stephen waddams· - university of toronto t-space · 2010] canadian contract law, 1970-2010 411...

CANADIAN CONTRACT LAW, 1970-2010

Stephen Waddams·

CONTENTS

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 II. Tenders for Construction Contracts . . . . . . . . . . . . . . . . . . . . . . . 409 Ill . Implied Terms a nd Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . 4 l2 IV. Consideration, Modification of Contracts, and Promissory

Estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 V. Third-Par ty Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 VI. Paro! Evidence Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 VIL Mistake. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 Vlll. Exemption Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424 IX. Unconscionability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 X. Non-Justiciable ConJracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 XI. Illegality and Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 XJI. Punitive Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 XIII. Mental Distress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 XIV. Speeific Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 XV. Conclusion ........ . ...... . . ..... ......... _ . . . . . . . 432

I. INTRODUCTION

ln the 40-year period since 1970 there have been a number of important developn1ents in Anglo-Canadian contract law, many representing significant changes fron1 former law, and some representing a marked departure from the law in other common law jurisdictions.

II. TENDERS FOR CONSTRUCTION CONTRACTS

Before 1981 the usual analysis of tenders was that the owner invited offers, the bidders made offers, and no contract came into existence until acceptance of the successful bid. But in Ron Engineering & Construction Eastern Ltd. v. Ontario1 it was held that a contract (called by the court a unllateral contract) binding upon the tenderer came into existence on submission of the tender. Subsequent cases held that the owner also was bound by contractual obligations to tenderers, but there was considerable

* 1.

University Professor and holder of the Goodman/Schipper Chair, Facully of Law. University of Toronto. Ron Engineering & Construction Eastern Ltd. l'. Ontario, [1981] 1 S.C. R. 11 1, J 19 D.L.R. (3d) 267.

409

410 Canadian Business Law Journal [Vol. 50

uncertainty about the source of these obligations, and how they followed from the reasoning in Ron Engineering (which implied, by speaking of a unilateral contract, that the obligations were on one side only). The Supreme Court of Canada in M~J.B. Enterprises Ltd. v. Defence Construction2 established that a contract normally comes into effect on submission of tenders, with obligations on both sides. The decision made it clear that the source of the obJigation was contractual. Iacobucci J ., giving the judgment of the court, said that the precise obligations would depend in each case "upon the terms and conditions of the tender call." The analysis of unilateral contract was doubted. 3 The clarification of these two points was an important addition to this area of the law, making it clear that the source of the obligations was a contract between the owner and each tenderer, and, since there were obligations on both sides, a bilateral contract. The terms of the contract are that each party will abide by the rules of the tender process, and these will normally be found in the call for tenders.

Proposals, or calls, for tenders usually contain a clause designed to protect the owner from liability to unsuccessful tenderers. In its simplest f onn, often called a privilege clause, the clause provides that "the lowest or any tender will not necessarily be accepted." The defendant in the M.J.B. case sought to argue that such a privilege clause relieved it of any obligation: this was the argument that had succeeded in the lower courts. The Supreme Court of Canada, as has been mentioned, took the documents, principally the call for tenders, as the primary source of the owner's obligations. It followed that a clause in the document clearly limiting these obligations ought, on this reasoning, to be given effect, and the court accepted this. But the privilege clause, on its proper interpretation, the court held, did not entitle the owner to accept a non-conforming tender. It is well established that documents may be strictly construed against the interests of the party which draws them up, and in this case it was possible to give a reasonab]e meaning to the clause without giving it the interpretation favoured by the defendant. The nieaning was that the defendant might in some circu1nstances legitimately reject a conforn1ing tender (because of a tenderer's poor business reputation, or inadequate capacity, for example), but that it was not permitted by the clause to accept a non-conforming tender.

2. M.J.B. Enterprises Ltd. v. Defence Construction ( 1951) Ltd., [1999] I S.C.R. 619, 170 D.L.R. (4th) 577.

3. Ibid., al p. 585 (D.L.R.).

2010] Canadian Contract Law, 1970-2010 411

This seemed to be a reasonable interpretation in the circumstances, and again il is to be noted that the conclusion depended on the intention and reasonable expectation of the contracting parties.

In Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways ) 4 the Supren1e Court of Canada had to interpret a much niore explicit clause purporting to exclude liability to unsuccessful tenderers. The courl divided on the question of interpretation, Lhe majority holding that, in the very unusual circumstances of the particular case (where there was a breach of a specific undertaking to consider bids only fr01n a small number of named tenderers) the clause could not be interpreted to exclude liability. But the whole court held that an appropriately worded clause, if sufficiently clear, could effectively exclude liability. This was a natural conclusion from the premise that the only source of obligations was the ordinary law of contracts, and it was in this spirit that the court rejected the doctrine of fundamenta] breach, a matter to be discussed below.

In a purely private law context it is difficult to see what objection there is to the owner excluding contractual obligations, provided it is done so clearly as not to create contradictory expectations. There is no principle of contract law by which an obligation could be iinposed on a party that clearly rejected the obligation, and the invalidation of such exclusion clauses would not be in the long-term interests of either owners or tenderers, because if the courts created non-excludable obligations, or complicated the law by artificial and adverse construction of clauses designed to protect the owner, the effect in the private sphere would be to deter owners from issuing calls for tenders. Such a development would re1nove from the marketplace a useful commercial device, and in the long run would be to the detriment of owners and potential contractors, particularly small contractors not previously known to owners.

In the public sphere other considerations apply, because public policy, sometimes incorporated in legislation or regulation, 1nay require a public call for tenders before the expenditure of public money. It might well be thought to be undesirable that this requirement should be evaded or diluted, but, if so, the obvious re111edy would be for the legislature to impose an appropriate obligation, for example, by clarifying that government procuren1ent contracts must be by a process of public tender that

4. Terco11 Contractors Ltd. v. British Columbia (Ministry of Transportation and lffglm·ays) (2010), 315 D.L.R. (4t.h) 385, (2010] I S.C.R. 69, 2010 sec 4.


treats all tenderers.fairly.5 Possibly it might be argued that such an obligation is already implicit in relevant legislation, but then the natural route to explore that line of thought would be through so1ne appropriate branch of public law with the object, if necessary, of compelling c01npliance with the law. Jt seems very doubtful that what is fundamentally a public objective can be satisfactorily achieved by application of principles of ordinary contract law. On the contrary, the atte1npt to achieve public law objectives through the 1nanipulation of private law principles is likely to fail to achieve its public object (as ever more explicit exclusion clauses, successively tested by expensive litiga tion, eventually succeed in their object) while complicating and distorting the ordinary law of contracts. 6

Ill. IMPLIED TERMS AND GOOD FAITH

The M.J.B. case affirmed and perhaps extended7 the power of the court to imply terms in contracts. The power is an important and flexible tool of justice. All contracts are negotiated in some sort of context, and express words, however many and however clear they may be, can never be exhaustive of the parties'

5. This suggestion is made by Jassmine Girgis, ''Tercon Contractors: The Effect of Exclusio n Clauses on the Tendering Process" (2010), 49 C.B.L.J. 187.

