Fundamental Breach
- court will not uphold exclusion of liability for fundamental breaches
- rule of construction – this rule does not apply if parties intended for the exclusion clause to cover fundamental breach.
o Look at relative bargaining power, consideration paid, freedom to contract
- A fundamental breach excuses the parties from further performance under the K. The P can accept the repudiation and sue for damages. The K is terminated. The P is suing on the part of the contract that had happened.
Rules of Exclusionary Clauses
- limitation clauses are to be construed strictly
o if you are attempting to exclude liability, make sure the words do it
- Contra preferentum rules
o If the drafting party uses ambiguous terms, it will be interpreted against the drafting party
- If want to exclude negligence, you need clear words to specifically exclude negligence
o If there are other forms of liability, and negligence isn’t included in exclusion clause, courts will interpret that negligence is not included in the limited liability.
o Alderslade Laundry v. Hendon (1945,
§ Customer had dropped his clothes to be cleaned. The clothes were lost. The receipt for the laundry, said the maximum amount allowed for loss is 20x the charge.
§ COURT: Held for D. Even though the exculpatory clause didn’t mention negligence specifically, since that was the only liability that could happen, the exculpatory clause works. (it was a bailment – only liability available would be negligence)
- implied warranty of merchantability
o the goods were reasonable made and of reasonable quality
- implied warranty of fitness for purpose
o threshing machine case – it should do so many acres in an hour. It wouldn’t do that. It wasn’t fit for the purpose that had been described
- put the common law rules into statute
- elevated misrepresentations into warranties so that they became terms of the contract.
o Breach of the warranty gives rise to expectation damages
o Misrepresentation gives rescission, but no reliance
- still allowed for freedom of contract – the parties can contract out of those warranties. The only question is whether the parties have properly gotten out of those warranties
o if one party is stronger, it has a stronger bargaining power and can dictate the terms of the contract by saying take it or leave it
People were getting out of the implied warranties by specifically contract against them. This left P vulnerable. Developed theory of fundamental breach – cannot contract out of a fundamental breach.
1956 - Fundamental breach started in Karsales as a rule of law
o Exclusionary clause should not apply if the breach went to the root of the contract. If performance of the K is radically different than what the parties anticipated.
o This was intended to protect innocent P’s who got themselves into bad consumer contracts
o Its not about whether the clause covers the situation – the clause is void because the whole K is void
1966 – Suburban – SCC applies Karsales in
o as a rule of law, you can’t exclude liability for a fundamental breach
1966 – Suisse Atlantique -- House of Lords overrules Karsales
- fundamental breach is a rule of construction – if the parties have an exculpatory clause, see if the clause covers the situation
1970 – Harbutt’s Plastiscine -- fundamental breach applied as a rule of law by Denning (in response to Suisse Atlantique)
1975 – BG Linton - SCC accepts Suisse Atlantique in
1980 – Photo Productions overrules Harbutt’s Plastiscine
o Fundamental breach is a rule of construction
o In non-consumer transactions, look at the party’s allocation of risk
1980 – Beaufort -- SCC adopts rule of construction
1981 – Canadian Dominion Leasing Co vs. Welch --
1989 – Hunter Engineering v. Syncrude – SCC splits
o some would abolish fundamental breach entirely and only use unconscionability (Dickson CJC)
o some would allow fundamental breach – look to consequences of breach –is it fair and just in the situation to allow the exculpatory clause to apply
Karsales v. Wallis (1956,
- FACTS: P buys a car without a test drive, will pick it up the next morning. Car won’t run. Disclaimer clause in the contract that the vehicle is not warranted as road worthy.
- COURT: Held for P – fundamental breach
o Doctrine of fundamental breach
§ If performance of the contract is so radically different than what the parties contemplated when they entered into the contract then the exclusionary clause should not apply
§ “if he has been guilty of a breach of those obligations in respect which goes to the very root of the contract, he cannot rely on the exempting clauses” (p.805)
§ This is a rule of law – you cant contract out of the very thing that you promised to do. This is no longer about whether the clause covers the situation or not.
Cana-Dominion Lease v. Suburban (1966)
- FACTS: Customer (a jewellery store owner) purchased a mechanical display stand. Customer is leasing it, $16 per month for 5 years. Lease payments are assigned to P (cana-dominion lease). P has standard form with limitations. If the product is defective, notice of defect must mentioned within 5 days of delivery. Display stand is broken and doesn’t work, even with several repairs. Customer stops paying. Lease company sues for payments.
