery of goods under The Replevin Act and 
the discretionary remedy of specific performance under 
The Sale of Goods Act. Any change in the Ontario Rep- 
levin Act, as applicable to contracts of sale, should form 
part of a comprehensive review of replevin law. 

(c) The revised Act should not adopt a provision equivalent 
to UCC 2-502 dealing with the buyer's right to recover 
goods from an insolvent seller; rather, this issue should 
be resolved within the context of the law of bankruptcy. 
Consideration should also be given to a review of The Per- 
sonal Property Security Act by the Advisory Committee 
on that Act, with a view to determining whether The Per- 
sonal Property Security Act should be amended to accom- 
modate more adequately the security needs of buyers. 



324See, Draft Bill, s. 9.12(2). 

♦The Honourable J. C. McRuer dissents from this recommendation. See, 
footnote 50, supra. 



510 

3. The buyer's right to reject a non-conforming tender under the 
revised Act should, in the absence of contrary agreement, be 
confined to cases where the non-conformity amounts to a sub- 
stantial breach of the seller's obligations. 

4. The buyer's right to reject should not turn, as is the case under 
section 12(3) of the existing Sale of Goods Act, on whether, 
in a non-severable contract, the buyer has accepted part of the 
goods, or on whether the contract involves a sale of specific 
or non-specific goods or title has passed to the buyer. Accor- 
dingly, 

(a) (i) the buyer should not lose his right to reject where he 

has accepted part of a non-severable consignment of 
goods; rather, the revised Act should provide that, 
where the non-conformity amounts to a substantial 
breach, the buyer may accept the whole, reject the 
whole, or accept one or more commercial units and 
reject the rest; 

(ii) in the light of the above recommendation, section 29 
of the existing Act should be omitted from the revised 
Act; 

(b) the buyer should not lose his right to reject where the 
contract involves a sale of specific goods the property 
in which has passed to the buyer; 

(c) section 12(3) of the existing Sale of Goods Act should 
be omitted from the revised Sales Act. 

5. Subject to recommendations 6-11, infra, the revised Act should 
confer upon the seller a right to cure a non-conforming tender 
or delivery where the buyer has rightfully rejected or revoked 
his acceptance of the goods. 

6. The seller's right to cure should be subject to the following 
safeguards : 

(a) the seller must seasonably notify the buyer of his inten- 
tion to cure the non-conformity following the buyer's re- 
jection; 

(b) the non-conformity must be capable of cure without un- 
reasonable prejudice, risk or inconvenience to the buyer; 
and 

(c) the type of cure offered by the seller must be reasonable 
in the circumstances. 

7. (a) The seller's right to cure under the revised Act should 

arise, 

(i) subject to recommendation (b)(i), infra, where the 
buyer rightfully rejects a non-conforming tender or 



** 



.511 

delivery, whether before or after the time for per- 
formance has expired; and 
(ii) where the buyer revokes his acceptance of the goods. 

(b) The seller should not have a right to cure, 

(i) in the case of a late tender or delivery amounting to 
a substantial breach; or 

(ii) where the seller fails to cure in response to a de- 
mand by the buyer, and the buyer accordingly exer- 
cises his right to reject. 

Subject to recommendation No. 7(b) (i), supra, the revised 
Act should not restrict the type of non-conforming tender that 
may be the subject of cure. 

The revised Act should specify the permissible types of cure 
that are available to the seller. For the purpose of the cure 
provisions in the revised Act, "cure" should mean, 

(a) tender or delivery of any missing part or quantity of the 
goods; 

(b) tender or delivery of other goods or documents which 
are in conformity with the contract; 

(c) the remedying of any other defect, including a defect in 
title; or 

(d) a money allowance or other form of adjustment of the 
terms of the contract. 



10. Where the seller elects to cure a non-conformity, the buyer 
should be entitled to suspend performance of his obligations 
until the non-conformity has been cured. 

11. The seller's election to cure should not affect the buyer's right 
to recover damages in respect of the non-conformity. 

***12. Whether or not the non-conformity is such as to entitle the 
buyer to reject the tender or delivery, the buyer should be 
able, subject to recommendation No. 13, injra, to require the 
non-conformity to be cured within a reasonable time. If the 
seller fails to cure a non-conformity in response to the buyer's 
demand, the buyer should be entitled to reject the tender or 
delivery and to exercise the same remedies as if the non-con- 
formity had amounted to a substantial breach of the seller's 
obligations. 

13. The buyer's right to demand cure should be subject to the 
same safeguards as are recommended, supra, in respect of the 
seller's right to cure. 



**The Honourable J. C. McRuer dissents from this recommendation. See, 
footnote 146, supra. 
***The Honourable G. A. Gale and the Honourable J. C. McRuer dissent 
from this recommendation. See, footnote 150, supra. 



512 

14. The definition of cure recommended in respect of the seller's 
right to cure should apply to the buyer's right to demand cure. 

15. Where, in the case of a substantial breach, the buyer demands 
cure, he should be able to suspend performance of his obliga- 
tions until the non-conformity has been cured; where, however, 
the non-conformity is non-substantial but the buyer neverthe- 
less demands cure, the buyer should not be able to suspend 
performance of his obligations pending cure by the seller. 

16. The revised Act should contain a separate provision governing 
the buyer's right to demand cure in the case of a late tender 
or delivery. This provision should be to the effect that, where 
the seller fails to tender or deliver the goods or document of 
title on the date or within the time provided in the contract, 
the buyer may fix a further reasonable period for the perfor- 
mance of either of such obligations and, if the seller's failure 
is not cured within the further period, the buyer may treat the 
breach as a substantial breach. 

17. With respect to the buyer's right to examine the goods, the 
revised Act should adopt, in place of section 33 of the exist- 
ing Sale of Goods Act, a provision similar to UCC 2-513(1) 
to the effect that, unless otherwise agreed and except in the 
case of documentary sales and delivery on C.O.D. or similar 
terms, the buyer is entitled before payment or acceptance of 
the goods to inspect them at any reasonable place and time and 
in any reasonable manner. 

18. The revised Act should adopt, in place of section 34 of the 
existing Sale of Goods Act, provisions similar to UCC 2-606 
(l)(a) and (b) and UCC 2-606(2) dealing with the buyer's 
acceptance of the goods. The inconsistent act rule contained 
in section 34, and in UCC 2-606(1 )(c), should be replaced 
by a provision to the effect that the buyer will be deemed to 
have accepted the goods where the goods are no longer in 
substantially the condition in which the buyer received them 
except where the change in the condition of the goods was 
caused by their own defects or by casualty suffered by the goods 
while they were at the seller's risk. 

19. The revised Act should adopt a provision that is similar to, 
but more flexible than, UCC 2-602(2) (a) deahng with the 
effect, after rejection of the goods, of any exercise of owner- 
ship by the buyer. This provision should read as follows: 

after rejection, use of the goods or other acts of owner- 
ship by the buyer are prima facie wrongful as against 
the seller but do not nullify the rejection unless the seller 
has been materially prejudiced thereby. 

20. Subject to recommendation No. 21, infra, a provision com- 
parable to UCC 2-608 dealing with the buyer's right to revoke 



513 

acceptance in whole or in part should be incorporated in the 
revised Act. 

21. The provision in the revised Act comparable to UCC 2-608 
should not contain the subjective test of substantial impairment 
imported by the v^ords in UCC 2-608(1), "substantially im- 
pairs its value to hM\ but should provide that the buyer may 
revoke his acceptance of a lot or commercial unit whose non- 
conformity "amounts to a substantial breach". 

22. With respect to the buyer's powers and duties in respect of 
goods in the buyer's possession that he has rejected, the revised 
Act should incorporate: 

(a) a provision comparable to UCC 2-602(2) (b) obliging the 
buyer, after rejection, to hold the goods with reasonable 
care at the seller's disposition for a time sufficient to 
permit the seller to remove the goods; 

(b) provisions comparable to UCC 2-604 dealing with the 
buyer's options as to salvage of rejected goods; 

(c) provisions comparable to UCC 2-603 dealing with a 
merchant buyer's duties with respect to rejected goods; 
and 

(d) in addition to provisions comparable to UCC 2-603(3) 
requiring the buyer to act in good faith and with reason- 
able care, a provision to the effect that, where the parties 
do not agree as to the buyer's right to reject the goods, 
any instructions given to, or action taken by, the buyer 
pursuant to the provision in the revised Act comparable 
to UCC 2-603 ( 1 ) , do not affect any other rights of the 
parties. 

23. The revised Act should incorporate provisions comparable to 
UCC 2-605(1) (a) and UCC 2-605(2) dealing with the 
effect of the buyer's failure to state his grounds of rejection. A 
provision comparable to UCC 2-605(l)(b) should not be 
incorporated in the revised Act. 

24. A provision comparable to UCC 2-607(3) (a) requiring a 
buyer, after acceptance of the goods, to give the seller notice 
of any breach within a reasonable time after he discovers or 
should have discovered the breach, should not be incorporated 
in the revised Act, either for consumer buyers or for merchant 
buyers. Nor should the revised Act adopt provisions com- 
parable to UCC 2-607(3) (b) requiring the buyer, in the 
case of infringement or the like, to notify the seller of suit by 
a third party, or the related provision in UCC 2-607(5) (b). 

25. The revised Act should not incorporate the vouching-in pro- 
cedure in UCC 2-607(5) (a). 



514 



26. A provision comparable to UCC 2-711(3) conferring upon a 
buyer who rightfully rejects or justifiably revokes acceptance 
of goods, a security interest in respect of goods in his posses- 
sion or control for any payments made on their price and any 
reasonable expenses incurred by him in their inspection, re- 
ceipt, transportation, care and custody, should be incorporated 
in the revised Act. 

27. The provisions in the revised Act corresponding to UCC 2- 
602, UCC 2-603, UCC 2-604 and UCC 2-605 should also 
apply to goods wrongfully, but effectively, rejected by the 
buyer. 

****28. The question whether a distinction should be drawn between 
the measure of damages applicable in claims against a non- 
merchant seller and those applicable in claims against a mer- 
chant seller should be referred for further study to the Law of 
Contract Amendment Project. 

29. The seller and buyer should continue to be liable under the 
revised Act for all substantially foreseeable damages arising 
from a breach and falling within the Hadley v. Baxendale 
formula as refined in the decision in The Heron II. Accor- 
dingly, 

(a) the test of foreseeability in sections 49(2) and 51(2) in 
respect of the buyer's claim for damages in the existing 
Sale of Goods Act should be reformulated in the revised 
Act to read as follows : 

The measure of damages is the estimated loss which, 
having regard to the seller's knowledge of all the 
circumstances, he ought to have foreseen as likely 
to result from his breach of contract. 

(b) Likewise, with respect to the damage claims of the seller 
for breach by the buyer, the revised Act should contain 
a comparable reformulation of section 48(2) of the pres- 
ent Act. 

30. Section 51 should be expanded in the revised Act to cover all 
claims for non-conforming tenders involving accepted goods 
and should also incorporate the best features of UCC 2-714. 

31. The seller's or buyer's right to claim consequential damages 
should be stated in more affirmative language, as is done in 
UCC 2-715(2). The revised Act should incorporate a single 
provision, in place of section 52 of the existing Act, in respect 
of incidental and consequential damages, and in preference 
to UCC 2-715(1) and 2(a). This section should read as fol- 
lows: 



****The Honourable G, A. Gale dissents from this recommendation. See, 
footnote 242, supra. 



515 

A seller's or buyer's claim for damages may include a 
claim for incidental or consequential damages. 

32. The revised Act should make it clear, as does UCC 2-715(2) 
(b), that where injury to person or property is alleged, it is 
sufficient to show that the injury resulted proximately from 
breach of warranty. 

33. A provision corresponding to UCC 2-712(1) should be adop- 
ted in the revised Act permitting the buyer to cover his loss 
by making in good faith and without any unreasonable delay 
any reasonable purchase of or contract to purchase goods in 
substitution for those due from the seller where the seller's 
conduct amounts to a substantial breach and the seller repu- 
diates, fails to make delivery or to perform an act due before 
delivery, or where the buyer rightfully rejects or revokes accep- 
tance. 

34. Where the buyer has elected to cover, he should, as in UCC 
2-712(2), be entitled to recover as damages the difference be- 
tween the cost of cover and the contract price less expenses, 
if any, saved in consequence of the seller's breach, but failure 
to cover should not bar the buyer from any other remedy. 

35. A buyer who elects to cover should be bound by the results 
of his election in claiming his damages. The recommended 
general provision in the revised Act dealing with the compu- 
tation and measure of the buyer's damages should state that 
the buyer is not entitled to sue for the difference between the 
contract price and the price recommended in chapter 18, 
infra, for adoption in lieu of the market price, if his actual 
loss is less than this difference. 

36. The revised Act should not attempt to specify the circum- 
stances in which the buyer may be entitled to recover en- 
hanced damages on the ground that the seller's failure to per- 
form has caused him to lose a profitable sub-contract or on 
the ground that the seller's breach has involved him in dam- 
age claims brought by his sub-buyer. 

37. The buyer should be limited to such damages as he has actually 
suffered without distinguishing between events occurring be- 
fore or after the date of breach. 

38. The revised Act should not attempt to regulate the circum- 
stances in which a claim for enhanced damages based on the 
buyer's impecuniosity or inability to mitigate his damages may 
be recoverable. 

39. Subject to recommendations 29, 31 and 32, supra, the revised 
Act should not attempt to codify the common law principles 
either with respect to the measure of damages recoverable by 
the buyer where the goods bought are intended for use or with 



516 

respect to his right to elect between recovery of his rehance and 
expectancy damages. 

40. (a) The revised Act should entitle the buyer to recover so 

much of the price as has been paid, where the seller's 
conduct amounts to a substantial breach and the seller 
repudiates, fails to make delivery or to perform an act due 
before delivery, or where the buyer rightfully rejects or 
revokes acceptance. 

(b) Where the buyer has received the goods any claim by a 
buyer to recover so much of the price as has been paid 
should be subject to such a reduction on account of any 
benefits derived by him from the use or possession of the 
goods as is just in the circumstances. 

41. Recommendation No. 40 should apply to a buyer's claim to 
recover the purchase price where there is a defect in the seller's 
title. The seller should also have an opportunity to cure defects 
in title as an aspect of the seller's general right to cure, dis- 
cussed in recommendations 5-11, supra. 

42. The revised Act should make clear that the buyer is not 
obliged to pursue his restitutionary remedy and that, as under 
existing law, he should continue to have the option of suing 
for damages. 



CHAPTER 18 



ISSUES COMMON TO SELLER'S 
AND BUYER'S REMEDIES 



In chapter 16 of this Report, we discussed the seller's remedies for 
breach of a contract of sale by the buyer. Chapter 17 was concerned with 
the buyer's remedies for breach by the seller. In this chapter, we deal with 
issues common to both buyer's and seller's remedies. 

1. Meaning of "Substantial Breach" 

As will have been apparent from chapters 16 and 17, the concept of 
substantial breach is fundamental to the proposed remedial provisions of 
the revised Ontario Sale of Goods Act. It will determine, for example, the 
circumstances in which an aggrieved seller or buyer will be entitled to can- 
cel the contract, 1 and it will determine the buyer's right to reject a non- 
conforming tender.2 The concept of substantial breach will also, as ex- 
plained in a later section of this chapter, govern the consequences of an 
anticipatory repudiation and the parties' rights under an instalment con- 
tract. ^ We turn now to consider a number of issues arising out of the adop- 
tion of a test of "substantial breach". 

(a) TERMINOLOGY 

The Saskatchewan Consumer Products Warranties Act, 1977^ pro- 
vides a precedent for use of the term "substantial breach". A similar con- 
cept appears in sections 2-610 and 2-6 12^ of the Uniform Commercial 
Code, which speak in terms of a substantial impairment of value. There is, 
however, nothing sacrosanct about the term "substantial breach", and 
other expressions, such as "material breach", "major breach"^ or "serious 
breach" would convey the same flavour. For a number of reasons, we have 
consciously eschewed adoption of the term "fundamental breach", which 
appears both in Article 10 of the Uniform Law on the International Sale 
of Goods (ULIS) and in Article 8 of the 1977 draft UNCITRAL Con- 
vention. The first reason is that, in Anglo-Canadian jurisprudence, the 
term has become too closely associated with disclaimer and exception 
clauses to be readily adaptable to a broader purpose without causing con- 
fusion. Secondly, the normal test of a fundamental breach — that is, a 
breach that "goes to the root" or that destroys the "basis" or "founda- 



iSee, Draft Bill, ss. 9.3(2) 1, 9.12(2)2. 

2See, Draft Bill, s. 8.1(a). 

3See, infra, this ch., sees. 4 and 5; and see, also, Draft Bill, ss. 8.10, 8.12. 

4S.S. 1976-77, c. 15, ss. 2(c), 20. The Saskatchewan Act refers to a "breach of 

a substantial character". 
^Dealing, respectively, with anticipatory repudiation and breach of an instalment 

contract. 
^Compare, the Consumer Product Warranty and Liability Act, S.N.B. 1978, 

c. C-18.1, s. 14(l)(b); Restatement of the Law, Contracts 2d, Tent. Draft 

No. 8, sees. 262-63, 266. 

[517] 



518 



tion" of the agreement — is, in our view, too stringent a test to govern an 
aggrieved party's right to cancel the contract or to reject a non-conforming 
tender."^ We think it should be sufficient if the aggrieved party has been 
prejudiced by the breach to such a degree that it would be unreasonable 
to require him to continue with the contract and to confine himself to a 
claim in damages. He should not have to show that the breach has totally 
undermined the value of the bargain. Finally, the ULIS and UNCITRAL 
terminology is misleading. The term "fundamental breach" is not confined 
in ULIS to breaches that totally undermine the value of the bargain, and is 
equated in the UNCITRAL test with "substantial detriment". 

(b) DEFINITION 

Having adopted the concept of "substantial breach", the question 
arises whether the term should be defined. It may be argued that a defini- 
tion is not needed at all, and that it would be better to leave the expres- 
sion undefined, as is done in other branches of contract law that adopt a 
concept of substantial breach. On balance, however, we favour the adop- 
tion of a modest definition, designed to give our courts the benefit of 
American jurisprudence on the Code's test of substantial impairment of 
value. Accordingly, we recommend that the revised Act adopt the follow- 
ing definition of "substantial breach":^ 

'substantial breach' means a breach of contract that the party in 
breach foresaw or ought reasonably to have foreseen as likely to 
impair substantially the value of the contract to the other party. 