6. A tension between public objectives and contract law is evident also in the decision of the Supreme Court of Canada in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, 275 D.L.R. (4th) 577, where the majority of the court held that the city, having accepted a bid that apparently conformed on its face with the ca11 for tenders could, without liability to the unsuccessful bidders, subsequently waive or vary the contractual obligations of the successful tenderer. The majority thought I.hat there were "good policy reasons" for the resu)t (para. 73), by which they meant the public interest in the freedom of the city to renegotiate contracts from time to time should it judge it beueficial to do so. The dissenting judges heJd that the result "'completely nullifies the protection afforded by lhe implied obligation to accept only a compliant bid" (para. 83). In support of the majority it may be remarked that it is difficult to see how an obligation never to vary the final contract can be plausibly derived from private law coulractual principles, particu larly as substautial construct.ion contracts are almost always varied in some respects in the conrse of performance. The majority invoked "good policy reasons." Evidently the dissenting judges were also iuOuenced by a policy consideratiou, but a quite different policy, i.e., the public interesr iu tbe maintenance of a fair and open tendering process that should not be amenable to mauipulation (see para. 123).

7. Some of the narrower fo rmulations of I.he power to imply terms were scarcely satisfied iu this case. H is nol clear lhat the implication was "necessary," nor that the parties, if asked whether the term was iucluded would certainly both have said, "Oh, of course." On the contrary lhe traditional view was that, if the call for tenders was silent, no contractual obligation was implied: Spencer 1'. Harding (1870), L.R. 5 C.P. 561.


obligations. In the context of tenders for construction projects the whole object of the process is to compare like bids with like, and so it is a reasonable implication· that only bids that conform to the invitation are contemplated and that only such bids will be considered. It is to be noted that the theoretical source of this obligation is firmly rooted in the presmned intentions of the parties, and is not derived from any extra-contractual source.

A nmnber of previous cases, including some cases in provincial appellate courts, in imposing obligations on tenderers, had relied on the concept of good faith. This presented two difficulties. First, it was unclear what was the source of the obligation of good faith: if contractual, it was unclear how it could override - as it seemed to do in the reasoning of some of the cases - the terms of the call for tenders. Second, the phrase "breach of an obligation of good faith" suggests bad motive, but the motive of a party in breach of contract is usually irrelevant. Putting the two points together they amount to this: either the plaintiff has a contractual right, or it does not. If it does, and if the defendant infringes the right, the plaintiff is entitled to a remedy however much the other party may have acted in good faith. I.f the plaintiff has no contractual right, there is no remedy, however much the other party might be said to have acted for selfish motives: people are entitled to be selfish so long as they do not infringe the rights of others. The Supreme Court of Canada did refer to good faith in the M.J.B. case, but not as a source of the defendant's obligations. The defendant honestly believed that it was dealing with a compliant bid, and that it was entitled to act as it did. So in the ordinary sense of the words it did act in good faith. But this was no excuse for breach of what the court found to be a contractual obligation:

The respondent's argumenL of good faith in considering the Sorochan bid to be compliant is no defence to a claim for breach of contract: it amounts to an argument that because it thought it had interpreted the contract properly it cannot be in breach. Acting in good faith or thinking that one has interpreted the contract correctly are not valid defences to an action for breach of contract.8

The Supre1ne Court of Canada here affirmed that good faith cannot operate as an excuse for breach of a contractnal term, though the concept is clearly relevant to the prior question of what terms should be implied. Other courts have indicated that the concept of good faith cannot satisfactorily be used to create

8. Supra, footnote 2, at p. 596 (D.L.R.).


obligations inconsistent with the parties' intentions and reasonable expectations, inconsistent, that is, with the underlying princip]es of contract law itse]f. Some Canadian courts have emfloyed the phrase "good faith" with approval in various contexts,( but others have sounded a note of caution. The Ontario Court of Appeal said m Transwnerica Life Canada Inc. v. ING Canada Inc.:

Canadian courts have not recognized a stand-alone duty of good faith that is independent from the tenns expressed in a contract or from the objectives that emerge from those provisions. The implication of a duty of good faith has not gone so far as to create new, unbargained-for, rights and obligations. Nor has it been used to alter the express tenns of the contract reached by the parties. Rather, courts have implied a duty of good faith with a view to securing the performance and enforcement of the contract made by the paitics, or as it is sometimes pul, to ensure Lhat parties do not act in a way that eviscerates or defeals the objectives of the agreemenl that they have enlered into. 10

This approach accepts the idea of good faith in support of the parties' agreement, but not in contradiction or in opposition to it.

Good faith is a concept that has been used in different senses to address several distinct questions in contract law. These questions include, ainong others, whether pre-contractual negotiations can be broken off, whether 1naterial facts known to one party niust be disclosed to the other in pre-contractual negotiations, whether contracts are enforceable if induced by misrepresentation or niistake, whether and to what extent the courts should imply tenns into contracts, whether terms that are very unfair can be enforced, whether non-perfonnance by one party excuses the other, whether deliberate breaches of contract justify punitive damages, and whether the exercise of contractual rights may in some circmnstances be restrained or precluded. The concept of good faith, as applied to these various problems, necessarily varies substantially in meaning and significance, and for that reason it is not possible to assign a single meaning to the concept, nor is it plausible to call "good faith," when applied to such disparate questions, a single principle. Selfish 1notives could not, in all contractua] disputes, be conclusive against a party entertaining the111; nor could pure unselfish motives in themselves enlarge

9. Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 106 N.S.R. (2d) 180, 29 A.C.W.S. (3d) 262 (S.C.T.D.), affd 112 N.S.R. (2d) 180, 32 A.C.W.S. (3d) 1161, (S .C.A.D.) (implied lerm); Empress Towers Ltd. 11• Bank of Nova Scotia (1990), 73 D.L.R. (4Lh) 400, 48 B.L.R. 212 (B.C.C.A.), leave to appe<oll Lo S.C.C. refused 79 D .L.R. (4th) vii, 50 B.L.R. 13611 (negotiation of option to renew lease).

IO. (2002) , 234 D.L.R. (4th) 367, 68 0.R. (3d) 457 (C.A.), al para. 53.


contractual rights, or (as the M.J.B. case shows) excuse a party who was actually in breach ~f a contractual obligation. Neither could the motives of either party be conclusive on the question of whether contractual terms were unfair. It inay seem attractive, or innocuous, to embrace an overriding principle of good faith, but the effect of doing so on the scope of contractual rights and obligations would be far from clear: a contractual right that could only be exercised for unselfish reasons would, to the extent that it could not be exercised, lack the usual characteristics of a "right. " 11

It would, indeed, be possible to conceive of the whole of contract law as the embodhnent of the idea of good faith. Frederick Pollock wrote in his third edition in 1881 and repeated in subsequent editions that "[t]he law of Contract is in truth nothing else than the endeavour of the sovereign power, a more or less imperfect one by the nature of the case, to establish a positive sanction for the expectation of good faith which has grown up in the mutual dealings of men of average right-mindedness." 12

Evidently Pollock was thinking of good faith primarily as supplying a reason for enforcement of pr0111ises, not as a limit on enforcement. He meant that the rules of contract law, taken as a whole, themselves reflected the community's sense of what good faith required - an idea that Pollock associated with protection of reasonable expectations - not that good faith should be deployed to modify or displace the actual rules of English contract law: a contracting party must defer to the other party's interests insofar, but only insofar, as the contract, properly interpreted, requires such deference.