- COURT: Held for jewellery store owner
o Applies Karsales - this was a fundamental breach
o As a rule of law, you can’t exclude liability for a fundamental breach
- Maddog – the leasing company was just supplying financing – the customer should go to the source of the goods and settle with that guy, not the financing company
Suisse Atlantique (1966, HL,)
- FACTS: parties had contracted to how liability should fall between them. They had an exculpatory clause.
- COURT: Said that it was a matter of construction – that the court should rule on whether the clause covered the situation that happened. Did not apply the fundamental breach rule in Karsales. Rejecting the rule of law approach and saying that it must be done as a matter of construction
Harbutt’s Plasticine (1970,
- FACTS: D supplied plastic products in the plant. A fire started and the plant was burned down. There was a liability clause that would relieve the D of any liability for the workmen in installing the plastic pipe. P should get fire insurance for the plant. This is a rational application of risk. Denning upsets this risk.
- COURT: applies fundamental breach doctrine as a rule of law
o Denning is pissed because the HL had overruled his law in Suisse Atlantique
BG Linton v. CPR (1975, SCC, Ritchie J) p.812
- FACTS: Linton sends bid by CPR. CPR sends it late and in wrong format. There usually was a limited liability clause on the back, but didn’t use railway form this time.
- COURT: held for CPR
o the fact that he didn’t use the railway form doesn’t matter. This is a standard form that all railways use. Since the form is ubiquitous, the P should know of the limitations even without reading it.
o This wasn’t a fundamental breach – they delivered a bit late. The clause would cover negligence and exactly such a situation
- DISSENT (Laskin):
o it doesn’t make sense that someone can promise to do something and then escape liability when they didn’t do it. Doesn’t make sense that if you use the right words that you can give with one hand and take it away with the other.
- NOTE: this goes against McCutcheon?
Photo Production (1980, HL)
- FACTS: P has contract for security from D. D’s night-watchman throws a match into the P’s business. It burns down the whole plant.
- COURT: Held for D
o overrules Harbutt’s Plasticine
o in a non-consumer transaction, have to look at the parties allocation of risk
§ its absurd to think that the D was taking over from the P’s fire insurance. The price was low.
o Fundamental breach is a matter of construction, not a rule of law
- Maddog: fundamental breach is not a rule of law. All the court looks at is whether the clause covers the situation
Beaufort Realties (1980, SCC)
- FACTS: subcontractor doesn’t do good enough work. There was a waiver of lien rights in the contract between the contractor and the subcontractor. The contractor didn’t pay the subcontractor. Subcontractor says it’s a fundamental breach and puts a lien on the property.
- COURT:
o That is an exculpatory clause - applies photo production and says that fundamental breach is a rule of construction.
o Maddog - Court seems to pay lip service to the construction approach but then apply it as a rule of law. This didn’t clear things up as to whether fundamental breach is a rule of law or of construction
Canadian Dominion Leasing Co vs. Welch (1981,
- FACTS: supplier sold the customer a photo copier. Leasing company is assigned lease – customer must pay leasing company. Photocopier never works.. There was an exculpatory clause
- COURT: fundamental breach is a rule of construction.
o The parties had negotiated the allocation of risk. The leasing company is not guaranteeing the goods, but the customer should look to the supplier for remedy.
o The leasing company used the right words in the clause and they should not be liable. Suburban is overruled
Hunter v. Syncrude (SCC, 1989, Dickson) ** definitive Canadian Case**
- FACTS: D bought gears from P. The gears had a 12 month warranty. They broke after just over a year, but they should last 10-20 years. D sued on fundamental breach.