We have not copied Article 10 of ULIS because of the strong and, in our 
view justified, criticisms to which its complex provisions have been ex- 
posed.^ On the other hand, our definition has close affinities with the 
definition of fundamental breach in Article 8 of the 1977 draft UNCIT- 
RAL Convention, which reads as follows: 

8. A breach committed by one of the parties is fundamental if it 
results in substantial detriment to the other party unless the party in 
breach did not foresee and had no reason to foresee such a result. 

In our view, the test of substantial detriment contained in Article 8, and 
that of substantial impairment of value contained in our recommended 
definition of substantial breach, may be regarded as synonymous terms: 
it is difficult to conceive of a substantial detriment that will not also result 
in a substantial impairment of the value of the contract to the other party. 
We have borrowed from Article 8 the requirement of reasonable foresee- 
ability, because it is consistent with the Hadley v. Baxendale formula for 
the recovery of damages that we have recommended, in chapter 17, for 
adoption in the revised Ontario Act. It would be anomalous, we think, to 



^Compare, Treitel, The Law of Contract (4th ed., 1975), at pp. 543 et seq., 
and Decro-Wall International S.A. v. Practitioners in Marketing Ltd., [1971] 1 
W.L.R. 361 (C.A.), 380. 

8See, Draft Bill, s. 1.1(1)24. 

9See, supra, ch. 2, sec. 5(a); and see, also, Graveson, Cohn & Graveson, The 
Uniform Laws on International Sales Act 1967 (1968), at pp. 55 et seq. 



519 

apply different tests of foreseeability in the two types of case, or to dis- 
pense with a test of foreseeabihty altogether where a substantial breach 
of contract is alleged. 

Two possible objections to our definition of substantial breach may 
be noted. One is that it does not carry the reader very far: it is the begin- 
ning, not the end of the inquiry. ^^ We recognize that it would be possible 
to adopt a much more comprehensive series of tests, along the lines, per- 
haps, of section 275 of the Restatement of the Law of Contracts, or section 
266 of the Second Restatement on Contracts M We have not, however, 
chosen this route because, in our view, access to the Code's jurisprudence 
on the meaning of substantial impairment of value will be more helpful. 
Secondly, it may be objected that our definition considers the impact of 
the breach exclusively from the aggrieved party's point of view, and that 
it fails to take into consideration the hardship to the guilty party in per- 
mitting cancellation of the contract. The answer to this objecion is two- 
fold. In the first place, the right to cure that we have previously recom- 
mended^^ is designed to mitigate such hardship. Secondly, sales law has 
traditionally judged a breach in terms of its actual or assumed impact on 
the aggrieved party. We do not, therefore, consider that there is any sub- 
stance to these objections. 

(c) SINGLE OR MULTIPLE TESTS? 

We recognize that the test of substantial breach will have to be applied 
in a great variety of circumstances, and that whether a breach of contract 
will amount to a substantial breach in a given case will depend on the 
inferences to be drawn from all the facts. We have concluded that a single 
test of substantial breach, applied flexibly, is to be preferred to a series of 
diverse tests to be applied in different contexts. This is the approach 
adopted in Article 2 of the Uniform Commercial Code, in ULIS, and in 
the 1977 draft UNCITRAL Convention, and we recommend its adoption 
in the revised Act.^^ 



lOCompare, White & Summers, Handbook of the Law Under the Uniform Com- 
mercial Code (1972), at pp. 257-58. 
u Section 266 of the Restatement of the Law, Contracts 2d, provides: 

In determining whether a failure to perform or to make an offer to 
perform is material, the following circumstances are significant: 

(a) the extent to which the injured party will be deprived of the 
benefit which he reasonably expected; 

(b) the extent to which the injured party can be adequately compen- 
sated for the part of that benefit of which he will be deprived; 

(c) the extent to which the party failing to perform or to offer to 
perform will suffer forfeiture; 

(d) the likelihood that the party failing to perform or to offer to 
perform will cure his failure, taking account of all the circum- 
stances including any reasonable assurances; 

(e) the extent to which the behaviour of the party failing to perform 
or to offer to perform comports with standards of good faith and 
fair dealing. 

i^Supra, ch. 17, sec. C.l (d) (ii) ( 1 ). 
l3See, Draft Bill, s. 1.1(1)24. 



520 

(d) REPUDIATION AND BREACH 

A learned author has recently argued^"^ that there is a distinction 
between a breach going to the root of a contract and repudiation^^ Qf ^ 
contract. This difference is said to exist even where, apparently, the repudi- 
ation, like a performance breach, occurs at the time performance falls due. 
The two concepts, it is maintained, frequently overlap, but are not the 
same. We are not persuaded that this distinction is meaningful. ^^ How- 
ever, whether or not we are correct in this position, it should be clearly 
understood that our definition of substantial breach is intended to embrace 
acts or conduct amounting to a repudiation of a contract at the time when 
performance is due, as well as other breaches. That this is our intention 
should be evident from a reading of the section^"^ of the Draft Bill dealing 
with repudiation of a future performance "the loss of which would amount 
to a substantial breach of the contract", and the section^^ dealing with the 
circumstances in which, in an instalment contract, breach with respect to 
one or more instalments may be treated as a substantial breach of the whole 
contract. 

It may be argued, however, that these two provisions do not cover 
a situation where breach of a present obligation, which does not of itself 
amount to a substantial breach, is accompanied by repudiatory language 
with respect to a basic obligation. ^^ Such a situation might be dealt 
with in two ways. First, it might be said that the quality of the breach 
must be judged in its total setting. This is the approach adopted in sub- 
section (2) of section 268 of the Second Restatement on Contracts, which 
provides as follows: 

268.(2) Except as stated in subsection (3), a breach by non-per- 
formance accompanied or followed by a repudiation gives rise to a 
claim for damages for total breach. 

Alternatively, the repudiatory element might be severed and dealt with in 
accordance with the normal rules governing anticipatory breach. ^^ Although 
we have not thought it necessary to address this point specifically in our 
definition of "substantial breach", we would emphasize that acts or con- 



i^McRae, "Repudiation of Contracts in Canadian Law" (1978), 56 Can. Bar 
Rev. 233, at pp. 238-41. f 

i5Repudiation occurs where a party's acts or conduct amount "to an intimation j 

of an intention to abandon and altogether to refuse performance of the contract": 
Freetfi v. Burr (1874), 9 L.R.C.P. 208, 213, cited in McRae, footnote 14 supra, 
at p. 234. 

l6As Professor McRae himself notes, footnote 14 supra, at p. 241, section 17(2) 
of the British Columbia Sale of Goods Act (which is the same as s. 12(2) of 
the Ontario Act) also treats the two concepts as interchangeable (wrongly in 
his view) where it refers to a condition as a term "the breach of which may 
give rise to a right to treat the contract as repudiated". 

i7Section 8.10(1). 

isSection 8.12(3). 

i9As, for example, where a buyer whose payments are in arrears advises the 
seller that his financial position will not allow him to pay. Compare, Bridge v. 
Campbell Discount Co. Ltd., [1962] A.C. 600 (H.L.). 

20Compare, Restatement of the Law, Contracts 2d, s. 278, Comment a. 



521 

duct amounting to a repudiation at the time when performance is due are 
intended to constitute a substantial breach within the meaning of our defini- 
tion of the term. 

2. The Market Price Test 

Since the early part of the 19th century, the common law courts have 
applied a market price test to determine the prima facie damages suffered 
by a seller confronted with a defaulting buyer, or by a buyer faced with 
a non-performing seller. There is obviously much to commend this test. 
In optimum conditions it provides a ready yardstick for the quantification 
of damages, and at the same time it reaffirms the innocent party's obliga- 
tion to mitigate his damages by taking those steps that a reasonably pru- 
dent person would take in his place. The market price test reappears in 
sections 48(3) and 49(3) of The Sale of Goods Act,'^^ and is also adopted 
in Article 2 of the Uniform Commercial Code.^^ Nevertheless, despite its 
respectable age, a number of important aspects of the market price test 
remain shrouded in uncertainty. 

(a) measure of damages: "available market" or 

"commercially reasonable purchase or disposition" 

As the opening words to sections 48(3) and 49(3) of The Sale of 
Goods Act indicate, the market price test is premised on the existence of 
an available market. There is, however, considerable uncertainty about the 
meaning of "available market". In Dunkirk Colliery Co. v. Lever,^'^ James, 
L.J., enunciated the following test: 

. . . when the defendant refused to take the 300 tons the first week 
or the first month, the plaintiffs might have sent it in wagons some- 
where else, where they could sell it, just as they sell corn on the 
Exchange, or cotton at Liverpool: that is to say, that there was a fair 
market where they could have found a purchaser either by themselves 
or through some agent at some particular place. 

James, L.J., therefore, postulated some fixed geographical location where 
buyers and sellers meet regularly to transact business. Although Upjohn, 



2lSection 48(3), which deals with the pritria facie measure of damages in the 
case of a seller's claim, reads as follows: 

(3) Where there is an available market for the goods in question, the 
measure of damages is prima facie to be ascertained by the difference be- 
tween the contract price and the market or current price at the time or 
times when the goods ought to have been accepted, or, if no time was 
fixed for acceptance, then at the time of the refusal to accept. 
Section 49(3), which deals with the prima facie measure of damages in the 
case of a buyer's claim, provides: 

(3) Where there is an available market for the goods in question, the 
measure of damages is prima facie to be ascertained by the difference be- 
tween the contract price and the market or current price of the goods at 
the time or times when they ought to have been delivered, or, if no time 
was fixed, then at the time of the refusal to deliver. 
22UCC 2-708 (1 ) and UCC 2-713(1). 
23(1878), 9 Ch. D. 20 (C.A.), at p. 25. 



522 



J., in W. L. Thompson Ltd. v. Robinson (Gunmakers) Ltd.,^ considered 
himself bound by the test in the Dunkirk Colliery case, he thought it too 
restrictive, particularly in the light of the dramatic changes in marketing 
practices that had occurred since Lord Justice James' day. Upjohn, J., 
was of the view that a more appropriate test was one that asked whether 
"the situation in the particular trade in the particular area was such that 
the particular goods could freely be sold, and [whether] there was a de- 
mand sufficient to absorb readily all the goods that were thrust on it, so 
that if a purchaser defaulted, the goods in question could readily be dis- 
posed of". In Charter v. Sullivan,^^ Jenkins, L.J., found neither test en- 
tirely satisfactory. Although he did not offer his own test, he questioned 
whether there can be an available market in the statutory sense in the 
absence of the following factors :^^ 

. . . unless those goods are available for sale in the market at the 
market or current price in the sense of the price, whatever it may be, 
fixed by reference to supply and demand as the price at which a pur- 
chaser for the goods in question can be found, be it greater or less 
than or equal to the contract price.^"^ 

The uncertainties surrounding the notion of an available market raise 
two questions. The first is whether the revised Act should adopt a defini- 
tion of "available market". We are of the view that such a definition would 
merely engender new difficulties and, accordingly, we do not recommend 
the adoption in the revised Act of a definition of the term. The second 
question is whether market price terminology, including the concept of 
"available market", should be abandoned altogether in favour of a more 
flexible test. If it were decided to retain the concept of an available market 
and other market price terminology, a provision similar to UCC 2-723(2) 
would commend itself to us as a means of establishing the market price 
at a relevant date where it cannot otherwise be ascertained. UCC 2-723(2) 
provides as follows: 

2-723.(2) If evidence of a price prevailing at the times or places 
described in this Article is not readily available the price prevailing 
within any reasonable time before or after the time described or at 
any other place which in commercial judgment or under usage of 
trade would serve as a reasonable substitute for the one described 
may be used, making any proper allowance for the cost of transport- 
ing the goods to or from such other place. 

It has, however, been suggested to the Commissions^ that, because 
of the definitional difficulties mentioned earlier and because of other dif- 
ficulties with the market price test discussed below, market price terminol- 
ogy should be abandoned. According to this suggestion, the seller's dam- 
ages should be measured by the difference between the contract price and 



24[1955] Ch. 177 (C.A.), at p. 187. 

25[1957] 2Q.B. 117 (C.A.). 

26/6/J., at p. 128. 

27See, also, Amicale Yarns Inc. v. Can. Worsted Mfg. Ltd., [1968] 2 O.R. 59, 

64, (1968), 68D.L.R. (2d) 131, 136 (H.C.J.). 
28Baer, "Seller's Remedies", Research Paper No. III.9, pp. 56-58. 



523 

the price actually obtained by the seller in a commercially reasonable dis- 
position of the goods. Alternatively, where the seller elects not to resell or 
fails to mitigate his damages, the measure of damages should be the dif- 
ference between the contract price and what the seller would have obtained 
if he had disposed of the goods in a commercially reasonable manner. A 
similar test would be applied to measure the buyer's damages where the 
seller is in breach. 

In chapters 16 and 17 of this Report, we recommended that the re- 
vised Act should adopt provisions similar to UCC 2-706 permitting a 
seller to resell,^^ and UCC 2-712 permitting a buyer to cover. ^^ It will be 
apparent that these recommendations incorporate the first part of the test 
for the measure of damages suggested above; the recommended provisions 
on resale and cover permit the seller or buyer to measure his damages, 
not by the market price test, but by the difference between the contract 
price and the resale or cover price, as the case may be. The question that 
remains is whether a test of commercially reasonable disposition or pur- 
chase should also be applied where the seller or buyer has not in fact resold 
or covered. 

Whatever its theoretical difficulties, the market price test has not 
worked badly in practice. ^^ Moreover, the fact that the test has been re- 
tained in Article 2 of the Uniform Commercial Code is a further argument 
in favour of its retention in the revised Act. On the other hand, it may be 
said that Article 2 has greatly diminished the importance of the market 
price test, and that, if a formula is desirable to measure damages where 
no resale or cover has taken place, a test based upon a hypothetical com- 
mercial resale or purchase at least has the merit of forming a conceptual 
continuum with the actual resale and cover provisions. Another point in 
favour of adopting the proposed test is that it would avoid some of the 
definitional difficulties engendered by the concept of an available market, 
and would give the courts greater flexibility in assessing damages. Although 
we consider the arguments to be fairly evenly balanced, we have con- 
cluded that the revised Act should adopt a test of commercially reason- 
able disposition or purchase in preference to the market price test con- 
tained in sections 48(3) and 49(3) of the existing Sale of Goods Act. 
Accordingly, we recommend that, where the buyer wrongfully neglects 
or refuses to accept and pay for the goods at the agreed time for perform- 
ance and in circumstances amounting to a substantial breach, and the seller 
has not actually resold, the measure of the seller's damages should prima 
facie be ascertained by the difference between the contract price and the 
price that could have been obtained by a commercially reasonable disposi- 
tion of the goods, less any expenses saved in consequence of the buyer's 
breach. 32 Similarly, where the seller wrongfully neglects or refuses to de- 
liver at the agreed time for performance and in circumstances amounting to 
a substantial breach, or where the buyer rightfully rejects or revokes accep- 



29Supra, ch. 16, sec. 2(b) (iii). 

^^Supra, ch. 17, sec. D. 3(c). 

^'Compare, Lawson "An Analysis of the Concept of 'Available Market' " (1969), 

43 A.L.J. 106, at p. 114. 
32See, Draft Bill, s. 9.10(3). 



524 

tance of the goods, and the buyer has not actually covered, the measure of 
the buyer's damages should prima facie be ascertained by the difference be- 
tween the contract price and the price at which the goods could have been 
obtained in a commercially reasonable purchase, less any expenses saved 
in consequence of the seller's breach. ^^ 

It should be noted that this prima facie test applies to measure the 
seller's damages where the buyer wrongfully neglects or refuses to accept 
and pay for the goods at the agreed time for performance and in circum- 
stances amounting to a substantial breach. Similarly, the prima facie test 
applies to measure the buyer's damages where, at the agreed time for 
performance and in circumstances amounting to a substantial breach, the 
seller wrongfully neglects or refuses to deliver the goods, or where the 
buyer rightfully rejects or revokes his acceptance of the goods. In other 
cases, the measure of the seller's and buyer's damages is governed by the 
general Hadley v. Baxendale formula recommended for adoption in the 
revised Act.^"^ 

(b) THE PLACE FOR DETERMINATION OF COMMERCIALLY 
REASONABLE PRICE 

The Sale of Goods Act provides no guidance as to the geographical 
location of the market whose prevailing prices are to determine the mea- 
sure of the seller's or buyer's loss. Much may turn on this question, par- 
ticularly where the buyer and seller are far apart or trade in different 
markets. The following example will illustrate this proposition. Let us 
suppose that S, a seller in Vancouver, sells to B, a buyer in Toronto, a 
consignment of walnuts f.o.b. Vanvouver. If B wrongfully rejects the 
walnuts while they are in transit or after their arrival in Toronto, the pros- 
pects are that S will try to resell the walnuts in the Toronto market. The 
Sale of Goods Act is silent as to whether the loss should be measured with 
reference to the price prevailing at the place of tender or at the place of 
destination. If, in our example, the place of tender (that is, Vancouver) 
is to determine S's prima facie loss, and if the price of walnuts is lower 
in Toronto, where S resells, S's recovery of damages against B may be 
insufficient to cover his actual loss. The sparse case law^^ offers only 
limited guidance as to the place at which the seller's loss is prima facie 
to be measured, and it seems desirable that the position should be clarified 
in the revised Act. 

Article 2 adopts different tests to determine the place of the market, 
depending on whether it is the seller or the buyer who is claiming dam- 
ages. In the case of a claim by the seller, the place of the market is stated 
to be the place where tender is to be, or presumably has been, made.^^ 



33See, Draft Bill, s. 9.16(3). 

34See, supra, ch. 17, sec. D; and see, also, Draft Bill, ss. 9.10(2) and 9.16(2). 

35For example, Hasell v. Bagot, Shakes cfe Lewis Ltd. (1911), 13 C.L.R. 374 

(Aust. H.C.); Aryeh v. Lawrence Kostoris & Son Ltd., [1967] 1 Lloyd's Rep. 

63 (C.A.); Benjamin's Sale of Goods (1974), paras. 1264, 1617. For the 

divergent pre-Code U.S. and other authorities, see, Sassoon, C.LF. and F.O.B. 

Contracts (2nd ed., 1975), sees. 512-14, 521. 
36UCC 2-708(1). 