Good faith in this sense has nothing to do with the state of mind of a party seeking to exercise a contractual right. Whether as a reason for enforcement or as a limit on enforcement, the adoption of good faith as a general principle could not eliminate the need for particular rules in the various contexts in which it has been invoked, and it see111s probable that such particular rules would develop in Anglo-Canadian law if a general concept of good faith were adopted by it, or imposed upon it.

11. This point is convincingly made by Victor Goldberg, "Discretion in Long-Term Open Quantity Contracts: Reining in Good Faith," in Framing Contract La111: an Economic Perspective (London, Harvard University Press, 2006), pp. 101-141,

12. Fredel'ick Pollock, Principles<~/' Contract at Law and in Equity, 3rd ed. (London, Steven and Sons, 1881 ), p. xx.

416 Canadian Business Law Journal {Vol. 50

IV. CONSIDERATION, MODIFICATION OF CONTRACTS, AND PROMISSORY ESTOPPEL

Modification of contracts has, since the · early I 9th century, given rise to nluch difficulty in English and Canadian law. In a number of 19th-century cases sailors, having agreed to serve during a voyage for a certain wage, found themselves in a position, during the course of the voyage, to demand higher wages. Promises to pay higher wages in these circumstances were generally set aside. Sometimes judges were reported as reaching this conclusion on the basis of public policy, but Campbell's report of Stilk v. Myriclc13

gave the reason as lack of consideration, and this reason came in the 20th century to be accepted as the orthodox view, and was followed by the Ontario Court of Appeal in Gilbert Steel Ltd. v. University Construction Ltd., 14 where a promise to pay an increased price to a supplier of steel beams was held not to be enforceable.

However, in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd. 15 (1 990) the English Court of Appeal held a contractual renegotiation to be enforceable. In that case, a subcontractor had contracted to perform carpentry work at an agreed price. When the work was partly done it became clear that the subcontractor would not complete it at the contract price, and the head contractor, who was subject to a penalty clause in the main contract for delay in completion, agreed to pay a higher price for completion of the carpentry work. This latter agreement was held to be enforceable. The court held that perfonnance of an existing obligation migh t constitute consideration. References to "principle" were prominent. Glidewell L.J., who gave the leading judgment, rejected the argumenl Lhat this conclusion was contrary to principle:

If it be objected that the propositions above contravene the principle in Stille v. Myrick, ... I answer thar in my view they do not; they refine, and limit the application of that principle, but they leave the principle unscathed . . . It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application in the present day. 16

13. Stilk v. Myrick (1 809), 2 Camp. 317 (H.C.). A different reason (public policy) is given by Espinasse, 6 Esp. 129.

14. (1976), 67 O.L.R. (3d) 606, 12 O.R. (2d) 19 (C.A.). 15. [1991] 1 Q. Il. 1, [1990] 1 All E.R. 512 (C.A.), at pp. 10 and 19 (Q.B.). 16. Id., at p. 16.

2010] Canad;an Contract Law, 1970-2010 417

But Glidewell L.J. added the very significant proviso that the renegotiation would be liable to be set aside if there were economic duress, which he called "another legal concept of relatively recent development," 17 thereby suggesting that the result in S tille v. Myrick might be supported, though not on the reasoning given in Campbell's report. Many have welcomed the demise of consideration in this context, but it is not easy to say precisely what has replaced it.

The Canadian position on this point is also unclear. ln Greater Fredericton Airport Authority Inc. v. NA v Canada, 18 the New Brunswick Court of Appeal said that, in the absence of duress, a tnodification might be enforceable without consideration, but that an implied threat to break the contract could amount to duress. ln River Wind Ventures L td. v. British Colwnbia19 detrimental reliance by the plaintiff or a gained benefit by the defendant was said to be a requirement of enforceability. As the idea of detrimental reliance suggests, another possible approach to the question is by way of the concept of promissory estoppel. The English Court of Appeal has held that promissory estoppel may apply in the analogous context of a promise to accept part payment of a debt in sa tisfaction of the whole,20 but uncertainty remains on several aspects of the scope of promissory estoppel, notably whether and what "intention" is needed, and whether the doctrine gives rise to an independent cause of action. It was recently held by the Ontario Superior Court, interpreting the Mercantile Law Amendment Act, that acceptance of part payment in full satisfaction of a debt was not binding on the creditor if the debtor's threat not to pay the full amount constituted duress.21

V. THIRD-PARTY BENEFICIARIES

Cases of contracts for the benefit of third parties have given rise to Inuch trouble over several centuries in Anglo-Canadian law. In the old case of Dutton v. Poole,22 a father, wishing to give money to his daughter and proposing to cut down trees to raise the money,

17. Id., at p. 13. 18. (2008), 290 D.L.R. (4th) 405, 2008 N13CA 28, para. 31. 19. (2009), 177 A.C.W.S. (3d) 375, 2009 scsc 589, a t pa ras. 32-36. 20. Co/fier ''· P. & M. J. Wright ( Holdings) Lid., (2008] 1 W.L.R. 643, (2007] EWCA

Civ. 1329 (C.A.). 21. Proce.l's Automation Inc. 11• Norstream lntertec Inc. (2010), 321 D.L.R. (41.h) 724,

2010 ONSC 3987. 22. Dutton v. Poole (1678), 2 Lev. 210, 83 E.R. 523 (K.B.), affd T. Raym. 302, 83

E.R. 156 (Ex. Ct.).


agreed with his son and heir that he would refrain from cutting down the trees if the son would pay the daughter a sum of money. The son inherited the land with the timber intact, but refused to honour his promise. The promise was held to be enforceable.

Until Tweddle v. Atkinson2 3 (1861) it was generally accepted that this case was rightly decided, though it was evidently an exception to the idea of privity of contract. The reason for the conclusion in Dutton v. Poole plainly had much to do with general considerations of justice, including unjust enrichment. As the report puts it, "[T]he son hath the benefit by having of the wood, and the daughter hath lost her portion by this means. "24 Of course, the precise phrase "unjust enrichment" was not in use in the 17th century, but plainer language could scarcely have been found to express the idea that the son had been unjustly enriched at the expense of the daughter. In a parallel modern case, Bes111ick v. Beswick, an uncle transferred a coal business to his nephew in exchange for the nephew's promise to pay an annuity to the uncle's widow. The promise was held to be enforceable, but only because the widow happened to be the administratrix of the uncle's estate, and so entitled, in the opinion of the House of Lords, to a decree of specific performance. Again it is plain that general considerations of justice were in play. Lord Reid described the possibility of there being no remedy as "grossly unjust."25 This was an issue where English law, contrary to its usual habits, aJlowed the apparent requirements of logic to override general considerations of justice and co1runercial convenience. Statutory reform of English law was recommended by the Law Revision Committee in l 937, but nothing was done until the enactment of the Contracts (Rights of Third Parties) Act, 1999.

In Canada the English law of the late 19th and 20th centuries was strictly followed, leading to a result in Greenwood Shopping Plaza Ltd. v. Neil J. Buchanan Ltd. 26 that many commentators considered absurd. The lessor of business premises had covenanted with its tenant to insure against fire . A loss by fire occurred, allegedly caused by the negligence of two of the tenant's employees, and the Supreme Court of Canada held that the lessor (and its insurer) was entitled to sue the two employees individually for the whole of the loss, even if the proper

23. (1861), 1 B. & S. 393, 121 E.R. 762 (Q.B.). 24. Du/Ion 1•. Pool, supra, footnote 22, p. 212 (Lev.). 25. [1968] J A.C. 58, [1967] 2 All E.R. 1197 (H.L.). at p. 73 (A.C.). 26. [1980] 2 S.C.R. 228. 111 D .L.R. (Jd) 257.