- COURT: Held for P – warranty was only for a year
o Discussed problems arising from applying the fundamental breach doctrine as a rule of law:
§ Uncertainty and characterization problems (what is a fundamental breach vs. what is small)
§ Exclusion clauses are fair and reasonable in lots of cases
§ In many commercial cases exclusion clauses are reflected in the price so would be unfair surprise / unjust enrichment to say they are not binding
§ If allow exclusion clauses to fall, why not other unfair terms
§ Result is to hide the real inquiry, i.e. fairness / unconscionability
o Concludes should abolish the doctrine of fundamental breach (even as a rule of construction) and apply law of unconscionability in deciding whether to uphold an exclusion clause
o In this case upheld the clause since equality of bargaining power (both parties had lawyers, both knowledgeable, no undue pressure to enter contract, etc)
- Wilson J:
o Agrees with the majority that the clause is adequate for the purpose
o Agreed with Dickson on problems, but should retain doctrine of fundamental breach as a rule of construction since using test of whether unconscionable at time of contract formation is itself problematic:
§ Must look to the consequences of what happened. If we find fundamental breach, ask if its reasonable to give relief in the circumstances. This is not about whether the clause is reasonable per se at the time the contract was made. Some of these clauses are bargained for – the courts can’t determine what’s reasonable or not.
§ Too complicated / subjective – parties negotiated for 18 months in this case, huge paperwork, impractical for courts to wade through it all to determine if there was a trade off between price and exclusion clause
§ Ignores fact that exclusion clause might have been fair at time of formation but became unfair later on (e.g. consider employee contract that says can terminate with just 4 weeks notice, but then employee works there for 20 years – is termination provision still fair and reasonable)
§ Even if equality of bargaining power, doctrine of fundamental breach still guards against a party abusing the protection of an exclusion clause by intentionally breaching contract, so would want to make clause unbinding in some cases (comment: this is perhaps just unconscionability however)
- NOTE: thus not settled whether doctrine of fundamental breach (as a rule of construction) is still with us – subsequent cases have applied both judgments
- Maddog –
Signed contracts
RULE: A signature implies knowledge and understanding and consent to the terms of the document. It is absolutely binding. (L’Estrange)
EXCEPTIONS:
(1) fraud or misrepresentations
(2) duress
(3) non est factum – mistaken signature, signor able to argue that he thought he was signing something else. A fundamental mistake of the character of the document. This is hard to prove = courts don’t like to reward negligent contractors for signing without reading.
- Cannot be used as against a third party who relied on the K (Marvco)
(4) doctrine of fundamental breach
(5) interpretation – interpret an exculpatory clause to avoid situation that happened
a. Conditions that go beyond what a reasonable person would think – those conditions will have no effect (Tilden)
L’Estrange v. Graucob (1934, Court of Appeal, Scrutton J)
- FACTS: lady bought a cigarette machine. She signed the contract that the company produced. The machine never worked. The company is pressing for payments. There is a small-print clause that excludes all warranties, implied and expressed.
- COURT: picks up on Parker (Mellish J) – the agreement is proved by signature. It is immaterial that he didn’t read the contract.
o Different from ticket cases
§ In ticket cases, the contract was unsigned. The court look deeper than contract because it is unsigned
§ In signed contracts, the signature is all that’s needed to show consent.
o Signing is the only evidence needed (except for fraud or misrepresentation cases)
- If the contract is signed, there is acceptance of all its contents. It doesn’t matter whether the party read the contract.
McCutcheon v. MacBrayne (1962, HL, Lord Devlin)
- FACTS: The only way to get goods off of Isle of Islay is by a ferry operated by MacBrayne. In shipping the goods, you must sign a long contract in small print. In this case, the P had not actually signed the document. The P put his car on the ferry and the ferry sunk. The D wants to assert their exclusionary clause.
- COURT: Held for P. There was not written contract and no signature. This was simply an oral contract for transport with no limited liability.
- Maddog – isn’t this exactly against Parker v. SE Railway? P knew that there were conditions but just didn’t bother reading them.
Tilden Rent-A- Car v. Clendenning (1978,
- FACTS: P rents a car. He buys the “complete coverage” insurance package. P didn’t read the contract and never has in the past when renting a car. P drinks and drives and hits a pole, damaging the car. Contract says that it won’t cover alcohol. P says that he was not aware of the clause and shouldn’t be bound by it.
o D argued L’Estrange – you signed the document and subject to all the conditions
o Trial judge – L’estrange would normally apply. But in these circumstances, the P thought that he was buying complete coverage up to the point of criminal offences. Tilden knew that Clendenning thought that. Trial judge implies an oral warranty.