525 

The place of tender governs the measure of the seller's loss whether the 
claim arises because of the buyer's wrongful rejection of the goods after 
their arrival, or because of the buyer's repudiation of the contract before 
he receives the goods. The inflexibility of this test has rightfully been criti- 
cized.^"^ In the case of a claim for damages by the buyer, the market price 
is to be determined as of the place of tender if the seller fails to deliver or 
repudiates; where the buyer rejects the goods after arrival or revokes his 
acceptance, the market price is to be determined as of the place of arrival. ^^ 
However, even this bifurcated test may create difficulties, as the following 
example illustrates. Suppose that a consignment of nylon yarn is purchased 
by a Toronto buyer from a New York merchant for shipment f.o.b. Tokyo. 
In accordance with the Code rule, Tokyo will then be the place of tender 
of the goods. It is difficult to believe that, if the seller fails to deliver or 
repudiates, Tokyo would also be the most appropriate market by which 
to measure the buyer's loss. Presumably, the Toronto buyer would have 
purchased the goods in Japan if he had had the right connections in the 
overseas market. This example demonstrates the undesirabihty of tying 
the courts' hands. Given the infinite variety of goods, parties, market places 
and their interaction with each other, we do not favour the adoption of 
a rigid test to determine the place for measuring the damages deemed to 
have been suffered by an aggrieved buyer or seller. Accordingly, we recom- 
mend that, for the purpose of measuring the buyer's or seller's loss, the 
revised Act should contain a simple rule that the price that could have 
been obtained by a commercially reasonable disposition or purchase of the 
goods shall be the price obtaining at a reasonable place. We so recom- 
mend. ^^ 

(c) THE TIME FOR DETERMINATION OF COMMERCIALLY 
REASONABLE PRICE 

Section 49(3) of The Sale of Goods Act provides that, where the 
seller neglects or refuses to deliver, the market price is to be determined 
as of the time or times when the goods ought to have been delivered; 
where, on the other hand, no time is fixed for delivery, the market price 
is to be determined as at the time of the refusal to deliver. The same test 
is applied, mutatis mutandis, in section 48(3) of The Sale of Goods Act 
where the buyer is in default. In both cases, the test gives rise to difficul- 
ties."*^ First, it requires the buyer to respond with what may be unreason- 
able haste to cover his position where he has been let down by the seller."^* 



37Peters, "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, at pp. 257-58; White & Summers, Handbook of the Law Under 
the Uniform Commercial Code (1972), at p. 222. 

38UCC 2-713(2). 

39See, Draft Bill, ss. 9.10(3) and 9.16(3). 

40Compare, McGregor on Damages (13th ed., 1972), para. 636. 

'^Un practice, the courts do not always apply the statutory requirements with such 
strict literalism, and indeed it may not always be easy to establish the actual 
date of breach. Compare, C. Sharpe & Co. Ltd. v. Nosawa & Co., [19171 2 
K.B. 814; R.V. Ward Ltd. v. Bignall, [1967] 1 Q.B. 534 (C.A.); see, also, 
Asamera Oil Corp. Ltd. v. Sea Oil & General Corp. and Baud Corp. N.V. 
(1978), 23 N.R. 181 (S.C.C), at pp. 211-12, citing with approval Atiyah, The 
Sale of Goods (4th ed., 1971), at p. 294. 



526 

Secondly, it is unclear whether, in the case of an anticipatory repudiation 
where no time is fixed for delivery, the time for determination of the 
market price is to be governed by section 49(3), or by the general com- 
mon law test applicable to cases of anticipatory repudiation. The common 
law rule applicable to cases of anticipatory repudiation is that the time for 
determination of the market price is the time when performance is due, 
not the time of repudiation, unless the repudiation has been accepted, in 
which case other considerations come into play. A literal reading of sec- 
tion 49(3) would lead to the conclusion that, in the case of an anticipatory 
repudiation where no time has been fixed for delivery, damages are to be 
assessed as of the time of refusal to deliver, even though the time of per- 
formance has not arrived and the buyer has not accepted the repudia- 
tion.'^^ The third difficulty is that it is unsettled whether a delivery that is 
to be made within a reasonable time constitutes a "fixed time" for the 
purpose of the section.'^^ Finally, the test is inappropriate where there is 
some delay between the date of delivery and the date of rightful rejection 
of the goods by the buyer, assuming that section 49 applies at all in this 
situation. 

Article 2 of the Uniform Commercial Code provides what appear to 
be reasonable solutions to most of these problems. Its provisions with 
respect to cover,'^'* and with respect to resale,'^^ substantially relieve against 
the rigours of the immediate response requirement. However, the aggrieved 
party may not have covered, or resold as the case may be, at the time the 
dispute comes to trial. We have concluded that, in such a case, damages 
should prima facie be measured with reference to the price that the buyer 
would have paid for substitutional goods, or that the seller could have 
obtained in a commercially reasonable resale, "within ... a reasonable 
time" after the buyer or seller "learned" of the other's breach. "^^ A prece- 
dent for this approach is provided by UCC 2-713(1), which, in the case 
of non-delivery or repudiation by the seller, measures the buyer's damages 
with reference to the time when the buyer "learned" of the seller's breach. 

So far as the other difficulties that we have mentioned are concerned, 
UCC 2-610 and related provisions, including, particularly, UCC 2-704, 
deal with the second difficulty, the effect of an anticipatory repudiation. 
These provisions are referred to more fully hereafter.'*'^ The Code does 
not address itself specifically to the case where no time is fixed for de- 

42Compare, Melachrino v. Nickoll & Knight, [1920] 1 K.B. 693; Millett v. Van 
Heek <fe Co., [1921] 2 K.B. 369 (C.A.), approved in Tai Hing Cotton Mill Ltd. 
V. Kamsing Knitting Factory, [1978] 1 All E.R. 515(P.C.). See, further, infra, 
this ch., at pp. 539 et seq. 

^"^Millett V. Van Heek & Co., footnote 42 supra', and compare the suggestion in 
the Tai Hing Cotton case, footnote 42 supra, at p. 522, that "on analysis [this 
limb of Ontario SGA s.49(3)] proves, exceptionally, to have no content what- 
ever". 

44See, UCC 2-712. 

45See, UCC 2-706. 

46See, Draft Bill, ss. 9.10(3) and 9.16(3); and compare, UCC 2-723(2) which 
provides, inter alia, that if evidence of a price prevailing at the times or places 
described in Article 2 is not readily available the price prevailing within any 
reasonable time before or after the time described may be used as a reasonable 
substitute. 

^llnfra, sec. 4. 



527 

livery, but the test in UCC 2-713(1), that the market price is to be deter- 
mined as of the time when the buyer learned of the breach, appears ade- 
quate to meet the situation. Finally, it is clear from UCC 2-713(2) that 
this "learning" test also applies in cases of rejection or revocation of ac- 
ceptance. 

Once again, however, there is some inconsistency in Article 2:"** 
in the case of non-acceptance by the buyer, the relevant time for assessing 
the seller's loss is, as provided by UCC 2-708(1), the time of the non- 
acceptance by the buyer of the goods or documents of title. This test is 
clearly unsatisfactory where the seller does not learn of the buyer's breach 
until the goods reach their destination, and the destination is not the same 
as the place of tender. We would not, therefore, confine the test in UCC 
2-713(1) to breaches by the seller. Accordingly, we recommend that the 
revised Act should incorporate a test, in place of the test contained in 
sections 48(3) and 49(3) of the existing Sale of Goods Act, to the effect 
that the aggrieved party's damages shall be determined with reference to 
the price at which the goods could have been resold or purchased, as the 
case may be, within a reasonable time after the aggrieved party learned of 
the breach by the other party ."^^ 

(d) CONCLUSIONS 

It will be convenient to set out at this stage the provisions'^ govern- 
ing the prima facie test of the seller's and buyer's damages that we recom- 
mend should be included in the revised Act in place of sections 48(3) and 
49(3) of the existing Sale of Goods Act: 

9.10(3) Where at the agreed time for performance and in circum- 
stances amounting to a substantial breach the buyer wrongfully neg- 
lects or refuses to accept and pay for the goods and section 9.9 does 
not apply, the measure of damages is prima facie to be ascertained by 
the difference between the contract price and the price that could 
have been obtained by a commercially reasonable disposition of the 
goods within or at a reasonable time and place after the seller learned 
of the buyer's breach, less any expenses saved in consequence of the 
buyer's breach. 

9.16(3) Where, at the agreed time for performance and in circum- 
stances amounting to a substantial breach, the seller wrongfully neg- 
lects or refuses to deliver the goods to the buyer, or where the buyer 
rightfully rejects or revokes acceptance, and section 9.15 does not 
apply, the measure of damages is prima facie to be ascertained by 
the difiference between the contract price and the price at which the 
goods could have been obtained in a commercially reasonable pur- 
chase within or at a reasonable time and place after the buyer learned 



48See, White & Summers, Handbook of the Law Under the Uniform Commercial 

Code (1972), at p. 221. 
49See, Draft Bill, ss. 9.10(3) and 9.16(3). 



528 

of the seller's breach of contract, less any expenses saved in conse- 
quence of the seller's breach. 

3. Assurance of Performance 

An important innovation in Article 2 is the right that it confers upon 
a seller or buyer under specified conditions to seek "adequate assurance 
of due performance" from the other party. The germ of the concept already 
exists in The Sale of Goods Act,^^ but it has been much enlarged in UCC 
2-609. Sections 39(1) (c) and 42 of The Sale of Goods Act, respectively, 
entitle the seller to withhold delivery or to exercise a right of stoppage 
where the buyer is insolvent, whether or not payment is otherwise due. The 
underlying rationale of sections 39(1) (c) and 42 is that insolvency of the 
buyer manifests an inability to fulfill his part of the bargain and, therefore, 
makes it unfair to require the seller to proceed with his obligations under 
the contract. 

The difficulty with sections 39(1) (c) and 42 is that they are too 
narrow. For instance, either the seller or the buyer may have reasonable 
grounds to believe that his prospects of receiving performance from the 
other are impaired even though no question of insolvency is involved. Or 
again, the party seeking assurance of performance may have information 
that falls short of showing clearly the other party's inability or unwilling- 
ness to perform; the information may be equivocal. Furthermore, the ag- 
grieved party may wish not to have to assess the import of the available 
evidence with respect to the likelihood of non-performance, or may not be 
in a position to do so accurately. He may simply wish to require the other 
party to allay his concerns. 

It is these varying circumstances that UCC 2-609 seeks to address. 
UCC 2-609 provides as follows: 

2-609.(1) A contract for sale imposes an obhgation on each party 
that the other's expectation of receiving due performance will not be 
impaired. When reasonable grounds for insecurity arise with respect 
to the performance of either party the other may in writing demand 
adequate assurance of due performance and until he receives such 
assurance may if commercially reasonable suspend any performance 
for which he has not already received the agreed return. 

(2) Between merchants the reasonableness of grounds for in- 
security and the adequacy of any assurance offered shall be deter- 
mined according to commercial standards. 

(3) Acceptance of any improper delivery or payment does not 
prejudice the aggrieved party's right to demand adequate assurance 
of future performance. 

(4) After receipt of a justified demand failure to provide within 
a reasonable time not exceeding thirty days such assurance of due 



51NYLRC Study, ch. 5, footnote 52, supra, pp. (535) -(537). See, also, Wardrop, 
"Prospective Inability in the Law of Contracts" (1936), 20 Minn. L. Rev. 380. 



529 

performance as is adequate under the circumstances of the particular 
case is a repudiation of the contract. 

It will be observed that the section has three principal components. First, 
it entitles the aggrieved party to seek adequate assurance of due perfor- 
mance when "reasonable grounds for insecurity" arise with respect to 
performance by the other party.^^ The Official Comment to the section 
makes it clear that the grounds of insecurity need not be restricted to 
factors involving the particular contract. For example, delay in the pay- 
ment of earlier accounts or the delivery of defective goods of the same 
type to other buyers may suffice. ^^ Secondly, until the assurance is fur- 
nished, the aggrieved party may suspend his own performance. Thirdly, 
failure to supply the assurance amounts to a repudiation and will entitle 
the aggrieved party to exercise the remedies available to him when re- 
pudiation occurs. 

We support the principle of UCC 2-609^"^ and regard it as one of 
the most useful innovations in the performance provisions of Article 2. 
Accordingly, we recommend that a comparable section be included in the 
revised Act.^^ However, UCC 2-609 raises several issues of interpreta- 
tion that merit attention. We now turn to discuss these issues. 

The first difficulty relates to the opening sentence of subsection 
(1), which provides that "[a] contract for sale imposes an obligation 
on each party that the other's expectation of receiving due performance 
will not be impaired". Read in conjunction with UCC 1-106(2), ^^ this 
suggests that an action will lie whenever the other party's expectation 
of due performance has been impaired. Presumably this was not intended, 
and the draftsmen's intention was to limit the aggrieved party's remedy 
to an assurance of due performance. Our view is that the sentence is 
superfluous, as well as potentially misleading. Accordingly, we recommend 
that it should not be incorporated in the comparable provision in the 
revised Act.^*^ 

Secondly, UCC 2-609(2) stipulates that, between merchants, the 
reasonableness of grounds for insecurity and the adequacy of any assur- 
ance offered shall be determined according to "commercial" standards. 
In addition, UCC 2-609(1) stipulates that the aggrieved party may, while 
he is awaiting adequate assurance, suspend performance if it is "commer- 
cially" reasonable. On balance the Commission has decided that such 



52"Performance" has been read broadly by the courts and will include a case 
where a buyer complains of malfunctioning equipment. See, Lockwood-Condi- 
tionaire Corp. v. Educational Audio Visual, Inc. (1966), 3 U.C.C Rep. Serv. 
354 (N.Y. Sup. Ct.). It is open to question, however, whether UCC 2-609 was 
intended to apply to a case of defective present performance as well as pros- 
pective inability to perform. UCC 2-609, Comment 1, suggests a restrictive view. 

53UCC 2-609, Comment 3. 

54A similar provision appears in the 1977 draft UNCITRAL Convention, Art. 48. 

55See, Draft Bill, s. 8.9. 

56UCC 1-106(2) reads as follows: 

Any right or obligation declared by this Act is enforceable by action 
unless the provision declaring it specifies a different and limited effect. 

57See, Draft Bill, s. 8.9(1). 



530 

restrictions are unnecessary and may unduly limit the exercise of the ag- 
grieved party's rights under the section. Therefore, we do not recommend 
the inclusion in the revised Act of a provision comparable to UCC 2-609 
(2), and we recommend that the word "commercially" in the phrase 
"commercially reasonable" in UCC 2-609(1) should not be incorporated 
in the corresponding provision in the revised Act.^^ 

Thirdly, it is not clear from the language of UCC 2-609 to what 
extent the contract may impose or permit standards deviating from those 
incorporated in the section. The section is not mandatory in its terms. 
For example, is a clause entitling the seller to cancel a contract whenever 
he deems himself insecure permissible, where the seller himself is the sole 
judge of his insecurity? It appears from the Comments to UCC 2-609^^ 
that the draftsmen intended to restrict the parties' right to vary the sta- 
tutory standards both by the general requirement of good faith and by 
the explicit requirement in subsection (1) of "reasonable grounds for 
insecurity". Since the same question arises in other sections involving 
the exercise of rights and duties, we have concluded that the extent to 
which the contract may impose or permit standards deviating from those 
incorporated in the section should be governed by the proposed general 
provision in the revised Act^^ delineating the extent to which the parties 
are free to vary the provisions of the Act. We so recommend. 

Fourthly, there is also some doubt whether an assurance of due 
performance can be sought even though the aggrieved party has already 
fulfilled his part of the contract. For example, can a seller demand assur- 
ance of payment where goods have been delivered on credit and, thereby, 
accelerate unmatured obligations if the assurance is not forthcoming?^^ 
Subsection ( 1 ) does not restrict the right to demand an assurance to cases 
where the aggrieved party's performance is still executory, although such 
a reading would be consistent with the rationale of the section and the 
right to suspend performance conferred by subsection (1). Our view, 
however, is that ample room should be left for flexible interpretation of 
the section in the light of its underlying purposes. Accordingly, we recom- 
mend that the provision in the revised Act corresponding to UCC 2-609 
should not be expressly restricted to cases where the person seeking 
adequate assurance of performance has not performed his obligations 
under the contract. 

Finally, the legal implications of the right to suspend performance 
may need to be spelled out more fully. Obviously, the aggrieved party 
will not be in breach for withholding performance while he awaits the 
assurance of performance. However, having received the assurance, it 
may be asked whether he can postpone completion of his performance by 
a period equivalent to the delay between the request for the assurance 



59Comments 4 and 6. 

60See, Draft Bill, s. 3.1. 

61NYLRC Study, ch. 5, footnote 52, supra, p. (539), and see, also, Wrightstone 
Inc. V. Matter (1961), 1 U.C.C. Rep. Serv. 170 (Pa. C.P.), criticized in White 
& Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), p. 170, n. 11. 



531 

and its receipt, or whether the period depends on the circumstances of 
each case. If the delay has caused other forms of prejudice to the aggrieved 
party, will this entitle him to a longer period to complete performance, 
or even excuse him altogether? Similar questions arise in the case of an 
anticipatory repudiation^^ that is retracted by the repudiating party before 
the aggrieved party has acted on it. in such a case, UCC 2-611(3) pro- 
vides as follows: 

2-611.(3) Retraction reinstates the repudiating party's rights under 
the contract with due excuse and allowance to the aggrieved party for 
any delay occasioned by the repudiation. 

The meagre case law under UCC 2-609 provides few answers to 
these questions concerning the legal implications of the right to suspend. 
There is, however, persuasive evidence from two sources that the drafts- 
men intended the party seeking assurance of performance to be excused 
for any reasonable delay occasioned by his justifiable apprehensions. The 
first source is found in Comment 2 to the section, which explicitly recog- 
nizes such a consequence; the second, and still more significant, source 
is provided by UCC 2-609(1), which authorizes the aggrieved party "to 
suspend" any performance for which he has not already received the 
agreed return. Obviously, suspension of an obligation due at that time 
must result in a delay. It may be, therefore, that the key to the questions 
we have raised is already found within the language of the section. Nev- 
ertheless, to resolve any lingering doubt we recommend the adoption of 
a further provision^^ ^o make it clear that, upon adequate assurance being 
provided, the aggrieved party's obligation to perform is restored, but that 
he is not liable for any delay occasioned by his suspension of performance. 
Admittedly, this proposal does not indicate the length of the delay to 
which the aggrieved party is entitled, but this question does not admit 
of a quantifiable answer. It will depend on the circumstances. 