20101 · Canadian Contract Law, 1970-2010 419

interpretation of the contract was that it had promised not to do so. As the Chief Justice of the Nova Scotia Court of Appeal commented, this result flew in the face of c01nmon sense, modern com1nercia.l practice and labour relations. 27

When the issue arose again in London Drugs Ltd. v. Kuehne & Nagel lnternatfonal Ltd.28 the court took a very different view. The facts were quite similar to those in the Greenwood case. The pJaintiff stored a valuable transformer with the defendant warehouser, agreeing to limit liability to $40. The transformer was damaged by the negligence of two employees, and, as in Greenwood, the owner sued the e1nployees personally. The plaintiffs counsel relied on "Jongstanding, eslablished and fundamental principles of law," no doubt with son1e confidence of success in view of the quite recent decision of the court in Greenwood.

However, Iacobucci J., giving the judgment of the majority of the courl, decided in favour of the employees. Iacobucci J. could easily have found that the case fell into one of lhe established exceptions to the doctrine of privity, but he chose instead to deal with the issue directly, saying that "I prefer to deal head-on with the doctrine of privity and to relax its ambit in the circumstances of this case. "29 He considered that the strict rule should be relaxed for reasons of "commercial reality and co1nmon sense."30 Si1nilar expressions were repeated: "sound commercial practice and justice,"31 "Lhe reasonable expectations of aJl the parties to the transaction, "32 " the underlying concerns of commercial reality and justice,"33 "commercial reality,"34 a result that made "sense in the modern world,"35 "sound policy reasons,"36 "comn1ercial reality and justice,"37 and "modern notions of commercial reality and justice, "38 ideas that were contrasted, to their advantage, with "a strict application of the doctrine of privity, "39 and '< lhe rigid 27. (1979), 99 D.L.R. (3d) 289 (N.S.S.C.A.D.), p. 295, per MacKeigan C.J.N.S. 28. London Drugs Lid. v. Kuehne & Nagel lntemafional Ltd., (1992) 3 S.C.R. 299, 97

D.L.R. (4th) 261. 29. Id., at p. 341 (D.L.R.). 30. Id., at p. 342. 31. Id., at p. 348. 32. !hid. 33. Ibid. 34. Id., at p. 360. 35. Id., at p. 364. 36. Ibid. 37. Id., at p. 365. 38. Id., at p. 370. 39. Id., at p. 361.

420 Canadian Bus;ness Law Journal [Vol. 50

retention of a doctrine that has undergone systematic and substantial attack. "40 He said that il would be "absurd in lhe circumstances of this case to let lhe appellant go around lhe limitation of liability clause by suing lhe respondent employees in tort. ,,41

In the subsequent case of Fraser River Pile & Dredge Ltd. v. Can-Di11e Services Ltd. ,42 Iacobucci J., giving the judgment of the whole court, extended the London Drugs case lo a case involving waiver by an insurer of subrogation rights. The decision shows that the recognition of third-parly rights in contracts is nol limited to any particular class of contract, and lhere seems no reason why third-parly rights should not be recognized in any case where considerations of justice require it. Iacobucci J. described the London Drugs case as having introduced a "principled exception" to the doctrine of privily.43 Some cases have held lhal third parties can only rely on this exception as a defence, nol as a cause of aclion,44 but the very general nature of the Supreme Courl of Canada's appeal to considerations of justice suggests lhal, when justice requires il45 a third party may enforce a contract made for lhat party's benefit.

VI. PAROL EVIDENCE RULE

The parol evidence rule purports to say that, where a contract has been reduced into writing, extrinsic evidence is inadmissible to inodify the writing. There are many exceptions to the rule, and setting them oul is a difficult task, because there is no authoritative precise definition of lhe rule, so thal what are from one poinl of view exceptions may, from a different perspective, be described as instances in which the rule, properly understood, does not apply. The House of Lords held in 1971 that evidence of the factual setting of the contract is admissible in interpreting il,46 and laler English decisions held thal all relevant evidence is admissible on 40. Id., at p. 358. 41. Id., al p. 363. 42. [1999) 3 S.C.R. 108, 176 D.L.R. (41h) 257. 43. Id., at para. 24. 44. Kitimar (District) v. A/can 111c. (2006), 265 D.L. R . (4th) 462, 2006 eccA 75, at

paras. 66-71; Design Services Ltd. v. Canada (2006), 272 D.L.R. (4th) 361 (F.C.A.), affd 293 D.L.R. (4th) 437, [2008) I S.C.R. 737.

45. As in Bes111ick 1'. Beswick,, supra, footnole 25, for example, or Vandepitte v. Preferred Accident Insurance Corp. of New York, [1933] 1 A .C. 70, 49 T.L.R. 90 (P.C.), which was expressJy overruled by the Snpreme Court. of Canada in Fraser River, supra, footnote 42, at para. 40.

46. Pre1111 v. Simmonds, [1971] I W.L.R. 1381, [1971) 3 All E.R. 237 (H.L.).


questions of interpretation,47 except, possibly, evidence of prior negotiations.48

In Eli Lilly and Co. v. Novopharm Ltd.49 the Supreme Court of Canada, in a case not involving a dispute between the actual parties to the contract, held that evidence of the subjective intention of the parties should be excluded. The court said "The contractual intent of the parties is to be determined by reference to the words they used in drafting the document, possibly read in light of the surrounding circun1stances which were prevalent at the time."50 The concluding words just quoted appear to indicate that evidence of surrounding circumstances is generally admissible, but some other passages in the judgment51 might be read to support a more rigid rule excluding all extrinsic evidence, and some lower Canadian courts have so interpreted them.

Courts have often suggested that the "true" meaning of contractual words can be determined simply by perusing the document and that extrinsic evidence is only admissible in case of ambiguity. But it is doubtful if this is a workable test, for words cannot be determined to be ambiguous or unambiguous without considering (expressly or by implication) their context. As the Ontario Court of Appeal said in Dumbrell v. Regional Group of Companies Inc., 52 citing Professor John McCamus,

A consideration of the context in which the written agreement was made is an integral part of the interpretative process and is not something that is resorted to only where the words viewed in isolation suggest some ambiguity. To find ambiguity, one must come to certain condusions as lo the meaning of the words used. A conclusion as to the meaning of words used in a written contract can only be properly reached if the contract is considered in the context in which it was made: see McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 710-11.

Evidence of custom or trade usage has long been held to be admissible, even if it modifies or contradicts the meaning of words

47. Chal'ter Reinsurance Co. Ltd. 11. Fagan, [1997) A.C. 313, [1996] 3 A ll E.R . 46 (H . L.); Investors Compensation Sche1ne Ltd. 11. West Bromll'ich Building Society, [1998] l W.L.R. 896, [1 998] I All E.R. 98 (H . L.).