- COURT: held for Clendenning
o The practice of the rental company was to not mention the exclusionary clauses unless specifically asked by the customer. The clause is very extensive. Even if you had one glass of beer, you’d be excluded from coverage. Or if you drove 1 mph over the speed limit. Or if you parked in a no-parking zone. Or if you had an accident in a shopping mall.
o What would a party normally expect in these circumstances? This is an objective test. Any reasonable driver would be surprised by these clauses
- This is a new exception to the L’estrange rule
o This case adds that if Tilden knew or ought to have known that the other party did not understand the nature of the conditions that were being imposed, then they can’t have application.
§ Its not that all the conditions have no effect. Only the conditions that go beyond what is reasonably accepted will have no effect.
- DISSENT (Lacourciere JA)
o Doesn’t want to impose the burden on the courts to decide what is reasonable and what is unreasonable in a clause. The courts don’t have the expertise to do that
o Maddog – that’s a cop out. Courts do have the job of deciding what is a reasonable expectation in society.
Karroll v.
- P entered a ski race. While racing she hit another skier and broke her leg. She had signed a release form. She had participated in 5 previous races and signed 5 release forms. She couldn’t remember whether she read it or not.
- COURT:
o Reasonable expectations – when entering a race of this sort, its not surprising to sign a waiver of liability
o Because of Tilden, must ask if the clause is reasonable in the circumstances. In this case, it is reasonable.
- Karroll sues the ski club (who provided set up and volunteers) as well as the mountain. The ski club is a third party beneficiary of the mountain’s release form. Ski club is an agency. McLachlin cites Scruttons v. Midland in how to find agency.
o This case was decided prior to London Drugs. If this case was decided today. McLachlin probably would not have used the agency thing, but would have used the precedent on London Drugs.
Unconscionability
- courts are showing increasing willingness to stop a contract because its not fair.
Undue influence at Equity à K is voidable (rescission). End K, return benefits
- (1) Actual undue influence - Always open to prove undue influence
- (2) Presumed undue influence
o D must rebut presumption that he took undue advantage if the relationship is:
§ Trustee and beneficiary
§ Doctor and patient
§ Solicitor and client
§ Guardian and ward
§ Spiritual advisor and devotee
§ Parent and child (or adult child and old parent)
§ NOT husband and wife
o Its open to show that there was a relationship of trust and confidence. If that can be proved, onus will shift to other party to prove that they didn’t use undue influence
- Remedy à rescission. The K is voidable.
Unconscionable transactions (equity) à K is voidable (rescission) End K, return benefits
- Must show two things:
o establish the inequality of bargaining strengths between the parties
o Contractual term is unreasonable. Courts won’t upset a fair deal
- Established categories of unconscionability.
o Weakness of mind (Waters, Lloyd’s Bank)
o Drunkenness (at time of transaction, or general)
o Illiteracy
o Inability to understand the language
o Illness or physical defect (hearing impairment)
o Infirmity of old age
o Inexperience in business matters – particularly if no legal advice (Kreutziger)
o Emotional distress
- Remedy à rescission. The K is voidable.
o Tear up transaction – put the parties back to the position before the contract. Return any benefits conferred
- Courts reluctant to recognize new categories (Gaertner)
Waters v. Donnelly (1884,
- FACTS: P was weak minded and easily led. D was a shrewd business man. D’s property was worth $4000. P’s orchard was worth $7000. They exchanged properties
- COURT: P was out-matched – he would not have entered into this deal if he was properly advised.
- Unconscionability – when one party can take undue advantage of another and then they actually do take advantage.
Harry v. Kreutziger (1978, BCCA, Lambert JA) (p.873)
- FACTS: P owned a fishing boat that had a fishing license attached. The only way to get a license was to purchase an existing license. P didn’t know how valuable his boat with license was. D bought the boat & license cheap.
- COURT:
o There was an inequality. That inequality was taken advantage of
- “Sufficiently divergent from the community standards of commercial morality”
LLyods Bank v. Bundy (1975,
- FACTS: Bundy is persuaded to mortgage his only asset to the bank.
- COURT: Denning pulls together various doctrines bound by a common thread
§ (1) Duress of goods
· Doctrine of “by color of office”. Public utility/officials charges more than they should just because they can
§ (2) unconscionable transactions – stronger party is pushing the weaker party to gain a benefit. Denning cites two Canadian cases, but not
§ (3) undue influence
§ (4) undue pressure *new category*
§ (5) salvage agreements at sea
o These all represent the general theme of unconscionability – Denning would give relief.