Neither UCC 2-609 nor our recommended version of UCC 2-609 
matches the provisions of UCC 2-611(3) dealing with the effects of 
retraction of an anticipatory repudiation. Neither provision confers on 
the aggrieved party the rig-;: to an "allowance" for any delay occasioned 
by his suspension of performance while awaiting assurance. However, 
we think there is a justifiable distinction. UCC 2-611 involves a breach 
by the repudiating party, whereas UCC 2-609 requires no breach, con- 
scious or otherwise. It would not be right, therefore, to hold liable in 
damages the person who has given the assurance. Accordingly, we recom- 
mend that the provision in the revised Act comparable to UCC 2-609, 
unlike UCC 2-611(3), should not confer upon the aggrieved party the 
right to an allowance for any delay occasioned by the aggrieved party's 
suspension of performance. 



62Anticipatory repudiation will be considered in the next section of this chapter, 
63See, Draft Bill, s. 8.9(4). 



532 
4. Anticipatory Repudiation^'* 

(a) comparison of ANGLO-CANADIAN and AMERICAN POSITIONS 

When a contracting party declares his intention not to honour a 
future obHgation, or puts it out of his power to do so, he is said to be 
guilty of anticipatory repudiation. The expression is an unfortunate one, 
since it suggests that the aggrieved party's concern is solely with the 
prospect of a future breach, whereas it may fairly be argued^^ that the 
repudiating party's conduct also amounts to a present breach; that is, the 
breach of an obligation not to impair the other party's expectation of 
future performance. The problem of characterization is indicative of the 
much more serious difficulties that the Anglo-Canadian courts have ex- 
perienced in putting the doctrine of anticipatory repudiation on a sound 
theoretical footing. The difficulties are still with us and, though the doc- 
trine is not peculiar to sales law, it is of particular importance in this 
area. It is desirable, therefore, that the revised Act should seek to elimin- 
ate some of the more obvious defects in the existing rules. 

The first defect arises out of the well-established rule that traces its 
origin to Chief Justice Cockburn's classic judgment in Frost v. Knight.^^ 
In that case, it was held that on learning of the repudiation, the aggrieved 
party is put to his election: he may either accept the repudiation, in which 
case the contract is deemed to be at an end except for the purpose of 
entitling the aggrieved party to sue for breach, or he may ignore the 
repudiation. In the latter event, the contract remains in force for all pur- 
poses, and both parties are bound to continue with the contract as if the 
wrongful act had never occurred. The consequences of affirming the 
contract, or being deemed to have done so,^"^ are serious. For one thing, 
if the innocent party affirms the contract he cannot later change his mind 
and rescind because of the earlier breach. ^^ Again, he cannot suspend 
performance of his own obligations even though there is no assurance 
that the party repudiating will retract his repudiation. On the other hand, 
it appears to be settled law that an innocent party who does not accept 
the repudiation is under no duty to mitigate his damages prior to the 
time when the repudiating party's performance actually becomes due. In- 
deed, the decision of the House of Lords in White and Carter (Councils) 



64For a general discussion of this topic, see, Carr, "Anticipatory Repudiation 
and Mitigation of Damages", Research Paper No. III. 8. 

65Compare, Maredelanto Compania Naviera SA v. Bergbau-Handel GmbH The 
Mihalis Angelas, [1970] 3 W.L.R. 601, [1970] 3 All E.R. 125 (C.A.) per 
Denning, M.R., at p. 131; Frost v. Knight (1872), L.R. 7 Ex. Ill at p. 114; 
and McRae, footnote 14 supra, at pp. 260-61, reviewing earlier scholarly dis- 
cussions with respect to the question. 

66(1872), L.R. 7 Ex. Ill; Benjamin's Sale of Goods (1974), paras. 1235-37; 
Treitel, The Law of Contract (4th ed., 1975), pp. 579-82; Waddams, The Law 
of Contracts (1977), pp. 384 et seq. 

67Compare, Avery v. Bowden (1856), 6 El. & Bl. 953, 119 E.R. 1119 (Exch.); 
Dalrymple v. Scott (1892), 19 O.A.R. 477. 

68Unless the other party continues to repudiate: Benjamin's Sale of Goods 
(1974), paras. 1237, 1274. 



533 

Ltd. V. McGregor^^ supports the proposition that, at least in some cir- 
cumstances, the aggrieved party may recover avoidable expenditures in- 
curred after he learned of the repudiation, even though the expenditures 
may be of no benefit to the repudiating party. This result has been much 
criticized. 

In contrast to Anglo-Canadian law, the American common law 
adopts a more flexible attitude. "^^ The innocent party is not bound to elect. 
He may accept the repudiation and terminate the contract, but failure to 
do so, or his urging the other party to retract his repudiation, does not 
amount to an affirmation of the contract. ''^ The breach is not effaced 
unless the repudiating party retracts the repudiation. The repudiating 
party is free to retract his repudiation at any time before the innocent 
party acts upon or accepts it, and, contrary to the usual rule applicable 
to contractual breaches, an effective retraction nullifies the repudiation. "^^ 
Until there is retraction, the innocent party may suspend his own per- 
formance and continue to urge retraction without prejudicing his other 
rights.'^^ If there is no retraction the innocent party can still terminate the 
contract and sue for breach. In any event, the innocent party must act 
in conformity with the normal rules governing mitigation of damages"^"^ 
and, in particular, he must not incur avoidable expenditures that enhance 
his loss unjustifiably.'^^ 

These rules have been substantially reproduced in UCC 2-610 and 
2-6 11, ''^ albeit in such a form that this fact would not be obvious to a 
reader unfamiliar with the American common law principles. The sec- 
tions read as follows: 



69[1962] A.C. 413 (H.L. (Sc.)); as to which, see, inter alia, Goodhart, "Measure 
of Damages When a Contract is Repudiated" (1962), 78 L.Q.R. 263; Nienaber, 
"The Effect of Anticipatory Repudiation: Principle and Policy", [1962] Cam. 
L.J. 213; and Treitel, The Law of Contract (4th ed., 1975), pp. 675-78. The 
decision was distinguished by the Ontario Court of Appeal in Finelli v. Dee, 
[1968] 1 O.R. 676, (1968), 67 D.L.R. (2d) 393 (C.A.). See, also, Hounslow 
London B.C. v. Twickenham Garden Dev. Ltd., [1971] 1 Ch. 233, at pp. 
254-57. 

"^^WiUiston on Contracts (3rd ed., 1957), sees. 1300 et seq.; Williston on Sales 
(Rev. ed., 1948), sees. 584 et seq.; Restatement of the Law of Contracts (1932), 
sees. 318 et seq.'. Restatement of the Law, Contracts 2d, Tent. Draft No. 8 
(1973), sees. 274 et seq. 

7lSee the leading judgment of Baker, J., in Lagerloef Trading Co. Inc. v. 
American Paper Products Co. of Indiana (1923), 291 F. 947 (C.A.); Williston 
on Sales (Rev. ed., 1948), see. 585f. As Williston observes in Vol. 3, sec. 585d, 
p. 257, in criticizing the English rule, "[w]hen A repudiates his promise, what 
is more natural or reasonable than for B to write urging him to perform". 

'^^Restatement of the Law of Contracts (1932), see. 319; Restatement of the 
Law, Contracts 2d, Tent. Draft No. 8 (1973), see. 278. 

"^^Restatement of the Law of Contracts (1932), sec. 320; Restatement of the 
Law, Contracts 2d, Tent. Draft No. 8 (1973), sec. 280. 

'^'^Restatement of the Law of Contracts (1932), sees. 336(1), 338, Comment c to 
sec. 338. 

"^^Williston on Sales (Rev. ed., 1948), see. 589. This branch of the mitigation 
rule was established as early as Clark v. Marsiglia (1845), 1 Denio 317, 43 
Am. Dec. 670 (N.Y.). 

76Compare, NYLRC, ch. 5, footnote 52, supra, pp. (669)-(676), commenting 
on an earlier version of UCC 2-610 and UCC 2-611, and Taylor, "The Impact 
of Article 2 of the U.C.C. on the Doctrine of Anticipatory Repudiation" 
(1968), 9 B.C. Ind. & C.L. Rev. 917. 



534 



UCC 2-610 



When either party repudiates the contract with respect to a per- 
formance not yet due the loss of which will substantially impair the 
value of the contract to the other, the aggrieved party may 

(a) for a commercially reasonable time await performance by 
the repudiating party; or 

(b) resort to any remedy for breach (Section 2-703 or Section 
2-711), even though he has notified the repudiating party 
that he would await the latter's performance and has 
urged retraction; and 

(c) in either case suspend his own performance or proceed 
in accordance with the provisions of this Article on the 
seller's right to identify goods to the contract notwith- 
standing breach or to salvage unfinished goods (Section 
2-704). 

UCC 2-611 

(1) Until the repudiating party's next performance is due he 
can retract his repudiation unless the aggrieved party has since the 
repudiation cancelled or materially changed his position or other- 
wise indicated that he considers the repudiation final. 

(2) Retraction may be by any method which clearly indicates 
to the aggrieved party that the repudiating party intends to perform, 
but must include any assurance justifiably demanded under the pro- 
visions of this Article (Section 2-609). 

(3) Retraction reinstates the repudiating party's rights under 
the contract with due excuse and allowance to the aggrieved party 
for any delay occasioned by the repudiation. 

These provisions present some problems of interpretation, which will be 
examined below. For the moment it will suffice to draw attention to the 
sahent features of the two sections. 

UCC 2-610 states the basic rights of the innocent party. He may 
either, for a commercially reasonable time, await performance by the 
repudiating party, or he may resort immediately to any remedy for breach. 
In either event he may suspend his own performance, and he is free to 
urge the repudiating party to retract his repudiation. It is clear, there- 
fore, that the aggrieved party is under no obligation to elect between ac- 
ceptance and rejection of the repudiation. UCC 2-610 makes no explicit 
reference to the innocent party's duty to mitigate his damages, but the 
duty appears to be implied in UCC 2-6 10 ( a), "^"^ and to this extent his 
freedom of action is not unqualified. 

UCC 2-611 states the circumstances in which the repudiating party 
may retract his repudiation. He may do so unless one of the three events 



77Compare, Oloffson v. Coomer (1973), 296 N.E. 2d 871 (111. App. Ct.) 



535 

described in subsection ( 1 ) has occurred. However, retraction does not 
completely "cure" the breach; the aggrieved party, exercising his rights 
under UCC 2-609, discussed in a previous section of this chapter, may 
demand an "adequate assurance" that the party retracting his repudiation 
will honour his obligations. In any event, the aggrieved party is entitled to 
"due excuse and allowance" for any delay occasioned by the repudiation. 

(b) CONCLUSIONS 

We are of the view that the Code's rules on anticipatory repudia- 
tion are preferable to the Anglo-Canadian rules. Subject to a number of 
changes mentioned below, we are of the opinion that they should be 
adopted in the revised Ontario Act. The Anglo-Canadian rules suffer 
from two principal weaknesses. The first weakness is that the rules pro- 
ceed from the premise that there is an inherent distinction between breach 
of a present obligation to perform and breach by anticipatory repudiation. 
The distinction breaks down, however, once it is conceded that breach 
by anticipatory repudiation also involves breach of a present obligation 
— the obligation not to impair the other party's rightful expectation of 
performance. Indeed, this must be so for, if there were no such present 
breach, it would be difficult to justify the other party's right to bring an 
action for damages before the due date for performance. It follows that 
other and more persuasive reasons must be given for attaching basically 
different consequences to these two types of breach than are offered under 
existing Anglo-Canadian law. The other weakness is that the existing rules 
subordinate an aggrieved party's general duty to mitigate his damages, to 
the "higher" principle that a contract breaker cannot impose cancellation 
of the contract on the other party. "^^ Modern American law, broadly speak- 
ing, has managed to avoid both these weaknesses. We have, therefore, con- 
cluded that, subject to the matters discussed below, there should be in- 
cluded in the revised Act sections comparable to UCC 2-61 0*^9 and UCC 
2-611,8^ and we so recommend. 

While we support the Code provisions we do not favour verbatim 
adoption of UCC 2-610 and 2-611. We proceed to discuss five difficulties 
of interpretation and our responses to them. 

(i) Meaning of Repudiation 

The opening paragraph of UCC 2-610 does not attempt to define 
the circumstances in which a party's conduct will amount to repudiation. 
However, some guidance is to be found in Official Comments 1 and 2 to 
the section, portions of which state as follows: 

Comment 1 

. . . anticipatory repudiation centers upon an overt communication of 
intention or an action which renders performance impossible or 
demonstrates a clear determination not to continue with performance. 



78Carr, footnote 64 supra, at pp. 4, \9 et seq. 
79See, Draft Bill, s. 8.10. 
80See, Draft Bill, s. 8.11. 



536 



Comment 2 



It is not necessary for repudiation that performance be made 
literally and utterly impossible. Repudiation can result from action 
which reasonably indicates a rejection of the continuing obliga- 
tion. . . . 

These tests coincide substantially with the tests adopted in the Restate- 
ment of the Law of Contracts^^ and in the Second Restatement on Con- 
tracts,^ and with the law as generally understood in England and Can- 
ada.^^ The difficulty, however, is not in defining the term but in applying 
it to particular facts. Since a statutory definition will not resolve this prob- 
lem, we see little point in adding a definition to the Ontario version of 
UCC 2-610. Accordingly, we do not recommend that a definition of re- 
pudiation be included in the revised Act. 



(ii) Meaning of UCC 2-610(a) 

American commentators have encountered difficulties in construing 
clause (a) of UCC 2-610 and in determining the consequences of an 
aggrieved party awaiting performance by the repudiating party for more 
than a commercially reasonable time. It has been conjectured^"^ that the 
Code's draftsmen probably intended that an aggrieved party who awaits 
performance for more than a commercially reasonable period should 
lose his right to cover or to recover consequential damages that he might 
otherwise have been able to avoid, but that failure to "cover" was not 
intended to prejudice his other remedies such as the right to recover the 
contract-market price differential under UCC 2-713 or the seller's cor- 
responding right under UCC 2-708. The draftsmen themselves, while not 
adverting specifically to clause (a), seem to have had in mind the ag- 
grieved party's inability to recover damages that he could have avoided 
if he had not waited for more than a commercially reasonable period. The 
relevant portion of Comment 1 states as follows: 

Under the present section when such a repudiation substan- 
tially impairs the value of the contract, the aggrieved party may at 
any time resort to his remedies for breach, or he may suspend his 
own performance while he negotiates with, or awaits performance 
by, the other party. But if he awaits performance beyond a com- 
mercially reasonable time he cannot recover resulting damages which 
he should have avoided. 

With the benefit of hindsight one could suggest that such a general prin- 
ciple of mitigation could have been expressed more clearly. We return 
below to this question. 



^^Restatement of the Law of Contracts (1932), sec. 318. 

^'^Restatement of the Law, Contracts 2d, Tent. Draft No. 8 (1973), sec. 274. 

83Fridman, The Law of Contract in Canada (1976), pp. 519-20. 

s^White & Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), pp. 204 et seq. 



537 

(iii) Effect of Urging Retraction: UCC 2-610(b) 

UCC 2-610(b) provides that, in the case of anticipatory repudia- 
tion, the aggrieved party may resort to any remedy for breach, even 
though he has notified the repudiating party that he would await perfor- 
mance by the repudiating party and has urged the repudiating party to 
retract. A Hteral reading of clause (b) leads to the conclusion that the 
innocent party is free to resort to any remedy for breach, even though 
the repudiating party's performance is prejudicially affected by the inno- 
cent party's unannounced change of position. It seems unlikely that the 
draftsmen intended to adopt such an uncompromising position, since it 
would conflict with the Code's general concepts of good faith and fair 
dealing. ^5 Presumably, their intention was to protect the aggrieved party 
against an unwitting waiver of his rights. We think the distinction between 
protecting the aggrieved party against such a waiver of his rights and 
allowing the aggrieved party to change his position, even if it prejudices the 
repudiating party, should be made clear. It is important to avoid hard- 
ship to a repudiating party who has suffered foreseeable detriment or 
loss as the result of a notification by the aggrieved party that he would 
await performance by the repudiating party, or because the aggrieved party 
has urged the repudiating party to perform in spite of his repudiation. 
Accordingly, we recommend the addition of the following provision to the 
section in the revised Act comparable to UCC 2-610 1^^ 

Where the repudiating party has suffered foreseeable detriment or 
loss as a result of his reliance upon a notification or urging under 
[the relevant subsection] , the aggrieved party, 

(a) shall not exercise his remedies under this section unless he 
first gives the repudiating party reasonable notice of his 
intention to do so; and 

(b) is liable to compensate the repudiating party for such fore- 
seeable detriment or loss as he has suffered before the notice 
mentioned in clause (a). 

Clause (a) corresponds with the well established duty of notification in 
cases of equitable estoppel ;^'^ clause (6) is more controversial and requires 
the aggrieved party to compensate the repudiating party for any foresee- 
able detriment or loss the repudiating party has suffered before receiving 
the notice. 



85Compare, Bernstein v. Meech (1891), 29 N.E. 255 (N.Y. Ct. App.), cited in 
NYLRC Study, ch, 5, footnote 52, supra, at p. (674) for the proposition that 
the aggrieved party may be estopped from denying liability to perform where 
he has led the repudiating party to believe that he would. To the same effect, 
see, Restatement of the Law, Contracts 2d, Tent. Draft No. 8 (1973), sec. 280, 
Comment a, and Duesenberg and King, Sales and Bulk Transfers Under the 
Uniform Commercial Code (1972), sec. 14.06 [2]. 

86See, Draft Bill, s. 8.10(3). 

^nool Metal Mfg. Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 1 W.L.R. 761 
(H.L.). 



538 

(iv) Avoidance of Unjustifiable Expenditures and Duty To 
Mitigate 

As we have previously noted,^^ under existing Anglo-Canadian law 
the aggrieved party is not obliged to mitigate his damages unless he has 
accepted the repudiation. Indeed, in the light of White and Carter (Coun- 
cils) Ltd. V. McGregor,^^ he may even be entitled to continue with his 
performance and incur further costs. The latter proposition was explicitly 
rejected, at least with regard to the seller, in section 64(4) of the Uniform 
Sales Act, which limited an aggrieved seller's damages for a repudiatory 
breach to those damages the seller would have suffered if he had done 
nothing towards carrying out the contract of sale after receiving notice 
of the buyer's repudiation. Pre-Code case law^ was apparently a little 
more hesitant in imposing a blanket duty of mitigation on the aggrieved 
party. However, the equivalence of the position in the case of present and 
anticipatory breaches was clearly recognized in section 338 of the Re- 
statement of the Law of Contracts.^^ The Code's counterpart to section 
64(4) is UCC 2-704(2), which inverts the earlier rule and states the 
circumstances, in the case of a breach falling within UCC 2-703 and not 
just an anticipatory breach, in which "in the exercise of reasonable com- 
mercial judgment" and "for the purpose of avoiding loss" the seller may, 
inter alia, complete the manufacture of the goods or proceed in any other 
reasonable manner.^ The negative implication, of course, is that, except 
in the circumstances indicated, the aggrieved party may not incur further 
expenditures, and the contrary reasoning in the White and Carter case 
is necessarily rejected. 