48. Chartbrook Ltd. v. Persimmon Homes Ltd., (2009) UKHL 38, [2009) 4 All E.R . 677. 49. [1998] 2 S.C.R. 129, 161 D .L.R. (4th) 1. 50 . Id., para. 54. 51. E.g., para. 57. 52. (2007), 279 D.L.R. (4th) 201, 2007 ONCA 59, para. 54.


that are, in their ordinary sense, or in other contexts, unambiguous. In Brown v. Byrne53 Coleridge .J. said:

Merely that il varies the apparent contract is not enough to exclude the evidence; for jt is impossible to add any material incident to the written tenns of a contract without altering its effect, more or less. Neither in the construction of a contract among merchants, tradesmen or others, wil1 the evidence be excluded because the words are in their ordinary meaning unambiguous .. . Whal words more plain that "a thousand," "a week," "a day"? Yet the cases arc familiar in which "a thonsand" has been held to mean twelve hundred, "a week" a week only during the theatrical season, "a day" a

ki da 54 wor ng y.

Almost all fields of human activity use words with specialized meanings, and the admissibility of evidence to prove such 1neanings in case of dispute is essential in order to give effect to the intentions (as reasonably understood according to the usual objective test) of the parties.

Where a writing, signed by the parties, contains a recital that it is the final and conclusive expression of their agreement (a ''merger ,""integration," or "entire agreement" clause) the case for excluding extrinsic evidence is strengthened. But a n1erger clause, like any other set of contractual words, itself takes its meaning from its context. Sometimes the context will show that the parties can reasonably be taken to have intended to exclude all extrinsic evidence, but often this will not be a reasonable inference. It will not us1ially be reasonable to suppose that the parol evidence rule, with or without the assistance of a merger clause, excludes evidence that words have a specialized trade meaning, or that it prevents the courts from implying terms, a process that always has the effect of adding to or varying the express written tem1s of a document. It will be reasonable in many commercial cases to suppose that the parties intended to exclude evidence of prior negotiations - that is the obvious purpose of a merger clause. 55 But it will not usually be reasonable to suppose that the parties intended to exclude implied tenns necessary for the business efficacy of the contract, or

53. Brown v. Byrne (1854), 3 E. & B. 703, 118 E.R. 1304 (Q.B.), al pp. 715-716 (E. & B.).

54. Referring lo Smith v. Wilwn (1832), 3 B. & Ad. 728, 11 0 E.R. 266 (K.B.); Grant v. Maddox (1846), 15 M. & W. 737, 153 E.R. 1048 (Ex. Ct.); Cochrane 11. Retberg (1800), 3 ·Esp. 121, l 70 E.R. 560.

55. The reservation in Clwrtbrook Ltd. v. Persimmon Homes Ltd., (2009] UKHL 38, [2009] 4 All E.R. 677, for prior negoliations might possibly be defended on this basis.

2010] Canad;an Contract Law, 1970-2010 423

evidence of trade usage that both had tacitly assumed and acknowledged.

Where there is no express merger clause, the parol evidence rule may be said to operate as an implied merger clause: where the p arties impliedly agree that extrinsic evidence shall be excluded their agreement will be effective, but (as with an express 1nerger clause) only insofar as it can reasonably be supposed to have been intended to apply. Looked at from this point of view (i.e., as an implied merger clause) it will be apparent that the parol evidence rule cannot be more stringent in scope and effect than would have been an express merger clause.

VII. MIST AKE

Before the Judicature Acts the courts of equity exercised a broad, but rather ill-defined, power to set aside contracts entered into under the influence of a fundamental mistake relating to relevant facts56 (a kind of mistake son1etimes called "mistake in assumptions").57 The House of Lords in 1932 took a very narrow view of relief for this kind of mistake.58 Jn 1950, Lord Denning atte1npted to revive the 1nore flexible equitable approach in Solle v. Butcher59 and this decision was followed in a number of cases in England60 and Canada,61 but rejected by the English Court of Appeal in 2003 in The Great Peace.62 The United Kingdom Supreme Court has yet to consider the effect on English law of The Great Peace, but the retention in Canadian law of a flexible power to grant relief for mistake (though not a power necessarily to be linked with the history of the courts of equity) was affinned by the Ontario Court of Appeal in 2007,63 again adopting the persuasive arguments of Professor John McCamus. 64

56. See Cooper v. Phibbs (1867), L.R. 2 H .L. 149 (H.L.). 57. G. Palmer, Mistake and Unjust Enrichment (Columbus, Ohio St.ate University

Press, 1962). 58. Bell v. Lever Brothers. Ltd., [1932} 1 A.C. 161, [I 93 I] All E. R. Rep I (H. L.). 59. [1950] I K .B. 671, [1949] 2 All E.R. 1107 (C.A.). 60. Magee v. Pennine Insurance Co. Ltd., [1969] 2 Q.B. 507, [1969] 2 All E.R. 891

(C.A.). 61. Toronto-Dominion Bank v. Fortin (1978), 88 D.L.R. (3d) 232, {1978] 5 W.W.R.

302 (B.C.S.C.). 62. Great Peace Shipping Ltd. i•. Tsai1/iris ( International) Ltd., [2003] Q.B. 679, [2002)

4 All E.R. 689 (C.A.). 63. Miller Paving Ltd. v. B . Gollardo Construction Ltd. (2007), 285 0.L.R. (4th) 568,

2007 ONCA 422. 64. J. McCarnus, "Mistaken Assumptions iu Equity: Sound doctrine o r C'himera?"

(2004), 40 C.B.L.J. 46.


VIII. EXEMPTION CLAUSES

The attempt of the courts to deal with unfair exc1usions of liability has a convoluted history, both in England and in Canada. In the mid-20th century, largely under the influence of Lord Denning, the English courts developed a doctrine, usually known as "fundamental breach," to the effect that, in case of a fundamental breach of contract (or breach of a fundamental term) a clause excluding liability was ineffective. This concept, aJthough it served what may be regarded as a useful purpose in enabling courts lo avoid unfair clauses in some cases, had many defects. Its theoretical basis was unclear (was it a rule of construction or a rule of law?), and, since it did not directly address the question of fairness it resulted in the striking down of clauses that were fair and reasonable, and in the failure to strike down clauses that were unfair. The House of Lords rejected the doctrine in 1966,65 and then, after a rear-guard action by Lord Denning, again, definitive! y, in 1980. 66 The Supreme Court of Canada ostensibly approved these House of Lords cases in 198067

and 1989,68 but uncertainty remained: while many lower Canadian courts enforced clauses limiting liability, others did not, 69

uncertainty persisting into the first decade of the 21st century on the existence and scope of the doctrine of fundamental breach.

All these cases must now be read in the light of the recent decision of the Supreme Court of Canada in Tercon Construction Ltd v. British Columbia,7° Cromwell J. said, for the majority:

On the issue of fundamental breach in relation to exclusion clauses, my view is that lhe time has come to lay this doctrine to rest, as Dickson CJ. was inclined to do more than 20 years ago: Hunter Engineering Co. 11. Syncrude Canada Ltd . ... I agree with the analytical approach that should be followed when ladding an issue relating to the applicability of an exclusion clause sel out by my colleague Binnie J.71

65. Suisse Atlantique Societe d'Armement Maritime S.A . 1•. N. V. Rotterdamsche Kolen Centrale, [196711 A.C. 361 (H.L.).

66. Photo Procluction Ltd. v. Securicor Transport Ltd., [1980] A.C. 827 (H.~,.) . 67. Beaufort Realties (1964 ) br.c. v. Chomedy Aluminwn Co., IJ980] 2 S.C.R. 718, 116

D.L.R. (3d) 193. 68. Hunter E11gi11eeri11g Co. 11• Syncrude Canada Ltd., [l989] 1 S.C.R. 426, 57 D.L.R.