- The bargain was not good for Bundy, but good for bank. There was a relationship of confidentiality that was abused.
o Maddog – cannot see the confidentiality. The confidential agreement was between father and son, not between father and bank
- Other two members of the court put this decision on undue influence
Gaertner
- FACTS: A lonely old lady signed up for dance lessons. She was coaxed into signing 5 additional contracts for $7000.
- COURT: the D is unscrupulous, preying on lonely people
o The contract is valid and enforceable. They may be foolish, but they are valid.
o In one of the contracts, there was fraud – the court set aside that transaction
o Counsel should have invoked Waters
Schroeder Music v. Macaulay (1974, HL)
- FACTS: young songwriter enters into standard form contracts. They can’t give their songs to anyone other than the D. The D is under no obligation to publish the songs. The copyright in the past and future songs is given to publishers. D can extend contract at the D’s option (not the P’s option). The D can cancel the contract at any time, but the P can’t cancel
- Lord Reid:
o adopts the old common law rule of restraint of trade. These contracts were tying up the P’s right to deal.
o Has the D done more than what was reasonably necessary to protect its reasonable interests. It had.
- Lord Diplock
o This is about unconscionability
Clifford Davis v. WEA Records (1975,
** companion case to Schroeder
- court will relieve the other party of his duty to fulfill the contract if the contract was unconscionable.
Osorio v. Cordona (1984, BC CA, McLachlin)
- FACTS: parties bet on 6 horse races. If win all 6, big prize. At the race track, they decided to split the winnings (20-80 split of D won) if anyone won. After 5 races, D confirms the deal with split the winnings. D wins the 6 race and collects $735,000. P brings action for the 20%. D offers $60,000 (20% was $140,000) as a compromise.
- COURT: Held for P on unconscionability
o Issue 1 – was this a wagering contract and hence illegal? NO!
§ This was a pooling agreement – if one won, they would share the winnings. Not wagering, not illegal
o Issue 2 – was there an intention to create legal relations? YES!
§ Even if Cardona had reservations mentally about not wanting to pay, using the objective test he appeared to be contracting
o Issue 3 – was this a full settlement of the claim? YES!
§ This was not a payment on the greater sum – this is all Cardona intended to pay and it was his final offer. Osorio accepted that offer. That should be the end of the matter.
o BUT then McLachlin brings in equity – is this deal unconscionable?
- Unconscionable on two grounds:
o economic duress – D&C Builders –if you threaten to breach a contract, to pay a lesser sum, because you have an economic advantage.
§ This case – there was a threat that he would leave the area (move to NY) without paying anything. They took the $60,000 because they were afraid of getting nothing
o Unconscionable transaction - Inequality of bargaining power. The bargain was manifestly unfair. Was it sufficiently divergent from community standard of commercial morality? YES!
Legislation dealing with unconscionable transactions
(1) unconscionable transactions relief act
a. every province has one. This is a very narrow statute – it deals only with lending money at excess interest rates that are “harsh and unconscionable”
(2) Consumer Protection legislation – Consumer Protection Act, Trade Practices Act (BC)
a. 5 provinces have it – BC, ON, AB,
b. Wide reaching statute – covers a number of transactions, including unconscionable transactions (s.4(3) BC Trade Practice Act)
i. Undue pressure
ii. Taken advantage of because of infirmity, age, illiteracy, etc
iii. Price grossly exceeded a similar product
c. Can get damages for unconscionable transaction. Can get an administrative remedy.
d. Not only expands the grounds upon which can ground a claim but also expands the remedies.
Rushak v. Henneken (1991, BC CA, Taylor JA)
- FACTS: P wanted to buy 14 year old Mercedes Benz car. Car had new undercoating, suspicious that it was hiding rust. Dealer knew about history of car – it had come from Alpine Germany where rust is a problem.
- COURT: Held for P
o dealer had met all the common law tests to avoid liability
§ no representation, no breach of implied warranty of fitness
o dealer had not met statute Trade Practices Act
§ s.3(1)(b) – deception includes any conduct having the capability, tendency, or effect of deceiving or misleading a person
§ dealer should’ve given a greater warning. He had suspicions, yet he remained silent. It was a representation by omission.