In our view, the Code's approach is sound and we have concluded 
that it should be followed in the revised Act. We, therefore, recommend 
that the revised Act should contain a provision requiring the aggrieved 
party to mitigate his damages in the case of an anticipatory repudiation. 
However, as we have noted above, this obligation is expressed in very 
ambiguous language in UCC 2-6 10 (a), and we have concluded that the 
ambiguity should be removed. We, therefore, recommend that the lan- 
guage of UCC 2-6 10 (a) not be incorporated in the revised Act, but that 
the provision imposing an obligation to mitigate read as follows :^^ 

The repudiating party is not liable in any event for loss or damage 
that the aggrieved party should have foreseen and could have miti- 
gated or avoided without undue risk, expense or prejudice. 

This provision is substantially based on section 336(1) of the Restate- 
ment of the Law of Contracts, which addresses itself to the general duty 



^^Supra, at p. 532. 

89[1962] A.C. 413 (H.L. (Sc.)). 

90See, Williston on Sales (Rev. ed., 1948), sec. 588. 

^^Restatement of the Law of Contracts (1932), sec. 338. "The rules for deter- 
mining the damages recoverable for an anticipatory breach are the same as in 
the case of a breach at the time fixed for performance"; the Restatement pro- 
visions on mitigation of damages appear in section 336. 

92This too appears to embody pre-Code law. See, Williston on Sales (Rev. ed., 
1948), sec. 589. 

93See, Draft Bill, s. 8.10(4). 



539 

of mitigation in breaches of contract. We have modified its language to 
make it more appropriate to its new setting. 

We also recommend that the revised Act should include a section, 
similar to UCC 2-704, to the effect that where goods are unfinished at 
the time of a breach, the seller must exercise reasonable commercial 
judgment for the purposes of effective realization and avoidance of loss. 
The section should further provide that to these ends the seller may com- 
plete the manufacture and wholly identify the goods to the contract, or 
cease manufacture and resell for scrap or salvage value, or proceed in 
any other reasonable manner. This section should also apply to anticipa- 
tory breaches. ^"^ 

(v) Measurement of Damages 

We turn now to what has been termed "the most grizzly interpretative 
problem in Article Two".^^ The common law rule, both Anglo-Canadian^^ 
and American,^"^ is that the aggrieved party's damages are to be assessed 
as at the time fixed for performance, subject to considerations of mitiga- 
tion of loss, and not as at the date of repudiation. This rule has recently 
been reaffirmed by the Privy Council. ^^ However, a difficulty arises under 
Article 2 because of the language of UCC 2-713, the section dealing with 
the buyer's damages for non-delivery or repudiation. As indicated earlier,^^ 
UCC 2-713(1), provides that the measure of damages is the difference 
between the market price and the contract price "at the time when the 
buyer learned of the breach". Since the subsection expressly refers to the 
seller's repudiation of the contract, it seems to suggest that the American 
common law test governing the time for determining the market price in 
the case of anticipatory repudiation has been changed fundamentally, from 
the date of stipulated performance to the date "when the buyer learned 
of the breach"; that is, the date of repudiation. However, it has been 
argued persuasively that UCC 2-713(1) should not be taken at face value 
and that the "learning" date should only be applied to a seller's perform- 
ance breach and not to a breach by anticipatory repudiation.^^ So far, 
the issue appears to have been considered directly in only one reported 



94See, Draft Bill, s. 9.5 and s. 8.10(1 )(c). 

95White & Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), p. 197. See, also, Jackson, "'Anticipatory Repudiation' and the Tem- 
poral Element of Contract Law: An Economic Inquiry into Contract Damages 
in Cases of Prospective Non-Performance" (1978), 31 Stanford L. Rev. 69. 

96ra/ Hing Cotton Mill Ltd. v. Kamsing Knitting Factory, [1978] 2 W.L.R. 62, 
[1978] 1 All E.R. 515 (P.C.) and earlier authorities there cited. 

^"^Williston on Sales (Rev. ed., 1948), sec. 587. However, the rule was not in- 
flexible and exceptions were recognized for commodities for which there was 
an established market for long term contracts and for certain types of insurance 
contracts. Ibid., Vol. 3, pp. 264-65, citing, inter alia, Roehm v. Horst (1899), 
178 U.S. 1, a leading case on anticipatory breach. 

987a/ Hing Cotton Mill Ltd. v. Kamsing Knitting Factory, [1978] 2 W.L.R. 62, 
[1978] 1 All E.R. 515 (P.C). 

^^Supra, sec. 2. 

lOOwhite & Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), pp. 196-202. 



540 

decision, Oloffson v. Coomer.^^^ Here the Illinois Appellate Court ap- 
parently held that the time for determination of the market price was the 
date when the buyer learned of the seller's repudiation. However, the 
Court also found that the buyer was under a duty to mitigate his dam- 
ages and that he had not acted in good faith. Moreover, the Court did not 
refer to the constructional difficulties presented by UCC 2-713(1). The 
decision cannot, therefore, be regarded as conclusive on the point. 

It seems obvious that the ambiguity in UCC 2-713(1) as to the time 
with reference to which the damages of the aggrieved party should be 
assessed in the case of anticipatory repudiation, should be avoided in 
the revised Ontario Act. Accordingly, our recommended provisions deal- 
ing, respectively, with the prima facie measure of damages where the 
buyer wrongfully neglects or refuses to accept and pay for the goods, ^^^ 
and, in the converse situation, where the seller is in default^^^ make it clear 
that the measure of damages there specified only applies to performance 
breaches and not to anticipatory breaches. Our Draft Bill contains no 
separate rule governing the time for measuring damages in cases of anti- 
cipatory breach. As a result, the existing common law rule will continue 
to apply; that is, that damages are to be assessed as at the time performance 
is due. This rule will, however, be subject to our earlier recommendations 
imposing upon an aggrieved party a duty of mitigation, even though under 
existing law the aggrieved party would not be under such a duty if he had 
not accepted the repudiation. 

We recognize that the difference between the "learning" test in UCC 
2-713(1) and the combined effect of the common law rule and our pro- 
posed duty to mitigate will often be a modest one. In many cases, a court 
might reasonably conclude that the duty to mitigate would, indeed, re- 
quire that a victim of anticipatory repudiation cover or resell the goods 
at the time when he learned of the repudiation. It is only in situations 
where it is reasonable for the innocent party to take no immediate action 
that there will be a significant difference. 

A literal application of UCC 2-713(1) requires that the aggrieved 
party's damages be measured by the market price prevailing at the time 
when he learned of the breach, whether or not it was reasonable to require 
him to take immediate measures to reduce his loss. By contrast, our pro- 
posal allows the aggrieved party greater leeway, and puts the onus on the 
repudiating party to show that an aggrieved party acting reasonably would 
have covered his loss more promptly. We think this difference between 
our rule and that found in UCC 2-713(1) is justifiable, because an anti- 
cipatory breach is not identical with breach of a present performance 
obligation. This fact is recognized in other provisions of both Article 2 



^^^Olojjson V. Coomer (1973), 296 N.E. 2d 871 (111. App. Ct.). The issue would 
also have been relevant but was not adverted to by the courts in Fredonia 
Broadcasting Corp. v. RCA Corp. (1973), 12 U.C.C. Rep. Serv. 1088 (5th Cir.) 
and Sawyer Farmers Cooperative Assoc, v. Linke (1975), 17 U.C.C. Rep. Serv. 
102 (N.D.S.C). 

l02See, Draft Bill, s. 9.10(3). 

i03See, Draft Bill, s. 9.16(3). 



541 

and our Draft Bill, insofar as these provisions permit the aggrieved party 
to continue to urge retraction without putting him to his election and 
foreclosing his options. ^^"^ 

Moreover, the fact that we do not impose a measure of damages 
assessed rigidly with reference to the time when the innocent party learned 
of the repudiation may also benefit the repudiating party: it may reduce 
the amount of his liability to the innocent party in situations where the 
price of the goods is subject to wide fluctuations and an aggrieved party 
acting prudently would not have gone immediately into the market to 
resell or make a covering purchase, as the case may be. We recognize, 
however, that a delay may work to the repudiating party's disadvantage 
where the price of the goods has risen rather than dropped. 

It should be understood, however, that a seller who has actually 
resold or a buyer who has actually covered will be entitled to rely on 
the results of his resale or cover in cases of anticipatory breach in the same 
way as if the repudiating party's breach involved breach of a present 
obligation, and not an anticipatory breach of a future obligation. ^^^ 

5. Instalment Contracts 

The terms of a contract may often require or authorize the seller to 
make delivery by instalments. In the alternative, the buyer may have the 
option of requiring delivery to be made by instalments. It has long been 
recognized that some separate rules may be desirable to govern this type 
of contract. 1^6 Before the appropriateness of such rules can be determined, 
however, it is necessary to consider the meaning of the phrase "instal- 
ment contract". 

(a) MEANING OF "INSTALMENT CONTRACT" 

It has been pointed out^^"^ that the present law relating to "instal- 
ment contracts" is based upon two sets of common law distinctions, and 
upon section 30 of the present Ontario Sale of Goods Act. 

The first of the common law distinctions is that between an entire 
and a divisible contract. An instalment contract that is entire is, for many 
purposes, although not all, the same as a contract for the delivery of goods 
in one lot. The instalments are treated as though they were notionally 
lumped together in a single delivery. A divisible instalment contract, by 
contrast, is one in which a single instalment sometimes can be isolated 
from the rest of the contract. In such a case, a breach of the obligation 
to deliver or pay for a particular instalment may, in some cases, have no 
effect on the enforceability of the contract as it relates to the remainder 
of the instalments. 



104UCC 2-610(b) and, see, Draft Bill, s. 8.10(2). 

lOSSee, Draft Bill, ss. 9.9(1) and 9.15(1). 

l06For a general discussion of the topic of instalment contracts, see Carr, "Instal- 
ment Contracts", Research Paper No. III. 7, and Williams, "Partial Performance 
of Entire Contracts" (1941), 57 L.Q.R. 373, 490. 

i07Carr, footnote 106 supra, at pp. 1-3. 



542 

The second common law distinction builds upon the first. Assuming 
that a given instalment contract is divisible, rather than entire, and assum- 
ing that a breach in relation to a particular instalment occurs, some distinc- 
tion has to be made between situations in which the breach will be con- 
fined in its consequences to the obligations under the particular instal- 
ment, and those where the breach will have consequences extending to 
the obHgations of the parties in respect of all the other instalments. The 
former variety of breach is known as a severable breach, and the latter 
as a non-severable breach. 

The only express reference to instalment contracts in the present 
Sale of Goods Act may be found in the two subsections of section 30, 
which provide as follows: 

30.(1) Unless otherwise agreed, the buyer of goods is not 
bound to accept delivery thereof by instalments. 

(2) Where there is a contract for the sale of goods to be de- 
livered by stated instalments that are to be separately paid for and 
the seller makes defective deliveries in respect of one or more in- 
stalments or fails to deliver one or more instalments or the 
buyer neglects or refuses to take delivery of or pay for one or 
more instalments, it is a question in each case depending on the 
terms of the contract and the circumstances of the case whether 
the breach of contract is a repudiation of the whole contract or 
whether it is a severable breach giving rise to a claim for com- 
pensation but not to a right to treat the whole contract as re- 
pudiated. 

A problem common to both subsections is the lack of any definition 
of "instalment" in The Sale of Goods Act. As will appear from the sub- 
sequent discussion, there are several different types of arrangement that 
could arguably be considered to involve "instalments". The resulting un- 
certainty as to the scope of section 30 may pose problems both for the 
parties to the different kinds of contract, and for courts that are obliged to 
consider the relevance of section 30 to such contracts. 

The scope of the two subsections is otherwise quite different, how- 
ever. On the one hand, subsection ( 1 ) merely lays down the familiar rule 
that, unless otherwise agreed, the buyer is not obliged to accept delivery 
by instalments. ^^^ The subsection is only concerned with the mode of 
delivery, but it apparently applies to every type of delivery by "instal- 
rnents", whatever the details of the underlying contract may be. On the 
other hand, subsection (2) is narrowly restricted in its application to 
those instalment contracts in which the instalments are expressly specified 
in the contract, and in which the buyer is obliged to pay for each instal- 
ment separately. The subsection focuses upon the nature of the remedies 
that should be available for breach of this narrow range of instalment 
contracts. In our view, the subject matter of the two subsections is so 
different that it is confusing to lump them together under the common 
heading of "instalment contracts". We therefore recommend that in the 



lOSSee, Draft Bill, s. 5.5. 



543 

revised Act, as in the Uniform Commercial Code,^^ the provision com- 
parable to section 30(1) should constitute a separate section that is wholly 
severed from the question of remedies for breach of a true instalment 
contract. 

Subsection (2) appears to assume the existence of a divisible con- 
tract; the words "stated instalments that are to be separately paid for" 
seem designed to establish this, although it may be doubted that this 
is the correct test for such a contract. The subsection then leaves the 
question of whether a particular breach of such a contract is severable 
or non-severable to be determined in the light of all the circumstances. 
This latter provision has the merit of flexibility, but gives rise to consider- 
able uncertainty, since it provides no standards designed to assist the par- 
ties to predict the consequences of a particular breach. 

It might be thought that, if the narrow requirements of section 30(2) 
are not wholly satisfied, the other general provisions of The Sale of Goods 
Act would apply to determine the consequences of breaches of contract 
relating to multiple deliveries. It seems clear, however, that the common 
law on instalment contracts still appHes to such a case, rather than the 
other provisions of The Sale of Goods Act relating to remedies. ^^^ 

The key question is, therefore, whether the scope of any provision in 
our revised Act dealing with the remedies available for breach of an instal- 
ment contract should be expanded to apply to some or all of those contracts 
calling for multiple deliveries that lie outside the scope of section 30(2), 
and that are therefore governed by the common law. To help answer this 
question several types of arrangement that might arguably be considered to 
be "instalment contracts" should be considered. 

The first such arrangement is not really a single contract at all, but is, 
rather, a series of contracts that are, in substance, separate agreements, and 
that are included in the same writing or verbal order for purposes of con- 
venience. An example of this type of arrangement might be requests for 
items selected from a mail order catalogue."^ There are two reasons why 
the present section 30(2) of The Sale of Goods Act does not apply to such 
an arrangement. One is that the subsection is restricted to instalments to be 
delivered under "a contract", a term that presumably means a single con- 
tract, while in the case under discussion there are multiple contracts. The 
other is that the parties will not have framed their agreement in terms of 
"stated instalments", since each item is perceived as a separate order. As a 
result, a non-conforming tender of one item will not prima facie entitle the 
buyer to refuse delivery of the other items, however serious the non- 



109UCC 2-307. 

ilOSee, Jackson v. Rotax Motor Co., [1910] 2 K.B. 937 (C.A.), and H. Long- 
bottom & Co. Ltd. V. Bass Walker & Co., [1922] W.N. 245 (C.A.), per Atkin, 
LJ. 

lllCompare, Williston on Sales (Rev. ed., 1948), sec. 466a, p. 757. 



544 

conformity. ^^^ The result would be the same at common law,^^^ ^nd is 
defensible, if it is clear that there are, in substance, separate contracts for 
each item.^^"^ 

The second type of arrangement involves the delivery of goods whose 
various components amount to a functional whole: for example, the parts 
of a machine or the pages of a manuscript. If no separate price is set or 
payable for the several parts or components, then the contract should be 
treated as entire and indivisible. In such a case neither section 30(2) nor 
the common law dealing with severable instalments will apply. If a separate 
price is payable there may be a divisible contract, but it would require 
strong evidence that this truly reflected the parties' intention. With regard 
to section 30(2), in particular, even if this latter hurdle could be overcome, 
there would still be the difficulty of accommodating the facts within section 
30(2). In other words, it would be necessary that the goods be delivered 
in "stated" instalments, and that the separate payments relate to the 
particular instalments thus specified. 

The third arrangement occurs where there is but one contract, cover- 
ing different types of goods, and the items are to be delivered at different 
times and separately paid for. This type of contract appears to be divisible, 
and to be the type of contract where it might be proper to sever a breach 
of a single instalment from the rest of the contract. Nevertheless, it is far 
from clear that section 30(2) would apply. As mentioned earher, the term 
"instalment" is not defined in the Act, with the result that it is uncertain 
whether the section would be restricted to the situation where the instal- 
ments are made up of like goods, or extended to multiple deliveries of 
different goods under a single contract. Moreover, the reported cases deal- 
ing with instalment contracts, ^^^ both before and after 1893, all appear to 
have dealt with contracts that involved goods that were all of the same 
kind. In principle, however, given that the underlying purpose of section 
30(2) and the common law is to adapt the remedy that should be available 
for breach of one of a series of deliveries to the realities of the particular 
contract, there would seem to be no reason why the statute or the existing 



ii2By contrast, under UCC 2-609, such a breach with respect to delivery under 
one contract might give rise to "reasonable grounds for insecurity", so that the 
buyer might be able to demand adequate assurances of performance even with 
regard to contracts that are entirely separate and distinct from the contract 
which was breached, although there had not yet been a breach under those 
contracts, because delivery was scheduled for a later date. See discussion 
of this point, supra, this ch., sec. 3. We have recommended the adoption of a 
similar provision, which may be found in section 8.9 of our Draft Bill. 

ll3See, Benjamin's Sale of Goods (1974), para. 647. 

ii'^As Williston, footnote 111 supra, points out, the fact that the goods are of a 
different kind and are individually priced is not conclusive. In his opinion 
(ibid., p. 762) the test of whether the transaction constitutes several contracts 
is "whether the parties assented to all the promises as a single whole, so that 
there would have been no bargain whatever, if any promise or set of promises 
were struck out". 

llSFor example, see, Hoare v. Rennie (1859), 5 H. & N. 19, 157 E.R. 1083 
(Exch.); Simpson v. Crippin (1872), L.R. 8 Q.B. 14; Honck v. Muller (1881), 
7 Q.B.D. 92 (C.A.); Maple Flock Co. Ltd. v. Universal Furniture Products 
(Wembley) Ltd., [1934] 1 K.B. 148 (C.A.). 



545 

case law, as the case may be, should not also apply where the goods are not 
all of the same kind. 