(4th) 321 . 69. E.g., Solway v. Davis Movillf,f & Storage Jnc. (2002), 222 O.L.R. (4th) 251, 62

0.R. (3d) 522 (C.A.), leave to appeal to S.C.C. refused 224 D.L.R. (4lh) vii, [2003] 1 S.C. R. ix.

70. Supra, footnote 4. 71. Jd., al para. 62.

2010] Canadian Contract Law, 1970- 2010 425

Binnie J ., stating the view of the whole court on this point, said that

On this occasion we should again attempt to shut the coffin on the jargon associated with "fundamental breach." Categorizing a contract breach as "fundamental" or "immense" or "colossal" is not particularly helpful. Rather, the principle is that a court has no discretion to refuse to enforce a va1id and applicable contractual exclusion c1ause unless the plaintiff ... can point to some paramount consideration of public policy sufficient to override the public interest in freedom of contact and defeat what would otherwise be the contractual rights of the parties ... There is nothing inherently unreasonable about exclusion clauscs.72

In the light of this decision, the proper approach is first to interpret the clause (the question on which the court divided in the Tercon case). Then, "[i]f the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, 'as might arise from situations of unequal bargaining power between the parties' . .. "73 If the clause is applicable and valid on these tests, it should be enforced unless contrary to an overriding public policy. 74 This decision marks a definitive preference for Dickson C.J.C.'s view in Hunter: the nature of a breach may be relevant to the interpretation of an exclusion clause, but, no matter how grave the breach, there is no rule of law that clauses limiting or excluding liability are invalid, provided that they are not grossly unfair (unconscionable) at the time of the agreement, and that they do not contravene an overriding public policy.

IX. UNCONSClONABILITY

One effect of the Tercon case was to confirm the existence in Canadian law of a general doctrine of unconscionability. Another recent case to the same effect is the decision of the Su~reme Court of Canada in a 1natrimonial case, Rick v. Bran.dsema. 5 A residual power to set aside contracts that are very unfair, though n1inimalized in the 19th and 20th centuries, is probably a

72. Id., at para. 82. 73. Id., at para. 122, quoting from Hunter Engineering Co. v. Syncrude Canada Lid.

supra, footnote 68, at p. 462 (S.C.R.). 74. Id., at pa ra. 123. Plas-Tex Canada Ltd. v. Dow Chemical of Canada Ltd. (2004),

245 D.L.R. (4th) 650, 2004 ABCA 309, leave lo appeal lo S.C.C. refused 250 D.L.R. (4th) vii, [2005] l S.C.R. ix, where the defendant was found to have engaged in decep tive couduct, was approved on lhis basis. Other examples given of overriding public policy were selling products known to be dangerous to life.

75. Rick v. Brandsema, [2009] I S.C.R. 295, 303 D .L.R. (4th) 193, 2009 sec 10.


necessary feature of every system of contract law. 76 Whether " unconscionability" is the best word to describe that power is debatable. The word has certain advantages: it has a long history jn equity, it has been used in many statutes, and it implicitly indicates that relief from an otherwise valid contract must be highly exceptional. 77 On the other hand , the word has certain disadvanta~es. It has sometimes been taken to suggest wrongdoing, 8 but many cases, old and n1odern, have held that proof of wrongdoing is not a requirement for relief.79 The cases on penalty clauses and exemption clauses do not involve any wrongdoing on the part of the party seeking enforcement. Another difficulty is that unconscionability suggests the need to prove inequality of bargaining power, but in some kinds of case, including relief against penalty clauses, inequality of bargaining power, in the ordinary sense of the words, has not always been required. A simpler general concept, therefore, as a synonym for unconscionability might be something like gross unfairness: a contract may be set a~ide if it produces consequences that are very unfair. Neverthele_ss, it is "unconscionability" that now has the approval of the Supreme Court of Canada.

X. NON-JUSTICIABLE CONTRACTS

Certain kinds of contract may be unenforceable not because their formation or their performance would be contrary to public policy, but because they deal with matters that ought not to be the subject of judicial proceedings. Election pron1ises have been held to be unenforceable, not because the substance of what is promised is in any way contrary to public policy, but because deploy1nent of 76. See Study Group on a European Civil Code/Researeh Group on the Existing EC

Private Law (Aquis Group), Principles, D~f'inition and Model Rules of European PriFate La11•: Drqft Common Frame of Reference, C. von Bar et al., eds. (Sellier European Law Publishers, 2009), arts JI-7:207, JI-9:401-JO.

77. See Titus 11. William F. Cooke Enterprises Inc. (2007), 284 D.L.R. (4th) 734, 2007 ONCA 573, at para. 36 ("a high hurdle")-

78. Hart v. O 'Connor, [1985] A.C. 1000 at p. 1028, [1985) 2 All E.R. 88 (P.C.); Cain v. Clarica Life Insurance Co. {2005), 263 D.L.R. (4t.h) 368, 2005 A DCA 437, para. 32; Titus 1•. William F. Cooke Enterprises Inc_, ibid.

79. Earl <~f Aylsford v. M orris (1873), 8 Ch. App. 484, [1 861-73] All E.R. Rep. 300 (C.A.), al. p. 499 (Ch. App.) ("The Appellant is not alleged or proved to have been guilty of deceit or cireumvention"); Baker v. M onie (1864), 4 De G.J. & S. 388, 46 E.R. 968 (H.C. Ch.), p. 393-394; Woods v. Hubley (1995), 130 D.L.R. (4lh) I 19 alp. 128-129, 146 N.S.R. (2d) 97 (C.A.), leave to appeal S.C_C. refused 136 D.LR. (4th) vii, 152 N.S.R. (2d) 15911; M arslwll v. Canada Permanent Trnst Co. ( 1968), 69 D.L.R. (2d) 260 (Alta. S.C.); Lloyd's Bank 1•. Bundy, [1975] Q.B. 326, [1974] EWCA Civ. 8 (C.A.).

201 O] Canadian Contract Law, 1970-2010 427

contract law would interfere with the political process. 80 Some contracts to perf orn1 religious duties might be unenforceable as unduly restrictive of personal freedom, either on ground of public policy, or as non-justiciabJe, but the mere fact that a contract involves performance of a religious duty will not prevent enforcement, as was shown by the decision of the Supreme Court of Canad<i in Bruker v. Markovitz. 81 A husband agreed, as part of a separation agreement with his wife, that he would grant her a Jewish divorce, or get. For a long time he refused to do this, but eventually, after 15 years, he delivered the get. Ms Bruker brought an action for damages for the delay, and the Supreme Court of Canada, restoring the decision of the Quebec Superior court, held that the action was (by Quebec law) maintainable.

In considering the scope of the decision it is important to note that the contract in question was not a standard or formal contract that was part of a religious cere1nony or of a religious requirement preceding marriage, as in some of the earlier cases. The parties were dealing with each other at arm's length, and had full access to independent advice when the agreement in question was made. In considering the scope of the decision from a common law perspective, the question of intention is significant. Religious agreen1ents between spouses might sometimes be dealt with in common law courts by reference to the concept of "intention to create legal relations." There has been said to be a presumption that agreements between spouses are not intended to give rise to legal relationships82 This is not an absolute rule, but a presumption that can be displaced.