§ Statute allows damages – court awards damages
Good faith
- this is the same category as unconscionability. Having regard to the conduct of the parties, the court doesn’t like what you did.
- No duty of good faith in negotiating process. But in the performance of the K, have some recognition of a good faith duty.
McKinley Motors v. Honda.
- FACTS: motor company had contractual power to tell dealership how many cars they had to sell, and what the showroom should be like. Honda cut back on their allotment because new manager didn’t like them.
- COURT: found that technically the dealership agreement was fine. But Honda had acted in bad faith – use of the allocation system was not in good faith and was sufficient to count as a breach and to give McKinley damages.
Penal Clauses and Liquidated Damages
Penal Clause
- a sum stipulated in the K. Payment upon a breach. It is “penal” if court thinks its excessive
- Remedy à the penal clause will fail. The party will have to sue for damages regularly.
o if you have one penal clause that covers a number of breaches, it’ll be tested against its weakest link. Its if unreasonable for any one thing, the whole clause fails
Test for Penalty clauses:
- is this a genuine pre-estimate of damages? Court will not upset reasonable allocations
- Does the penalty exceeds the amount of damages that would arise for the most minor breaches?
NOTE: if the nature of the damages are difficult to quantify - that is evidence that it is a real liquidated damages clause, not a penal clause. If damages are difficult to quantify, we should let the party’s judgment rule and not substitute the judgment of the court.
Dunlop Pneumatic Tire (p.856)
- COURT: the $5 wasn’t unreasonable – its not a penal clause
o The real test is one of commercial reasonability
- Parties had made a genuine attempt to estimate damages, but they judged too high
- COURT: struck down the clause as penal
- CRITUQUE: the parties had made an effort to estimate the damages. The test should’ve been one of reasonableness. The court was too quick to jump
o court goes back to Dunlop test in Elsley v. Collins
Elsley v. Collins (SCC)
- court will not strike down a penalty clause where there is no oppression and if the parties have bargained on equal terms
Acceleration clauses
- Acceleration clause says that if you miss one payment, all future payments are due now
Graham v. Wagman p.869
- P wants some parking spaces for his company. D is building a parking garage. 150 spaces for ten years at $100 each. If not all spaces are available by April 1st, the price will go down to $20 per spot until they are all provided
- COURT: That clause was penal – thru tricky wording of a clause, the P tried to impose a penal provision for failure to meet a deadline. Since it was penal, the court won’t let it stand
Deposits
- Deposits are different than penal clauses in that deposits are paid up front, and penal clauses only paid if something doesn’t happen
- Generally, if you make a deposit, it will be forfeited if you breach the K
o So long as the deposit is reasonable, it will be forfeited
o If it is unreasonable – it is penal and not forfeited
§ Is it reasonable in the circumstances? Does it diverge from community standards of commercial morality?
Forfeitures (Stockloser)
- Forfeiture clause is good provided that it meets two fold test
o (1) is the forfeiture penal? Is it disproportionate to the damage actually suffered?
o (2) is it unconscionable that the D retain the part payment?
Stockloser v. Johnson (1954,
- P was getting into quarry business. He paid a $3000 deposit, balance paid over 3 years. Any missed installments meant that installments were forfeit. P had paid $6500 all together when he missed an installment
- Trial judge said that you forfeit the deposit because it’s a deposit. Gave the installments back. Appealed.
- This is part payment of the purchase price – it belongs to the vendor. There has to be good reason for him to give it up.
- No forfeiture clause
o Where the is no clause and the seller keeps the K open for performance, can’t get money back. If he rescinds the K back and treats it as coming to an end because of the breach, then the payer can get payments back. This is the doctrine of discharge by breach (Hong Kong Fir). Either party can get back benefits conferred
- Forfeiture clause
o Forfeiture clause is good provided that it meets two fold test
§ (1) is the forfeiture penal? Is it disproportionate to the damage actually suffered?
§ (2) is it unconscionable that the D retain the part payment?