The fourth type of arrangement is that which Chalmers presumably 
had in mind when he first drafted the U.K. equivalent of section 30(2) in 
1893.^'^ For example, let us suppose that there is a contract for the sale of 
goods that are all of the same kind, such as 100,000 bushels of wheat, to 
be paid for and delivered in five instalments. This is clearly a divisible 
contract, and one defective delivery should not automatically give rise to a 
right to cancel the whole contract. Nevertheless, even this prototype situa- 
tion may fall outside the literal scope of section 30(2). This might be the 
case, for example, if deliveries were not to be made bv "stated instalments" 
specified in the contract, but rather at the option of either party, or if each 
instalment were not to be paid for separately, but on some other basis. The 
pre- 1893 case law was not narrowly restricted in this manner, and the 
present day common law applies the same remedial rules as are found in 
section 30(2) to this kind of contract, when it falls outside the narrow 
scope of that subsection. ^^"^ Nevertheless, it seems desirable that the statu- 
tory language should be brought into closer alignment with the jurispru- 
dence and present day instalment transactions. 

It may be concluded, therefore, that the provisions of the present Sale 
of Goods Act dealing with instalment contracts are unsatisfactory in a 
number of respects. We have noted already the problems that may arise 
under both subsections of section 30 because of the failure of the Act to 
define the word "instalment", and because of the narrow scope of the 
remedial provisions of subsection (2), with its requirements of "stated 
instalments" and separate payments. It has been argued further that the 
nineteenth century distinction between entire and divisible contracts, upon 
which both section 30(2) and the common law are based, is itself unsatis- 
factory. It has been suggested that the use of such an a priori test is in- 
appropriate, and that, instead, the propriety of allowing termination of a 
whole contract for breach of a single instalment should be determined by 
an examination of the surrounding circumstances.^ ^^ 

By contrast, the Uniform Commercial Code does contain a definition 
of "instalment contract". That definition may be found in UCC 2-612(1), 
which provides as follows: 

2-612.(1) An 'installment contract' is one which requires or 
authorizes the delivery of goods in separate lots to be separately 
accepted, even though the contract contains a clause 'each de- 
livery is a separate contract' or its equivalent. 

The section does not expressly state that the goods to be delivered "in 
separate lots" may be of unlike kinds; but neither is there a specification 



11656 & 57 Vict., c. 7 (U.K.), s. 31(2). The wording of the two sections is not 
identical. For example, the Ontario provision expressly covers the situation 
where no delivery of an instalment takes place, while the U.K. subsection 
refers only to defective deliveries. 

ll'^See, Benjamin, footnote 113 supra, para. 649, and the cases there cited in 
n. 83. 

iiSCarr, footnote 106 supra, at pp. 14-16. 



546 

that the separate deliveries must involve fungibles or goods of the same 
type.1'9 The definition of "lot", which is found in UCC 2-105(5), is not 
particularly helpful. It merely states that "lot" means "a parcel or a single 
article which is the subject matter of a separate sale or delivery, whether 
or not it is sufficient to perform the contract". There is no clear indication 
of the meaning of the word "parcel", or specification whether the parcels 
or single articles that may be the subject of separate deliveries may be of 
unlike kinds. For this reason, coupled with the fact that the absence of 
a definition has not created difficulties under the existing Act, we have 
not adopted this, or any other, definition of "lot" in our Draft Bill. Despite 
the absence of any express reference to instalments made up of dissimilar 
goods, however, the language of UCC 2-612(1) appears sufficiently flex- 
ible that it could be applied to a contract calling for multiple deliveries of 
different types of goods, where the nature of the agreement and the under- 
lying circumstances make this appropriate. 

One advantage of UCC 2-612(1) over section 30(2) of The Sale of 
Goods Act is that it is clearly not restricted to situations where there are 
stated instalments or specific apportionments of the price. This is desirable, 
since the remedial problems relating to separate deliveries are not restricted 
to contracts with this degree of specificity. Instead, UCC 2-612(1) focuses 
upon separate acceptances of separate deliveries as the crucial test for 
application of the "instalment contract" provisions of the Code to a parti- 
cular transaction. Moreover, as Official Comment 2 observes, "If separate 
acceptance of separate deliveries is contemplated, no generalized contrast 
between wholly 'entire' and wholly 'divisible' contracts has any standing 
under this Article". As a result, the a priori classification problems dis- 
cussed above may be reduced or eliminated altogether. We believe that 
these advantages justify the incorporation of a similar provision in the 
revised Ontario Act. Accordingly, we recommend the adoption of a defini- 
tion of instalment contract modelled upon that found in UCC 2-612(1 ).^20 

The latter part of UCC 2-612(1), which provides that a contract may 
be an instalment contract even though it contains a clause specifying that 
each delivery is a separate contract, is consistent with existing law. Anglo- 
Canadian courts have generally treated such clauses as manifesting a clear 
intention to enter into a divisible, as opposed to an entire, contract, but one 
that is nonetheless a single contract. ^^^ Since, however, the subsection 
refers to "an" instalment contract, it would, presumably, still be open to a 
court to hold that a particular document did incorporate a series of separate 
contracts, if this was its true substance. ^^^ The principle that the courts 



ii9So far as we have been able to ascertain there does not appear to be a re- 
ported case on the point. 

i20Compare, Draft Bill, s. 8.12(1). 

121 For the English judicial treatment of "each delivery is a separate contract" 
clauses, see, Ross T. Smyth & Co. Ltd. v. T. D. Bailey Son & Co., [1940] 3 All 
E.R. 60 (H.L.), at p. 73, and see further, Benjamin, footnote 113 supra, para. 
648. 

i22See the test proposed by Williston, as set out at footnote 114 supra; this 
standard for distinguishing between a series of separate contracts and an agree- 
ment that is in substance a single contract, notwithstanding separate deliveries, 
has been approved by Benjamin, footnote 113 supra, at para. 647. 



547 

should look to see whether, in fact, there is really a single agreement for 
multiple deliveries, even in the face of a clause stating that there are 
separate contracts, appears to us, however, to be sound. We therefore 
recommend that a provision that a contract may be an instalment contract 
even though it contains a clause to the effect that each delivery is a separate 
contract be incorporated in the revised Ontario Act.^23 

(b) BREACH OF INSTALMENT CONTRACT BY SELLER 

Three problems will be considered under this heading. First, what is 
the effect on the balance of the contract of the seller's breach with respect 
to one or more instalments, or, more specifically, when may the buyer 
cancel the contract because of such a breach? Secondly, if the buyer is 
entitled, and has elected, to treat breach of part of the contract as a breach 
of the whole, how does this affect the position of previously delivered and 
conforming instalments? Thirdly, what are the buyer's rights of rejection 
with respect to a particular defective instalment, taken by itself? 

(i) Effect of Breach As To Instalment Upon The Balance of 
The Contract 

Section 30(2) of the present Sale of Goods Act provides no clear 
standard for the determination of the effect of a particular breach of one or 
more instalments upon the contract as a whole. The subsection merely indi- 
cates that "it is a question in each case depending on the terms of the 
contract and the circumstances of the case whether the breach of contract 
is a repudiation of the whole contract or whether it is a severable breach 
giving rise to a claim for compensation but not to a right to treat the whole 
contract as repudiated". The vagueness of the statutory language reflects 
the uncertain and, to some extent, conflicting criteria adopted in the pre- 
1893 case law.^^"^ It is now generally accepted that the appropriate modern 
tests for determining whether a particular breach of an instalment gives the 
buyer a right to cancel the whole contract are those set forth in the decision 
of the English Court of Appeal in Maple Flock Co. Ltd. v. Universal 
Furniture Products (Wembley) Ltd.^'^^ These criteria were "first, the ratio 
quantitatively which the breach bears to the contract as a whole, and 

secondly the degree of probability or improbability that such a breach will 
be repeated". ^26 

Section 45(2) of the Uniform Sales Act determined the consequences 
of a breach of a particular instalment in terms of the materiality of the 
breach; the test in the subsection is "whether the breach of contract is so 
material as to justify the injured party in refusing to proceed further and 
suing for damages for breach of the entire contract, or whether the breach 
is severable". ^2*^ It has been indicated that the proper test for materiality is 



i23See, Draft Bill, s. 8.12(1). 

l24Compare, Hoare v. Rennie (1859), 5 H. & N. 19, 157 E.R. 1083 (Exch.); 

Simpson v. Crippin (1872), L.R. 8 Q.B. 14; Honck v. Muller (1881), 7 Q.B.D. 

92 (C.A.). 
125[1934] 1 K.B. 148 (C.A.). 
^^(>Ibid., at p. 157. 
^^lUniform Sales Act, s. 45(2). 



548 

"whether the default is so substantial and important as in truth and in fair- 
ness to defeat the essential purpose of the parties". ^^^ 

Apparently the departure of section 45(2) of the Uniform Sales Act 
from the references to repudiation in The Sale of Goods Act, and the 
substitution of the objective test of materiality, reflected a conscious policy 
decision by the author of the Uniform Sales Act.^^^ This test is open to 
objection, however, on the ground that it does not expressly provide for 
the situation where the immediate breach is not, in and of itself, a material 
breach, but manifests a subjective intent on the part of the wrongdoer to 
repudiate the balance of the contract. By contrast, it could be argued that 
the repudiatory language of The Sale of Goods Act might be narrowly 
construed, so that a serious breach which did not manifest an unwillingness 
to perform, and hence was not a repudiation, would not come within the 
"instalment" provisions of section 30(2). In fact, however, the subsection 
has not been construed this narrowly. ^^^ 

The Uniform Commercial Code also retains the materiality concept, 
but expresses it in terms of an "impairment of value". UCC 2-612(3) 
reads as follows: 

2-612.(3) Whenever non-conformity or default with respect to one 
or more installments substantially impairs the value of the whole 
contract there is a breach of the whole. But the aggrieved party rein- 
states the contract if he accepts a non-conforming installment without 
seasonably notifying of cancellation or if he brings an action with 
respect only to past installments or demands performance as to future 
installments. 

In our view this test is an improvement on the materiality test because it 
clearly focuses attention on the effect of the breach, rather than the breach 
itself. It also expressly requires that the seriousness of the breach be 
evaluated in terms of its effect upon the contract as a whole, instead of with 
respect to the particular instalment, and establishes a clear standard for 
evaluating the seriousness of such an effect. Moreover, it resembles the test 
of substantial breach that we have recommended for adoption in the revised 
Act. ^31 We therefore favour the adoption of the Code standard for deter- 
mining when breach with regard to an instalment will amount to a breach 
of the whole contract, subject to the insertion of a requirement that the 
substantial impairment be foreseeable, in order to achieve consistency with 
our general definition of substantial breach. ^^^ Accordingly, we recommend 
that the revised Act should provide that, if a non-conformity or breach with 
respect to one or more instalments substantially and foreseeably impairs 



i2SHelgar Corp. v. Warner's Features (1918), 222 N.Y. 449 at pp. 453-54, (1918), 

119 N.E. 113 at p. 114. 
l29Williston, footnote 111 supra, sees. 467a, 467b. 
l30For a more detailed discussion of these problems, see Carr, footnote 106 

supra, at pp. 19-21. 
i3iSee, Draft Bill, s. 1.1(1)24, and ss. 8.1, 8.10, 9.3(2), 9.12(2), et ai 
i32Compare, Draft Bill, s. 1.1(1)24. 



549 

the value of the whole contract to the other party, there is a substantial 
breach of the whole contract. ^^^ 

It will be noted that, like the Uniform Sales Act, the Uniform Com- 
mercial Code test makes no reference to the guilty party's state of mind. 
It is unlikely, however, that this omission would adversely affect an inno- 
cent party. UCC 2-610, which deals with anticipatory repudiation, provides 
an alternative ground for excusing the innocent party from further obliga- 
tions, where the breach with regard to the present instalment provides 
evidence that the guilty party intends to repudiate his obligation to make 
future deliveries as well. This remedy would presumably be available even 
if the immediate breach does not meet the "substantial impairment" test 
under UCC 2-612(3), if the loss of the future performance would amount 
to a substantial impairment under UCC 2-610. We believe that the com- 
bined effect of our proposed provisions dealing with instalment contracts 
and anticipatory repudiation would achieve the same result. ^^"^ 

(ii) Effect of Breach of The Whole Contract On 
Previously Accepted Instalments 

Under this heading, two separate questions must be considered. ^^^ The 
first is whether the buyer must be in a position to return any previously 
accepted instalments as a condition of his right to cancel the contract 
because of a subsequent breach. The second question is whether the buyer 
is entitled to return any previously accepted instalments if he elects to do so. 

The first question is much easier to answer than the second. The 
buyer's right to cancel is not dependent on his ability to return previous 
instalments. This position can be justified by analogy to section 29(3) of 
the Ontario Sale of Goods Act. This subsection entitles the buyer to reject 
goods that do not conform to the contract description that have formed 
part of a single delivery, while retaining those goods that are conforming. 
More simply, this result can be justified on the basis that it is inherent in 
the concept of a divisible contract. Both The Sale of Goods Act and the 
Uniform Commercial Code appear to assume implicitly that this is the 
position, and no contrary case law has appeared since 1893. This point 
would not appear, therefore, to call for specific treatment in the revised Act. 

The second question is much more difficult. At first glance, it might 
be thought that, if the contract is divisible, it should no more be possible 
for the buyer to force previously accepted instalments back on the seller 
than it should be possible for the seller to insist on complete rescission. The 
meagre case law appears to support this proposition. ^^^ To the extent that 



i33See, Draft Bill, s. 8.12(3). 

l34Compare, Draft Bill, ss. 8.12(3) and 8.10(1). 

i35Compare, Carr, footnote 106 supra, pp. 46 et seq. 

^^^Brandt v. Lawrence (1876), 1 Q.B.D. 344 (C.A.); Tarling v. O'Riordan 

(1878), 2 L.R. Ir. 82 (C.A.), and see further, Carr, footnote 106 supra, pp. 

49-57. 



550 

they discuss the problem at all, textwriters appear to be divided in their 
views, '^"^ and neither the Ontario Sale of Goods Act nor Article 2 of the 
Uniform Commercial Code addresses itself directly to the issue. 

The position is complicated because discussions of this question do 
not always observe the distinction between entire and divisible contracts. ^^8 
If the manufacturer of a machine delivers part of it and then repudiates, it 
can be persuasively argued that the buyer should be able to revoke his 
"acceptance" of the part that has already been delivered. This conclusion 
rests, however, on the assumption that the machine constitutes a single 
functional unit and that the contract was indivisible. ^^^ There was, in 
reality, no true "acceptance" of the part; at best there was only a condi- 
tional acceptance, dependent upon satisfactory performance of the balance 
of the contract. This example throws little light on what the rule should be 
where the instalment that has been delivered and accepted constitutes a 
commercial unit in its own right. 

We appreciate these difficulties. On balance, however, the Commission 
has concluded that the equities favour the buyer. If the seller's breach is of 
such a substantial character that it impairs the value of the whole contract 
to the buyer, then it does not seem unreasonable to allow the buyer to 
revoke his acceptance of any previously delivered instalments, and we so 
recommend. However, we also recommend that, as in other cases of revo- 
cation, revocation of acceptance of such instalments should only be per- 
mitted in the following circumstances: if it occurs within a reasonable time 
after the buyer discovers or should have discovered the ground for revoca- 
tion; if there has been no substantial change in the condition of the goods 
which is not caused by their own defects or by casualty suffered by them 
while at the seller's risk; and, if notification of the revocation is given to 
the seller. 140 



i37Atiyah, The Sale of Goods (5th ed., 1975), p. 286, seems to imply that the 
buyer may have the right to return previous instalments, since he accepts at 
face value the language of section 30(2) that the breach of contract may 
amount to "a repudiation of the whole contract" (italics added). This rendering 
is inconsistent with the cases cited in footnote 136 supra. Benjamin, footnote 
113 supra, para. 653, implicitly rejects the buyer's right to return previous 
instalments though he cautiously recognizes that "if the instalments already de- 
livered can be regarded as parts of an indivisible whole, e.g., individual volumes 
of a set of books, parts of a machine, or a suit of clothes, then the buyer will be 
entitled to rescind the contract ab initio by returning the instalments already de- 
livered . . .". Note 9 to this text qualifies the textual statement by adding, "It 
could, however, be argued that, by making the contract divisible, the buyer could 
rescind only as to future instalments". Williston, footnote 111 supra, sec. 467, 
accepts the thesis that the seller's total breach should entitle the buyer to 
rescind the contract ab initio, though he admits that not all the principles stated 
by him are "undisputed". He bases his position on the provision analogous to 
section 29 of the Ontario Sale of Goods Act, but quaere the soundness of the 
analogy. 

i38This is perhaps true of the examples cited in Benjamin in footnote 137 supra. 

i39Compare 1977 draft UNCITRAL Convention, Art. 50(3): 

A buyer, avoiding the contract in respect of any delivery, may, at the same 
time, declare the contract avoided in respect of deliveries already made or 
of future deliveries if, by reason of their interdependence, those deliveries 
could not be used for the purpose contemplated by the parties at the time 
of the conclusion of the contract. 

i40See, Draft Bill, s. 8.12(4). 



551 

(iii) Breach With Respect To A Single Instalment 

The existing Sale of Goods Act does not state clearly the buyer's right 
with respect to a single defective instalment, where breach of the instalment 
does not amount to a breach of the whole contract, or where the buyer does 
not elect to treat it as such. In principle, however, the buyer's remedies 
with regard to that specific instalment should be no different from those 
that would have been available to him if there had been a breach of an 
entire contract calling for a single delivery of those same goods ;^'^i that 
is, he should have the right to reject the goods or claim damages or both, if 
the breach amounts to a breach of a condition, and he should be restricted 
to a claim in damages if the breach only involves breach of a warranty. 

A difficulty arises because section 30(2) of The Sale of Goods Act, 
in discussing the consequences of a defective delivery, speaks of a severable 
breach "giving rise to a claim for compensationf^'^^] ^^^ not to a right to 
treat the whole contract as repudiated". This suggests that the buyer in such 
cases is limited to a claim for compensation and that he has no right to 
reject. Textwriters appear to agree, however, that this is not a correct 
inference. ^"^3 If a provision similar to section 30(2) were to be retained in 
the revised Act, it would seem desirable to place this question beyond 
doubt by expressly giving the buyer a right to reject; we do not, however, 
recommend the retention of the subsection. 