From this perspective the facts of Bruker v. Marcovitz would readily lend themselves to the analysis that any presumption against enforceability of religious obligations in an agreement between spouses had been displaced by the context in which this agree1nent was made. Clearly the context was one of arms-length negotiations expected to have legal consequences, made on legal advice, with the defendant's attention drawn to the particular promise, and with value given in exchange for it. These are powerful reasons in support of the Supreme Court of Canada's decision on the facts of the case, and they also serve to distinguish such cases mentioned by the dissenting judges as standard

80. Canadian Taxpayers Federation v. Ontario (Minister of Finance) (2004), 73 0.R. (3d) 621, 135 A.C.W.S. (Jd) 1041 (S.C.J.).

81. [2007] 3 S.C.R. 607, 288 D.L.R. (4th) 257, 2007 sec 54. 82. Ba(!our v. Ba(four, [1919] 2 K.B. 571, [1918-19] All E.R. Rep 860 (C.A.).


cont~actual w~rds conta~ned in fonnal reli~ious ~freemen~s bef?re n1arnage, or included m the ceremony itself. - The d1ssen1lng judges in Bruker also gave examples of promises to wear religious clothing, to participate in religious ceremonies, or to raise children in a particular faith. Such promises might raise questions of public policy not present in the Bruker case.

XI. ILLEGALITY AND SEVERANCE

In Transport North American Express Inc. v. New Solutions Financial Corp.84 the Supreme Court of Canada held, in a case where the maxin1um interest rate provisions of the Criminal Code had been accidentally infringed, that the lender was entitled to recover the maximum legal rate of interest (60°/o). Arbour J ., for the majority of the court, restoring the judgment of Cullity J. at first instance, and approving the dissenting judgment of Sharpe J .A. in the Ontario Conrt of Appeal, applied what she called "notional severance," in effect a reading down of the contract so as to reduce the agreed interest rate to the maximum allowable. She rejected the view of the majority of the Ontario Court of Appeal, called the "blue pencil" test, that severance was only permissible as an "all or nothing" excision of a contractual clause that could be identified in distinct and separate words. In Shafron v. KRG

Insurance Brokers ( Western} lnc.85 the court held that "notional severance" was not applicable to a covenant against competition. The court was evidently afraid that if covenants against competition were enforceable to the extent that the court later found the111 to be reasonable, there would be no incentive on en1ployers to put reasonable limits on such cJauses in employment contracts.

XII. PUNITIVE DAMAGES

In 1970 it would have been said with confidence that punitive damages were not availa ble for breach of contract, but in Whiten v.

83. Abella J., referring to one of these cases (Morris v. M orris (1973), 42 D .L.R. (3d) 550, 14 R.F.L. 163 (Man. C.A.), leave to appeal to S.C.C. granted 51 D .L.R. (3d) 7711, [1974] 3 W.W.R. 479 (C.A.)) involving a Jewish marriage contract, or ketuhah, said (para. 46) tha t this question was not in issue in the Bruker case, though she also said that " l find the dissenting reasons [in M orris) compelling."

84. [2004] I S.C.R. 249, 235 D.L.R. (4th) 385, 2004 sec 7. See J. Ziegel and S. Waddams, " Notional Severance, Usurious Contracts, and Two Comments on the Supreme Court's Decision in the New Solutions Case" (2005), 42 C.B.L.J. 278.

85. [2009) I S.C.R. 157, 301 O.L.R. (4th) 522, 2009 sec 6.


Pilot Insurance Co.86 the Supreme Court of Canada, restored a $1 million jury award of punitive damages against an insurer for failure to pay a claim under a fire insurance policy. The court held that an award of runitive damages required "an independent actionable wrong"8 but found this requirement to have been satisfied by the breach by the insurer of the obligation of good faith which the court found to be "independent of and in addition to the breach of contractual duty to pay the loss. "88 It is not clear to what other kinds of contract this reasoning would extend. Obligations of good faith have been particularly associated with insurance contracts. They have also, as mentioned above, been i1nplied in other contracts for a variety of purposes having to do with the substantive obligations of the parties, but it does not necessarily follow that all such contracts ought to attract punitive damages.

There were features of the Whiten case not com1non to ordinary commercial contracts, notably a public, quasi-regulatory, interest in inducing insurers to investigate claims fairly and to 1neet their obligations, and the fact that the defendant's breach of contract involved not a siilJple failure to pay a debt but also an opprobrious and defamatory8

- accusation of arson. Another feature of the Whiten case was that the insured had suffered exceptional personal hardship, including loss of her home and much 1nental distress pending resolution of the dispute. Aggravated damages were not claimed,90 and the court, while stressing that punitive da1nages were not con1pensatory, added that "there is a good deal of evidence of emotional stress and financial cost over and above the loss that would have been incurred had the claim been settled in good faith within a reasonable time."91 It is possible therefore that some members of the majority were partly influenced, in restoring the award, by compensatory considerations.

Other factors suggesting that breaches of contract ought not always to attract punitive damages are the insistence in the Whiten case and in a companion case decided on the same day92 that

86. [2002] 1 S.C.R. 595, 209 D.L.R. (4th) 257, 2002 sec 18. 87. Id. , at p. 291 (D .L.R.), following Vor11is v. Insurance Corp. of British Colt1mbia,

[1989] 1 S.C.R. 1085, 58 D .L.R. (4th) 193. 88. Whiten , supra, foolnote 86, al para.. 79. 89. Id., at para. 25. 90. Id., at para. 91 . 91. Id., a t para. 92. 92. Sylvan Lake Golf & Tennis Club Ltd. v. Pe1fon nana llldustries Ltd., (2002] l

S.C.R. 678, 209 D.L.R. (4 th) 318, 2002 scc 19.


punitive damages must serve a rational purpose, together with the statement by the unanimous court two months ]ater in another case that '"efficient breach [of contract] should not be discouraged by the courts. This lack of disapproval emphasizes that a court will usually award money damages for breach of contract equal to the value of the bargain to the plaintiff. "93 Punitive da1na§es were refused in Fidler v. Sun Lffe Assurance Co. of Canada9 and in Keays v. H onda Canada Inc.95 Awards have been made against insurers,96 banks,97 franchisors,98 utility companies,99 and the Crown, 100 for breach of a duty of good faith, and against a lawyer, 101 but in 702535 Ontario Inc. v. Lloyd's London, NonMarine Underwriters102 the Ontario Court of Appeal emphasized, in a case approved by the Supreme Court of Canada, 103 that disputing a meritorious claim is not in itself bad faith and that "[i]n a general sense, insurers and insureds have a common interest in ensuring that only meritorious claims are paid." 104 The mere fact that a breach of contract is deliberate does not justify an award of punitive damages .105

XIII. MENTAL DISTRESS

Dan1ages for mental distress in actions for breach of contract were generally thought to be excluded until a decision of the English

93. Bank <~/America Canada I'. Mutual Trust Co., [2002) 2 S.C.R. 601, 211 D.L.R. (4th) 385, 2002 sec 43, at para 31.

94. [2006] 2 S.C.R. 3, 271 D.L.R. (4th) I, 2006 sec 30. 95. [2008] 2 S.C.R. 362, 294 D.L.R. (4th) 577, 2008 sec 39. 96. Asselstine 11. Manirfacturers Life insurance Co. (2005), 254 D.L.R. (4th) 464, 2005

BCCA 292. 97. Haggart Construction Ltd. '" Canadian Imperial Bank of Commerce, [1999] 11

W.W.R. 486. 89 A.C.W.S. (3d) 4 (Alta. C.A.), supp. reasons (2000] 2 W.W.R. 722, 93 A.C.W.S. (3d) 1100.