- If its penal, isn’t it also unconscionable. Denning found the clause was penal, but not unconscionable.
o Ex by Denning. Necklace being sold on installments. What if breach at first payment? There would be no problem to allow vendor to keep first installment as compensation. What if breach at 20th payment? Hard to believe that vendor would get to keep a large sum AND get the necklace back.
o Is it reasonable? Its reasonable to forfeit the first payment, unreasonable to forfeit the 20th. The courts decide that line of reasonableness.
- Denning says that it was part of the risk that the P took. Took the risk that his payments would be forfeit. He was renting the quarry and was making profits off of it.
Maddog – get rid of labels like penal, and just look at whether its reasonable. Look at whether it meets community standards of commercial morality.
Illegality
General Rule: an illegal K is not enforceable
Remedy à contract is void ab initio. Restitution may provide relief for benefits conferred
Common Law Illegality (Holman v. Johnson)
- a court will not lend its aid to enforce a contract that arises out of an illegal or immoral act
- losses lie where they fall because no recourse for relief (Pearce, Holman)
Pearce
- K for carriage of a prostitute. She doesn’t pay fee
- COURT: this was an immoral K. No enforcement.
Holman v. Johnson
- K to sell tea (to be smuggled into
- COURT: this was an illegal contract. No enforcement
PROBLEM: fails to distinguish between
- enforceability of the contract AND
- recovery of benefits conferred (this would lead to unjust enrichment)
Statutory Illegality
- does the statute (either expressly or impliedly) treat the K as unenforceable? If so, no contract and losses will lie where they fall
- can lead to harsh results – forget to put date, the whole K could fail
Exceptions:
(1) Mistake of Fact
(2) Protect Class – If a finding of illegality would negate the purpose of the statute (i.e. protecting a certain class of people), then strict application of illegality should not be followed
a. Kiriri – parties at fault, but statute created to protect tenants from landlords
b. Exception – if both parties are at fault, illegality applies
(3) Fraud and Wrongful Conduct
(4) Repentance
Modern Approach –
- what is the purpose of the statute? Is the purpose being served by denying enforceability of the contract that has been breached?
- Is there unjust enrichment, or should losses lie where they fall?
Geismer v. Sun Alliance Insurance Co.
Facts: P insures their jewelry. It’s discovered that the jewelry had been smuggled into the country. Jewelry is stolen. Insurer declines to pay on the grounds that this K is void for public policy. P sues.
Decision: K is void on grounds of public policy. Notice how far away we’re getting from the K itself? Smuggling is incredibly remote from the insurance K
Kiriri Cotton v. Dewani (Ugandan case, comes to JCPC)
Facts: Landlords charging “key money”, an un-front bribe to jump the rent waitlist. P pays his key money, case comes to court, K declared unenforceable. P wants his key money back. Holman and subsequent case law would say that the losses fall where they lie.
Decision: P gets his key money back. The purpose of the statue is to protect tenants, so this P is a member of the protected class under the statute. When both parties are equally at fault (in pari delicto), we let losses fall where they lie. If they are not equally at fault, we will at least allow recovery of benefits.
Facts: P is from
Decision: Judgment for D. Traditional application of Holman v. Johnson…this was illegal by statute, so the court has a deaf ear. It doesn’t matter if P didn’t know the Act existed. Arguments about unjust enrichment of D are to no avail
Still v. MNR
Facts: Housekeeper comes up from the
Decision: This contract was illegally formed, so normally it would be void ab initio and she wouldn’t get any benefits. But, the doctrine changes (see below). Judgment is for P. Now, even though a contract is illegally formed, it may be enforceable.
Pavey & Matthews v. Paul (1987)
Facts: Oral building contract. Statute said that building K’s had to be in writing and signed by each party. Matter comes before a court, court must decide if the K is enforceable.
Decision: The purpose of the act requiring written contracts was to facilitate insurance coverage…it spells out the duties of the contractor so we can easily identify whether there has been an insurable loss. Would be purpose of the act be defeated by holding this K enforceable? No. So the K is enforceable.
Nelson v. Nelson
Facts: Widow receiving benefits under the Veteran’s Act. Assets only payable if she did not exceed a means test. House is given to kids so she can come below the means test. Later, the house is sold. She wants the money from the sale, the kids say no. She sues the kids for the money, saying that the K giving them the house was unenforceable.
Decision: Court says that the penalty of losing her house is too severe for what she did. The only condition imposed is that the mother repay to the government the benefits she received after she started to exceed the means test.
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