The Uniform Commercial Code provisions are also not free from diffi- 
culty. UCC 2-612(2) provides: 

2-612.(2) The buyer may reject any installment which is non- 
conforming if the non-conformity substantially impairs the value of 
that installment and cannot be cured or if the non-conformity is a 
defect in the required documents; but if the non-conformity does not 
fall within subsection (3) and the seller gives adequate assurance of 
its cure the buyer must accept that installment. 

It should be noted that the buyer's right to reject under this subsection 
is not governed by the same criteria that apply to breach of a non-instalment 
contract. In the latter case, UCC 2-601 permits the buyer to reject if the 
goods are non-conforming "in any respect". In an instalment contract, on 
the other hand, in order to reject the buyer must be able to show a sub- 
stantial impairment in value of the defective instalment, and, it would seem, 
that the defect cannot be cured. An exception is made in the case of a 
defect in the required documents, where the special substantial impairment 
and cure requirements do not apply. The Official Comment to UCC 2-612 
provides no explanation for the application of a different standard with 
respect to the buyer's right to reject a defective instalment and the separate 
treatment of defective documents. 



I'^lCompare, Benjamin, footnote 113 supra, para. 655; Atiyah, footnote 137 supra, 

p. 286. 
l42The scope of this expression is explained in Workman Clark & Co., Ltd. v. 

Lloyd Brazileno, [1908] 1 K.B. 968 (C.A.), at pp. 978-79. 
i43See the authorities cited in footnote 141, supra. 



552 

The apparent imposition of a requirement that the defect not be 
curable as a condition of the buyer's right to reject is also inconsistent with 
the cure provisons in UCC 2-508(2). Under the latter subsection, the 
burden of offering cure falls on the seller. Moreover, the right to cure is not 
absolute, and it does not arise until after the buyer has rejected a tender as 
non-conforming. It may be that these discrepancies are only linguistic and 
that the draftsmen did not intend the cure provision to operate differently 
in the case of instalment contracts. However, the discrepancies are poten- 
tially of such a serious nature that it would be unwise to adopt UCC 
2-612(2) in its present form in a revised Ontario Act. 

We have previously recommended ^"^"^ the adoption of an integrated 
right to cure that would apply uniformly to non-conforming tenders or 
deliveries by the seller. If this recommendation is implemented it should be 
unnecessary for cure purposes to draw a distinction between breach of an 
instalment contract and other types of non-conforming tender. Instead, we 
recommend that a buyer's rights with regard to a non-conforming instal- 
ment should be the same as if the instalment were a separate contract. ^^^^ 

(c) BREACH OF INSTALMENT CONTRACT BY BUYER 

In principle the buyer's breaches of an instalment contract should be 
treated in the same way as those of the seller and we so recommend. It is 
therefore unnecessary to retrace all of the same ground in our discussion 
of this topic. The provisions of section 30(2) of the present Sale of Goods 
Act, which deal with the question of whether a breach of a particular in- 
stalment amounts to a breach of the whole contract, are made expressly 
applicable to the situation where the buyer "neglects or refuses to take 
delivery of or pay for one or more instalments". Section 30(2) does not 
state clearly the seller's rights with regard to the particular instalment, 
where the buyer's wrongful conduct does not amount to a breach of the 
whole contract, or where the seller elects not to treat it as such; however, 
as was earlier noted, ^"^^ the same is true with regard to the buyer's rights 
when the seller is in breach. In both cases general sales principles should 
be applied. 

The position under the Uniform Commercial Code is more compli- 
cated. UCC 2-612 does not expressly refer to the buyer's breaches, but 
Comment 6 to the section clearly contemplates that UCC 2-612(3), which 
determines when a breach as to an instalment will amount to a breach of 
the whole contract, will be applied in such circumstances. This conclusion 
is supported by the reference to "aggrieved party" in the second sentence 
of subsection (3), since UCC 1-201(2) defines "aggrieved party" as "a 
party entitled to resort to a remedy", and this definition is broad enough to 
embrace both buyers and sellers. 

We have concluded that the standard of substantial and foreseeable 
impairment of the value of the whole contract, which we have recom- 
mended should determine the situations in which a breach by a seller as to 



I445wpra, ch. 17, sec. C.(d)(ii)(l) 
i45See, Draft Bill, s. 8.12(2). 
^^^Supra, this ch., sec. 5(b) (iii). 



553 

a particular instalment should justify cancellation of the whole contract by 
the buyer, ^'^'^ should also apply to such breaches by the buyer. We recom- 
mend that provision in the revised Act specifying the circumstances in 
which breach of a single instalment will amount to a substantial breach of 
the whole contract should be equally applicable to buyers and sellers. ^"^^ 

The position under the Uniform Commercial Code with respect to the 
impact of the breach upon the seller's rights with respect to the particular 
instalment is less clear. UCC 2-612(2) only deals with the buyer's right of 
rejection of the particular instalment where the seller is in default, with no 
reference to the seller's rights when it is the buyer who is in breach. This 
silence invites the inference that the buyer's breach is to be regulated by 
the principle of strict performance enshrined in UCC 2-703. If this conclu- 
sion is correct, the seller would be entitled to exercise all the rights with 
respect to the instalment to which he would have been entitled if the goods 
involved in the particular instalment had been delivered as a single delivery 
under a non-instalment contract. This would be true even though the 
breach was minor in scope and could be easily cured. On the other hand, 
as noted earlier, ^"^^ the buyer would be able to reject the same instalment 
only if its defects substantially impaired the value of the instalment and 
they could not be cured, except where the non-conformity related to re- 
quired documents. These differences appear illogical, and we believe that 
the same standard should be applied to breaches relating to particular 
instalments by both the buyer and the seller. We therefore recommend 
that the buyer and the seller should have the same rights with respect to 
a breach by the other party concerning a single instalment that they would 
have had if that instalment had been a separate contract, and our Draft 
Bill so provides. ^^^ 

(d) REINSTATEMENT OF THE CONTRACT 

UCC 2-612(3), after specifying the circumstances in which a breach 
with respect to a particular instalment amounts to a breach of the whole 
contract, continues: 

. . . But the aggrieved party reinstates the contract if he accepts a non- 
conforming installment without seasonably notifying of cancellation 
or if he brings an action with respect only to past installments or 
demands performance as to future installments. 

The first and third conditions of reinstatement set out in this provision, 
that is, acceptance of a non-conforming instalment or a demand for future 
performance, are unobjectionable. The second, however, is of doubtful 
merit. It is not obvious why a suit involving only a past instalment should 
be conclusively treated as a waiver of the right to cancel the whole contract. 
The obligation to give prompt notification of cancellation should provide 
adequate protection to the party in breach. 



'^^1 Supra, this ch., sec. 5(b) (i). 
l48See, Draft Bill, s. 8.12(3). 
^"^^Supra, this ch., sec. 5(b) (iii). 
l50See, Draft Bill, s. 8.12(2). 



554 

It has been suggested to us^^^ that the reinstatement portion of UCC 
2-612(3) is unnecessary, and that problems of waiver and election of 
remedies for breach of an instalment contract can safely be left to be deter- 
mined in Hght of the general rules on this topic recommended for adoption 
in the revised Act,^^^ or under general principles of law.^^^ We agree with 
this suggestion, and recommend the revised Act should not include a pro- 
vision comparable to the second sentence of UCC 2-612(3) specifying 
conditions of reinstatement of the whole contract. ^^"^ 

(e) CONCLUSION 

In the light of the foregoing discussion, we recommend adoption of 
the following provisions on instalment contracts in the revised Ontario Act: 

8.12.(1) In this Act "instalment contract" means a contract that 
requires or authorizes the delivery of goods in separate lots to be 
separately accepted, notwithstanding a provision in the contract to the 
effect that each delivery is a separate contract. 

(2) Subject to subsection 3, the buyer's rights and remedies with 
respect to a non-conforming instalment and the seller's rights and 
remedies with respect to breach by the buyer of his obligations in 
relation to an instalment are the same with respect to that instalment 
as if it were a separate contract. 

(3) If the non-conformity or breach with respect to one or more 
instalments substantially and foreseeably impairs the value of the 
whole contract to the other party, there is a substantial breach of the 
whole contract. 

(4) Where there has been a substantial breach of the whole con- 
tract by the seller, the buyer may, subject to section 8.8(2) and (3), 
revoke his acceptance of any instalment previously received by him. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should adopt a single test to determine the circum- 
stances in which a breach of a contract will amount to a substantial 
breach. For this purpose, the following definition of "substantial 
breach" should be incorporated in the revised Act: 

'substantial breach' means a breach of contract that the party 
in breach foresaw or ought reasonably to have foreseen as 
likely to impair substantially the value of the contract to the 
other party. 

2. The revised Act should not contain a definition of the term "avail- 
able market"; rather, the concept of an available market and other 



iSiCarr, footnote 106 supra, at p. 68. 
i52Compare, Draft Bill, ss. 4.8, 8.10, 8.11. 
i53See, Draft Bill, s. 3.4. 
i54Compare, Draft Bill, s. 8.12(3). 



555 

market price terminology should be abandoned. If, however, it is 
decided to retain the concept of "available market", the revised Act 
should adopt a provision comparable to UCC 2-723(2) as a means 
of establishing the market price at a relevant date where it cannot 
otherwise be ascertained. 

3. The revised Act should adopt, in place of the market price test 
contained in sections 48(3) and 49(3) of the existing Sale of Goods 
Act, a test of commercially reasonable disposition or purchase. Ac- 
cordingly, the revised Act should provide that, 

(a) where the buyer wrongfully neglects or refuses to accept and 
pay for the goods at the agreed time for performance, and in 
circumstances amounting to a substantial breach, and the seller 
has not actually resold, the measure of the seller's damages 
should prima facie be ascertained by the difference between the 
contract price and the price that could have been obtained by 
a commercially reasonable disposition of the goods, less any 
expenses saved in consequence of the buyer's breach; and 

(b) where the seller wrongfully neglects or refuses to deliver the 
goods at the agreed time for performance and in circumstances 
amounting to a substantial breach, or where the buyer rightfully 
rejects or revokes his acceptance of the goods, and the buyer 
has not actually covered, the measure of the buyer's damages 
should prima facie be ascertained by the difference between the 
contract price and the price at which the goods could have been 
obtained in a commercially reasonable purchase, less any ex- 
penses saved in consequence of the seller's breach. 

4. For the purpose of measuring the aggrieved party's damages in ac- 
cordance with the test of commercially reasonable disposition or pur- 
chase, the revised Act should contain a rule that the price that could 
have been obtained by a commercially reasonable disposition or 
purchase of the goods shall be the price obtaining at a reasonable 
place. 

5. The revised Act should incorporate a test, in place of the test con- 
tained in sections 48(3) and 49(3) of the existing Sale of Goods 
Act, to the effect that the aggrieved party's damages should be de- 
termined with reference to the price at which the goods could have 
been resold or purchased, as the case may be, within a reasonable 
time after the aggrieved party learned of the breach by the other 
party. 

6. A section comparable to UCC 2-609 entitling one party to demand 
adequate assurance of performance from the other party where rea- 
sonable grounds for insecurity arise should be enacted in the revised 
Act subject to the following modifications: 

(i) The opening sentence of UCC 2-609(1) should not be incor- 
porated in the comparable provision in the revised Act. 



556 

(ii) A provision comparable to UCC 2-609(2) should not be in- 
cluded in the revised Act, and the word "commercially" in 
the phrase "commercially reasonable" should not be incorpor- 
ated in the provision corresponding to UCC 2-609(1) in the 
revised Act. 

(iii) The section should provide that, upon adequate assurance 
being provided, the aggrieved party's obligation to perform is 
restored, but that he is not liable for any delay occasioned by 
his suspension of performance. 

7. The extent to which a contract may impose or permit standards 
deviating from those incorporated in the section dealing with ade- 
quate assurance of performance should be governed by the proposed 
general provision in the revised Act delineating the extent to which 
the parties are free to vary the provisions of the Act. 

8. The right to seek adequate assurance of performance should not be 
expressly restricted to cases where the person seeking adequate as- 
surance of performance has not performed his obligations under the 
contract. 

9. The provision in the revised Act comparable to UCC 2-609, unlike 
UCC 2-611(3), should not confer upon the aggrieved party the right 
to an allowance for any delay occasioned by the aggrieved party's 
suspension of performance. 

10. Provisions comparable to UCC 2-610 and UCC 2-611 dealing with 
anticipatory repudiation should be incorporated in the revised Act, 
subject to recommendations 12 and 13(a), infra. 

1 1 . There should be no definition of repudiation included in the revised 
Act. 

12. There should be a provision included in the section of the revised 
Act comparable to UCC 2-610 stipulating that, where the repudiating 
party has suffered foreseeable detriment or loss as a result of his 
reliance upon a notification by the aggrieved party that he would 
await performance by the repudiating party, or because the aggrieved 
party has urged the repudiating party to perform, the aggrieved 
party 

(a) should not be able to exercise his remedies unless he first gives 
the repudiating party reasonable notice of his intention to do so; 
and 

(b) should be liable to compensate the repudiating party for such 
foreseeable detriment or loss as he has suffered before the 
notice mentioned in clause (a). 

13. The revised Act should contain a provision requiring the aggrieved 
party to mitigate his damages in the case of an anticipatory repudia- 
tion. Accordingly, the revised Act should incorporate the following 
provisions : 



557 

(a) a subsection modelled on section 336(1) of Restatement of 
the Law of Contracts, rather than UCC 2-61 0(a), stipulating 
that the repudiating party is not liable in any event for loss or 
damage that the aggrieved party should have foreseen and could 
have mitigated or avoided without undue risk, expense or preju- 
dice; 

(b) a section, similar to UCC 2-704, to the effect that, where goods 
are unfinished at the time of a breach, the seller must exercise 
reasonable commercial judgment for the purposes of effective 
realization and avoidance of loss, and to these ends the seller 
may complete the manufacture and wholly identify the goods 
to the contract, or cease manufacture and resell for scrap or 
salvage value, or proceed in any other reasonable manner. 

14. No special provision should be adopted to determine the time for 
the measurement of damages in cases of anticipatory repudiation. 
The existing common law rule that the aggrieved party's damages 
are to be assessed as at the time fixed for performance should con- 
tinue to apply, subject to recommendation No. 13, supra, imposing 
upon an aggrieved party a duty of mitigation. 

15. The provision in the revised Act comparable to section 30(1) of the 
present Sale of Goods Act, which specifies that the buyer is not 
obliged to accept delivery by instalments unless otherwise agreed, 
should constitute a separate section that is wholly severed from the 
section dealing with remedies for breach of an instalment contract. 

16. A definition of instalment contract modelled upon that found in 
UCC 2-612(1) should be adopted in the revised Ontario Act. 

17. The revised Act should provide that a contract may be an instalment 
contract even though it contains a clause to the effect that each de- 
livery is a separate contract. 

18. With the exception of recommendation No. 20, infra, the same rules 
should govern breaches of instalment contracts by both buyers and 
sellers. 

19. The revised Act should provide that, if a non-conformity or breach 
with respect to one or more instalments substantially and foreseeably 
impairs the value of the whole contract to the other party, there is 
a substantial breach of the whole contract. 

20. The revised Act should provide that, if the seller's breach is of such a 
substantial character that it foreseeably impairs the value of the whole 
contract to the buyer, the buyer should be able to revoke his accept- 
ance of any previously delivered instalments, but only in the following 
circumstances: if the revocation occurs within a reasonable time after 
the buyer discovers or should have discovered the ground for revo- 
cation; if there has been no substantial change in the condition of 
the goods which is not caused by their own defects or by casualty 
suffered by them while at the seller's risk; and, if notification of the 
revocation is given to the seller. 



558 

21. Both the buyer and the seller should have the same rights with re- 
spect to a breach by the other party concerning a single instalment 
that they would have had if that instalment had been a separate 
contract. 

22. The revised Act should not include a provision comparable to the 
second sentence of UCC 2-612(3) specifying conditions of rein- 
statement of the whole contract. 



PART VII 



[559] 



CHAPTER 19 



MISCELLANEOUS ISSUES 



We discuss in this chapter a number of issues that affect the general 
scope or operation of the revised Sale of Goods Act, the adoption of which 
we have previously recommended in this Report. 

1. Applicability of Revised Act to Crown 

We recommend that the Crown should be bound by the proposed 
revised Sale of Goods Act, and our Draft Bill contains a provision to this 
effect.^ Our recommendation is based on several grounds. First, we believe 
it right in principle that the Crown should be subject to the same rules 
of private law when entering the marketplace as is the citizen; the Crown 
should not be entitled, in the absence of strong policy reasons, to separate 
or preferential treatment.^ We know of no such reasons that would apply 
in this branch of the law. 

Our second reason is that recent or proposed Ontario legislation — 
such as The Mechanics Lien Act,^ The Blind Persons Rights Act, 1976,^ 
and the proposed revision to The Limitations Act^ — indicates a trend in 
favour of binding the Crown. We understand that this legislation in turn 
reflects considered, and consistent, current government policy with respect 
to this aspect of the prerogatives of the Crown. 



iSee, Draft Bill, s. 2.3. 

2We recognize that there is some authority for the proposition that the Crown, 
by entering into a contract, cannot fetter its discretionary power to act for 
the public good, even if this involves a breach of the terms of a purported con- 
tract. An extreme expression of this doctrine is to be found in the much 
criticized judgment of Rowlatt, J., in Rederiaktiebolaget Amphitrite v. The King, 
[1921] 3 K.B. 500, 503-04; and compare. The King v. Dominion of Canada 
Postage Stamp Vending Co. Ltd., [1930] S.C.R. 500, per Newcombe, J., at p. 
506. See further, Hogg, Liability of the Crown in Australia, New Zealand and 
the United Kingdom (1971), pp. 129 et seq.; Williams, Crown Proceedings 
(1948), pp. 9-10; de Smith, Judicial Review of Administrative Action (3rd ed., 
1973), p. 279; Waddams, The Law of Contracts (1977), pp. 402-03; and. The 
Canadian Encyclopedic Digest (Ontario) (3rd ed., 1975), Vol. 8, p. 40-79. There 
is, however, a remarkable paucity of authority on so important a question. More- 
over, there is no consensus among scholars about the current position and, 
indeed, about whether there is, in fact, an established doctrine of executive 
necessity or discretion. Chir own inquiries lead us to believe that the current 
practice of the Ontario Government is not to rely on such a doctrine, if, in 
fact, it exists. In the light of all these uncertainties we have not thought it 
necessary or prudent to create an express exception to the provision in the 
Draft Bill that binds the Crown for the purported doctrine of executive dis- 
cretion. If, indeed, there is such a doctrine, it will be captured in the general 
residuary provision in s. 3.4 of the Draft Bill. 