98. Katorikidis F. Mr. Submarine Ltd. (2002), 26 B.L.R. (3d) 140, 118 A.C.W.S. (3d) 56 (Ont.. S.C.J.). supp. reasous 29 B.L.R. (3d) 258, 118 A.C.W.S. (3d) 55.

99. Princeton Liglit & Pou•er Co. v. MacDonald (2005), 254 D.L.R. (4th) 431, 2005 BCCA 296.

100. Carrier Lumber Ltd. 11. Britfa·h Columbia (1999), 47 B.L.R. (2d) 50, 90 A.C.W.S. (3d) 227 (B.C.S.C.).

101. Chudy v. Merchant Law Group (2008), 300 D.L.R. (4th) 56, 2008 BCCA 484, leave to appeal to S.C.C. refused 303 D.L.R. (4th) vi, [2009) t S.C.R. xi.

102. (2000), 184 D.L.R. (4th) 687 (Ont. C.A.), leave to appeal to S.C.C. refused 191 D.L.R. (4th) vi, 145 0.A.C. 40011.

103. Fidler 11. Sun L(fe Assurance Co. of Canada, supra, footnote 94, para. 63. 104. 702535 Ontario Inc., supra, footnole 102. 105. See Delphinium Ltee 1'. 512842 NB. Inc. (2008), 296 D.L.R. (4th) 694, 2008 NBCA

56, para. 51.

2010) Canadian Contract Law, 1970-2010 431

Court of Appeal in 1972.106 In Fidler I'. Sun Life Assurance Co. of Canada107 the Supreme Court of Canada reviewed the question at length. The court stated that dan1ages for mental distress were in principle recoverable for breach of contract subject to the rule of remoteness in Hadley v. Baxendale.108 The court added, however, that "in normal commercial contracts" damages for mental distress would not ordinarily be within the reasonable contemplation of the parties: "[i]t is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration." 109 "But," the court continued, "[t]he matter is otherwise ... when the parties enter into a contract, an object of which is to secure a particular psychological benefit." 110 In such a case damages for mental distress, if within the parties' reasonable contemplation, could be awarded, and in the Fidler case itself an award of $20,000 was upheld for breach by an insurer of a disability insurance contract. l.n the later case of Mustapha v. Culligan of Canada Ltd. 111 the court held that damages for mental distress caused by seeing a dead fly in a bottle of drinking waler were not recoverable because not within the reasonable contemplation of the parties. As these decisions suggest, it will not always be easy to distinguish readily between contracts to secure a particular psychological benefit and ordinary com1nercial contracts: nian?' contracts 1night seem to fall into both categories, or into neither. 12 In Keays v. Honda Canada Jnc. 113 the Supreme Court of Canada, denying liability for 1nental distress for breach of a contract of employ1nenl, said, quoting another phrase from the Fidler case, that in order for damages to be justified the parties must contemplate that "the promise in relation lo stale of niind is a part of the bargain." This is likely lo

. be a difficult test to apply.

XIV. SPECIFIC PERFORMANCE

Specific performance is, conceptually, an exceptional remedy, available only if an award of dan1ages would be inadequate, but,

106. Jarl'is v. Swans Tours Ltd., (197311 Q.B. 233 (C.A.). I 07. Supra, footnote 94. 108. (1854), 9 Exeh. 341, 156 E.R. 145. I 09. Fidler 11. Sun L(fe Assurance Co. of Canada, supra, footnote 94, para. 45. 110. Ibid. 111. (2008), 293 D.L.R. (4th) 29, [2008] 2 S.C.R. 114, 2008 sec 27. 112. See Kelly v. A/iant Telecom/Island Tel (2008), 273 Nfld. & P.E.I.R. 177, 2008

rF.Scrn 12 (damages awarded for interruption of telephone service). 113. Supra, footnote 95, para. 58.


until l 996, specific perforn1ance was available "as of course" to a purchaser of land. There were good reasons for the distinction, because many of the difficulties of specific performance in other contexts do not apply to sales of land: the decree is unlikely in land sale cases to be oppressive to the defendant; there is no difficulty in defining the obligation; there are no difficulties of supervision; and the cost of enforcing the decree is minimal, since the court itself can, if the defendant refuses, itself effect the transfer of the defendant's interest. However in Semelhago v. Paramadevan114 the Supreme Court of Canada held that specific perfonnance was only available if the purchaser could show that the land was unique.

· Specific performance has been given in a nmnber of subsequent cases to commercial purchasers, 115 and is now, oddly enough, more readily available in practice to a con1mercial purchaser, which can often show that no other comparable land is available, than to an individual purchaser, who can rarely incur the risk and expense of litigation to attempt to establish thal a personal preference will be sufficient to qualify the land as unique.

XV. CONCLUSION

There is no simple way of sumn1arizing the changes that have occurred in Canadian contract law since l 970. No overarching philosophy or overridi.ng policy can be discerned. It is impossible to say whether '4progress" has been nlade, or even to define the meaning of "progress" in this context. Some of the decisions of the Supreme Court of Canada see1n to tend in opposite directions. The line of cases culminating in the M.J.B. case enlarges the scope of contractual obligation by imposing such obligations where there was fonnerly thought to be no contract, but this burden is to some extent counterbalanced by the Tercon case emphasizing the power of the contracting parties lo exclude liability. The Semelhago case din1inishes the burden of contractual liability by removing the obligation (fonnerly generally recognized) to render specific perfo1mance of land sale contracts; on the other hand the Whiten case drastically enlarges the potential liability of contracting parties by opening the door to unlimited awards of punitive da1nages, and the case, allowing unlilnited damages for mental distress, also substantially increases the potential burden of contractual

114. Semelhago v. Pal'amadevan, [1996] 2 S.C.R. 415, 136 D.L.R. (4th) I. I I 5. E.g., Jolin E. Dodge Holdings Ltd. v. 805062 Ontario Ltd. (2003), 223 D. L.R. (4lh)

541, 63 0 .R. (3d) 304 (C.A.), leave to appeal to S.C.C. refused 230 D.L.R. (4th) vi. [2003] 3 S.C.R. v.


obligation. Probably it is a mistake to expect to find any simple consistent trends. Contract law involves an almost infinite variety of human inter-relationships, and a complex interaction between principle and policy, and, like other aspects of the law, responds, so1netimes in unpredictable ways, to what have been perceived by the courts from time to thne to be the changing needs of society.

Reproduced from Stephen Waddams, "Canadian Contract Law, 1970-2010" (2011) 50 Canadian Business Law Journal 409-433, by permission of Thomson Reuters Canada Limited

stephen waddams· - university of toronto t-space · 2010] canadian contract law, 1970-2010 411...

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