3R.S.O. 1970, c. 267, as am. by S.O. 1975, c. 43, s. 2. 

4S.O. 1976 (2nd Sess.), c. 14, s. 1(3). 

5R.S.O. 1970, c. 246. See, Ontario Law Reform Commission, Report on Limita- 
tion of Actions (1969), p. 137, and Ministry of the Attorney General, Discus- 
sion Paper on Proposed Limitations Act (Sept. 1977), "Discussion Draft of 
Proposed Act", s. 13. 

[561] 



562 

Our third reason is that not to bind the Crown would invite much 
confusion in seeking to establish the applicable rules where the Crown 
is a party to a contract of sale. The Crown would apparently be bound 
by the common law rules of contract,^ and, to the extent that the revised 
Sale of Goods Act, like its predecessor, merely codifies those rules in the 
sales area, there would be no change.^ In many instances, however, our 
Draft Bill modifies or repeals a common law rule. In such cases, the parties 
would experience difficulties in determining the boundary between the 
binding and non-binding rules. We would regard this uncertainty as most 
undesirable. 

2. Limitation Period 

The existing Sale of Goods Act contains no provisions governing the 
limitation period in actions arising out of a contract of sale; nor does The 
Limitations Act.^ As a result, sales transactions are subject to the normal 
limitation period applicable to simple contracts; that is, six years from the 
time the cause of action arises.^ The Uniform Limitation of Actions Act 
adopted by the Uniform Law Conference of Canada, ^^ also contains no 
separate rules with respect to contracts of sale. 

By way of contrast, UCC 2-725 ^^ estabHshes a four year limitation 

68 C.E.D. (Ont. 3d), footnote 2 supra, para. 148, at p. 40-84, and authorities 
there cited. 

^Indeed, the proposition is advanced in 8 C.E.D. (Ont. 3d), footnote 2 supra, 
para. 149, at p. 40-84, that "[i]t would seem that, in determining the rights 
and liabilities under contracts with Her Majesty, provincial statutes forming 
part of the general law will bind Her Majesty, including Her Majesty in right 
of Canada, even though she is not mentioned therein." The authorities cited in 
support of this proposition are Dominion Building Corp. v. R., [1933] A.C. 
533 (P.C), and Bank of Nova Scotia v. The Queen (1961), 27 D.L.R. (2d) 
120 (Exch. Ct.). If this is a correct interpretation of the current position, then 
presumably a Sale of Goods Act, old or new, will bind the Crown even in the 
absence of an explicit provision to this effect. However, we believe it would 
be safer not to leave the question in doubt. 

8R.S.O. 1970, c. 246. 

9/6/W.,s. 45(g). 
^^Consolidation of Uniform Acts of the Uniform Law Conference of Canada 

(1978), pp. 29-1 etseq.,s. 2(l)(f)(i). 
IIUCC 2-725 reads as follows: 

(1) An action for breach of any contract for sale must be com- 
menced within four years after the cause of action has accrued. By the 
original agreement the parties may reduce the period of limitation to not 
less than one year but may not extend it. 

(2) A cause of action accrues when the breach occurs, regardless of 
the aggrieved party's lack of knowledge of the breach. A breach of war- 
ranty occurs when tender of delivery is made, except that where a warranty 
explicitly extends to future performance of the goods and discovery of the 
breach must await the time of such performance the cause of action ac- 
crues when the breach is or should have been discovered. 

(3) Where an action commenced within the time limited by subsec- 
tion (1) is so terminated as to leave available a remedy by another action 
for the same breach such other action may be commenced after the expira- 
tion of the time limited and within six months after the termination of the 
first action unless the termination resulted from voluntary discontinuance 
or from dismissal for failure or neglect to prosecute. 

(4) This section does not alter the law on tolling of the statute of 
limitations nor does it apply to causes of action which have accrued before 
this Act becomes effective. 



563 

period for the bringing of an action for breach of a contract of sale. 
The section also contains a number of subsidiary provisions with respect 
to the following matters: the parties' right to restrict but not to extend the 
statutory period; the time when a cause of action accrues for the purpose 
of the section; and, the extension of the period of limitation when an ac- 
tion commenced within the limitation period is terminated and the plaintiff 
seeks to bring a new action for the same breach. 

The desirability of a separate limitation period for actions arising 
out of contracts of sale was considered by the Commission in its earlier 
Report on Limitation of Actions. ^^ In particular, we considered whether 
the limitation period should be reduced from 6 to 4 years as suggested by 
UCC 2-725(1). We rejected such a reduction^^ on the grounds that we 
did not think the benefit to the commercial community would be so sig- 
nificant as to justify a change to the shorter period, and because the six 
year period for actions in contract was well known and established in 
Ontario and other common law jurisdictions. In our view, both reasons 
remain valid and, accordingly, we recommend no change in the current 
position. 

In 1974 a United Nations Conference adopted a Convention on the 
Limitation Period in the International Sale of Goods drafted by UNCI- 
TRAL.i'^ This Convention provides for a limitation period of four years 
in international contracts for the sale of goods and, if adopted by the 
federal government at the request of Ontario, ^^ would introduce an impor- 
tant distinction in Ontario between contracts subject to the Ontario Limi- 
tations Act and those subject to the shorter period stipulated in the Con- 
vention. An amendment to the Uniform Limitation of Actions Act was 
approved in 1976 by the Uniform Law Conference,^^ with a view to en- 
couraging the uniform extension of the Convention to the Provinces 
through an appropriate declaration by the federal government, if Canada 
should decide to accede to the Convention. Our opinion has not been 
sought with respect to whether Ontario should make such a request to 
the federal government, and we express no view on the desirability of such 
a step. 



^'^Supra, footnote 5, pp. 32-34. 

13/6/W., p. 34. 

l^See, Proceedings of the 57th Annual Meeting of the Uniform Law Conference 
of Canada (1975), Appendix M, pp. 160-61; Of)icial Records of the United 
Nations Conference on Prescription (Limitation) in the International Sale of 
Goods (U.N. Pub., Sales No. E. 74. V.8), p. 101. 

i5The Convention, in Art. 31, contains a 'federal state' clause to accommodate the 
interests of federal states, like Canada, when the subject matter of the Conven- 
tion falls constitutionally within the jurisdiction of the Provinces. In such cases, 
the Convention will only apply in respect of those Provinces that have made 
such a request, and where a declaration to this effect has been made by the 
Canadian government at the time of acceding to the Convention or subsequent 
thereto. 

^(^Proceedings of the 58th Annual Meeting of the Uniform Law Conference 
(1976), at p. 29, and Appendix L, pp. 146 et seq. A revised Uniform Act is 
currently under consideration by the Conference. 



564 

3. Conflict of Laws Provisions 

When a contract of sale contains a foreign element, the question 
may arise whether Ontario law or some other law governs the contract 
or some particular aspect of it. The rules that determine this question 
belong to that branch of the law known as the conflict of laws or, less 
accurately, in the North American context, private international law. The 
foreign element may be introduced^'^ in a number of ways: one of the 
contracting parties may reside or carry on business outside Ontario; the 
contract of sale may have been concluded, or may be intended to be per- 
formed, in whole or in part, outside the Province; or, the goods that are 
the subject of the sale may be located elsewhere. 

Given the frequency and importance of interprovincial and inter- 
national sales to the Ontario economy — and, of course, to the Canadian 
economy as a whole — we have considered the desirability of adding 
some conflict of laws provisions to the revised Sale of Goods Act. We have 
concluded, however, that this should not be done, and our Draft Bill con- 
tains no such provisions. 1^ 

Our reasons are as follows. First, whatever their theoretical impor- 
tance, conflict of laws issues are not often raised in practice in sales liti- 
gation,^^ and we anticipate no significant change in this respect in the 
foreseeable future. Secondly, the existing Sale of Goods Act contains no 
conflict of laws provisions, and their absence does not appear to have cre- 
ated any appreciable difficulties. Thirdly, the applicable conflict of laws 
rules are not peculiar to contracts of sale; if it were thought desirable to 
codify these rules, it would be better to do so in a wider context involv- 
ing the law of contract at large, or at least all commercial contracts. Fin- 
ally, and most importantly, it would be far from easy to draft a satisfac- 
tory, comprehensive, and useful set of rules. Conflict of laws rules in the 
contractual area are predominantly of judicial origin. Many of them are 
still in the course of evolution, or are flexible in character.^^ An attempt to 
codify could therefore result in a premature freezing of the rules, or in 
rules so vague — such as the rule that the parties' obligations under a con- 
tract of sale are governed, in the absence of an express choice of law clause, 
by "the proper law" of the contract^! — as to be of very limited assistance 
in the resolution of actual disputes. 



l7Compare, Benjamin's Sale of Goods (1974), ch. 26. 

isOur present concern is with choice of law rules and not with rules concerning 
the jurisdiction of Ontario courts over a defendant who is outside Ontario, Such 
jurisdictional questions are covered in the rules of practice. See, Rules 25-31 
of the Supreme Court of Ontario Rules of Practice, R.R.O. 1970, Reg. 545, 
as am. 

i^he position appears to be the same in the United Kingdom. See, Benjamin's 
Sale of Goods (1974), para. 2291, p. 1159. As Benjamin notes, foreign law 
must be pleaded and proved as a fact before a court is required to take notice 
of it. Since frequently it is not pleaded, even though a foreign element is 
present, the conflict of laws issues are never resolved and the court only applies 
its own domestic law. 

20Compare, Benjamin's Sale of Goods (1974), ch. 26; Castel, Canadian Conflict 
of Laws (1977), Vol. 2, ch. 19. 

2iSee, for example, Etler v. Kertesz, [1960] O.R. 672 (C.A.), and the earlier 
Canadian authorities cited in Castel, footnote 20 supra, at p. 516, n. 12. 



565 



4. Transitional Provisions 



Under this heading we discuss the question of the extent to which 
the revised Sale of Goods Act should apply to contracts of sale con- 
cluded, but not fully executed, before the operative date of the new Act. 
The general rule of construction is^^ that a statute is not retrospective 
in character. Accordingly, unless the revised Act provided otherwise, the 
Act would not apply to contracts of sale concluded before the Act comes 
into effect. 

We are of the view that the revised Act should not be made retro- 
spective, since to do so could prejudice unfairly rights and obligations bar- 
gained for in reliance on, or otherwise accruing under, the older law. It 
could be argued that this would not be true of all the provisions in the 
revised Act, and that a substantial number of them could usefully be 
applied to existing contracts without interfering with accrued rights or 
obligations. 23 While recognizing the force of this reasoning, we would 
prefer that a simple rule govern the applicability of the new Act. We would 
not favour a rule that distinguishes between the provisions of the revised 
Act, applying some of them to existing contracts of sale, but not others. 
Most contracts of sale are of a relatively short duration. The new Act 
could, therefore, be expected to capture a great majority of sales trans- 
actions within a short period after the Act comes into force. In addition, 
the courts would be free to apply by analogy some of the new rules to 
existing contracts, where they felt it appropriate to do so.^^ 

In the light of the foregoing comments, we recommend that the re- 
vised Act should contain provisions to the following effect: 

(a) that the Act shall apply to contracts of sale and other trans- 
actions governed by the Act that are entered into on or after 
the day on which the Act comes into force ;25 and, 

(b) that the existing Sale of Goods Act should be repealed except 
for contracts of sale entered into before the day on which the 
revised Act comes into force. ^^ 

5. Conflicting Legislation 

In previous chapters of this Report,^^ we have drawn attention to 
the substantial body of legislation, apart from The Sale of Goods Act, 
that affects all or some types of contract of sale. In a number of instances 
we have made specific recommendations, either to avoid a fairly obvious 
conflict between other legislation and the revised Sale of Goods Act, or 



^'^Craies on Statute Law (7th ed., 1971), pp. 387 et seq. 

23This would be particularly true of those provisions that are designed to clarify 

rather than to change the existing law. 
24In the U.S., some courts used the analogical route in applying or referring to 

the provisions in Article 2 of the Uniform Commercial Code before the Code 

had been adopted in their jurisdictions. 
25See, Draft Bill, s. 10.1. 
26See, Draft Bill, s. 10.2. 
27See, in particular, supra, ch. 2, sec. 2. 



566 

to bring other legislation into conformity with the principles of the revised 
Act. 

We have not made an exhaustive inventory of all the provincial 
statutes that may give rise to a conflict with the revised Act. We have, 
however, considered the question whether the revised Act should contain 
a provision to the effect that, in the event of a conflict between the re- 
vised Act and any other legislation, the revised Act should prevail. In 
our view, such a provision has more potential for harm than for good, 
and we do not recommend its adoption. 

Our reasons are as follows. The general rule of construction is^^ 
that a later Act does not repeal an earher Act covering the same subject 
matter, not being of a special character, unless there is a clear conflict 
between the two. To this extent, the suggested section in the revised Act 
would merely restate the existing law. It would not, however, be helpful, 
since it would not assist the courts in determining whether a conflict in 
fact exists — and this is usually the most difficult question. On the other 
hand, the proposed section would go too far, insofar as it might dictate 
the primacy of the provisions of the revised Act, whether or not the earlier 
legislation was of a special character (and thus otherwise subject to the 
prima facie rule that general legislation does not derogate from special 
legislation), 29 and regardless of its purpose. This could have serious con- 
sequences for such consumer protection legislation as The Consumer Pro- 
tection Act^^ and The Business Practices Act^^ and could also bring the 
proposed section into conflict with provisions such as section 45 of The 
Consumer Protection Act. To avoid these and similar difficulties, the 
proposed section would have to exclude these types of Act specifically; 
but even then there is always the possibility that a relevant Act might be 
overlooked. 

It will be seen, therefore, that there is no simple formula for resolving 
statutorily a potential conflict between the revised Act and other legisla- 
tion. There are two realistic alternatives. Such conflicts might be left to be 
resolved in accordance with the normal rules of statutory construction. 
This is commonly the case in Ontario with legislation of a general charac- 
ter. Alternatively, the revised Act could adopt much more detailed rules 
of construction than the simple provision to which we have referred. In 
our opinion, the first solution would be simpler. Accordingly, we recom- 
mend that the revised Act should contain no general constructional rules. 
It should be clearly understood, however, that this recommendation is not 
intended to affect the specific recommendations contained in earlier chap- 
ters with respect to the avoidance of conflict between the revised Sale of 
Goods Act and other legislation, or the promotion of greater harmoniza- 
tion between the two. Nor is it intended to preclude additional efforts to 
identify other potential points of conflict and their appropriate resolution. 



^^Craies on Statute Law (7th ed., 1971), pp. 371 et seq. 

'^Vbid., pp. 377-78; Seward v. Vera Cruz (1881), 10 A.C. 59 (H.L.) 

30R.S.O. 1970, c. 82, as am. 

31S.O. 1974, c. 131. 



567 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The Crown should be bound by the provisions of the proposed re- 
vised Sale of Goods Act. 

2. Actions involving contracts of sale should not be subject to a special 
limitation period; a provision comparable to UCC 2-725 should not 
be adopted in the revised Ontario Act. 

3. The revised Act should not contain any conflict of laws provisions. 

4. The revised Act should only apply to contracts of sale and other 
transactions to which the Act applies that are entered into on or after 
the day on which the Act comes into force. 

5. The existing Sale of Goods Act should be repealed except for con- 
tracts of sale entered into before the day on which the Act comes 
into force. 

6. The revised Act should contain no general provisions with respect 
to the resolution of any conflict between the revised Act and any 
other legislation; rather, such conflicts should be resolved according 
to the normal rules of statutory construction. 



568 

CONCLUSION 



This Reference has been a most difficult and taxing one for the Com- 
mission — the most difficult experienced during its fifteen years. In few 
areas is the law more complex; solutions to the almost infinite variety 
of problems are neither easy nor immediately apparent. The fact that this 
Report indicates some dissents in special areas by Members of the Com- 
mission illustrates the difficulty of reaching satisfactory conclusions and 
recommendations . 

Earlier in our Report^ we have emphasized the desirability of involv- 
ing the Uniform Law Conference in recommending to the common law 
Canadian jurisdictions a revised and uniform Sale of Goods Act. Our hope 
is that the draft Act that we have prepared may become the basis of such a 
Uniform Act in the early future. However, we do not suggest that Ontario 
await uniformity before dealing with our recommendations. 

We renew our expression of gratitude to the Research Director, 
Professor Jacob S. Ziegel, and to his colleagues on the Research Team. 
Professor Ziegel has invested an immense amount of his talent, unexcelled 
knowledge and scholarship as well as his time over a period of several 
years. Our gratitude to him is so great as to be immeasurable. Neverthe- 
less, we absolve him from responsibility for any recommendations. We are 
aware — indeed, vividly aware — from his vigorous presentation of his 
opinions, that there are a number (fortunately only a few) of our recom- 
mendations in which he would be hesitant to concur. 

In the preparation of the Draft Bill, the Commission has had the 
benefit of the great skill and long experience of Mr. L. R. MacTavish, 
Q.C., former Senior Legislative Counsel. The attempt to preserve as much 
of the actual language of the Uniform Commercial Code (so that Ameri- 
can interpretative jurisprudence might be available to us) while adapting 
it to the practices and style of Ontario drafting has been a most difficult 
task. We are deeply grateful to Mr. MacTavish for his exceptional services 
but hasten to acquit him of any responsibility for the attempted "drafting 
marriage". 

Much of the work of research for the preparation of this Report was 
undertaken when Dr. H. Allan Leal, Q.C., was Chairman of the Commis- 
sion. We acknowledge our major indebtedness to him but absolve him also 
from any association with or concurrence in our recommendations. 

The Vice Chairman and other Commissioners wish to record the fact 
that the final preparation of this Report has involved unusual labours on 
the part of our Chairman and of our Counsel. Dr. D. Mendes da Costa, 
O.C. and Ms. M. P. Richardson have demonstrated their very special dedi- 
cation to the cause of law reform and have earned the deep gratitude of 
their colleagues. We would also wish to acknowledge with gratitude the 
special efforts of two of our Legal Research Officers, Ms. J. K. Bankier, 



^Supra, ch. 2, pp. 10-11, and ch. 3, p. 30. 



569 



and Mr. W. A. Bogart, and of Miss A. F. Chute, Secretary to the Com- 
mission. 



All of which is respectfully submitted. 



^e-t4_ 'l^^'''-^ 



dd C(^k 



Derek Mendes da Costa, Chairman 




George A. Gale, Vice Chairman 




Richard A. Bell, Commissioner 



W. Gibson Gray, Commissioner 




James C. McRuer, Commissioner 




William R. Poole, Commissioner 



March 30, 1979 



I