• DUHAIME ON  CONTRACT: Eight chapters of pure, unadulterated contract law love.

1. Contract Law - The Introduction
2. Privity, Consent and the Reasonable Man
3. Consideration & Deeds
4. Offer & Acceptance
5. Mistake, Rectification & Misrepresentation
6. Restraint of Trade, Assignment, Novation & Frustration
7. Interpretation of Contracts
8. Time Limits, Breach & Remedies

Part 2: Privity, Consent and the Reasonable Man

One sure sign of the personal and private nature of contracts is that no one but one of the parties can go to court and enforce the contract even if the contract was to operate to a third party's benefit.

This is known as the privity of contract rule (see also the Legal Definition of Privity of Contract).

There are exceptions to it (see also From The Case Books below):

  • Agents, or employees who obviously accept or offer a contract not in their own personal names but on another person's or a corporation's behalf. In these situations, the contract is said to be signed by an "agent". The person employing the agent is called the principal and the principal could sue or be sued under contracts entered into by his or her agent even though the principal did not sign the contract directly.privity of contract
  • Another exception allowed under special laws is cheques and promissory notes (which are really just miniature contracts but contracts nonetheless). In these cases, enforcement rights are created by special laws between non-signatories as the cheque exchanges hands, from one bank to another or from one person to another.
  • Contracts that restrict or impact upon the use of land (eg. an easement) may be enforceable upon the next land-owner, even though they were not privy to the original contract. This is an old exception to the rule of privity of contract that is still applicable today.
  • The law of trusts, where a person may contract to the benefit of another, operates to convey certain rights to the third party even though, in fact, this third party was not party to a contract which created the trust.
Tweedle v. Atkinson (1 B. & S. 393, 1861)

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

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847

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

Beswick v. Beswick [1968] AC 58

A nephew bought out his uncle's coal business. One of the terms was that the nephew would pay support to the uncle's wife upon the uncle's death. When the uncle died, the nephew reneged. The widow sued. The widow was able to sue, not personally, but as executor of the uncle's estate and on his behalf (the uncle, of course, having been a party to the contract). "Where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B and recover all that B could have recovered if the contract had been made with B himself."

Vandepitte v. Preferred Accident Insurance Co. [1933] 1 DLR 289

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

McCannell v. Mabee McLaren Motors Ltd. [1926] 1 DLR 282

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

New Zealand Shipping v. A. M. Satterthwaite & Co., [1975] A.C. 154

A stevedore damaged a drill and was sued by the consignee. The stevedore objected to the liability suit because it was not taken within a year of the damage as required by the bill of lading. The court decided that the limitation in the bill of lading was available to the stevedore, that the stevedore was a party to the bill of lading: "The bill of lading brought into existence a bargain initially unilateral but capable of becoming mutual, between the shipper and the appellant, made through the carrier as agent. This became a full contract when the appellant performed services by discharging the goods. The performance of these services for the benefit of the appellant should have the benefit of the exemptions and limitations contained in the bill of lading."

London Drugs Ltd. v. Kuehne & Nagel International Ltd. [1992] 3 SCR 299

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


Beware the "reasonable man"!

reasonable man Another important feature of the law of contract is that where there is a dispute as to whether or not a contract exists, the courts will assess the situation not from the perspective of the parties, but from the perspective of a reasonable man. In other words, the judge will want to decide if, given all the circumstances, a reasonable man would believe there to be a contract. An 1871 English case, Smith v. Hughes, (1871) 6 QB 597, summarized this principle as follows:

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

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

In the real world, mere conduct will rarely cause a judge to "make" a contract between the parties. This is particularly true if some type of written document has been prepared or exchanged between the parties. Rather than invent a contract, the judges would then take any written document between the parties and try to make sense of it given it's wording, rather than suppose terms. A 1978 Canadian case (Marquest Industries Ltd. v. Willows Poultry Farms Ltd., 67 DLR (2d) 753, 1967) sets out the principle as follows:

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

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

R. v. Cae Industries Ltd. , [1986] 1 FC 129

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

Nicolene Ltd. v. Simmonds [1953] 1 QB 543

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

Hillas and Co. Ltd. v. Arcos Ltd. (1932)

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

May and Butcher v. R. (1929, reported at [1934] 2 KB 17

"An agreement between two parties to enter into an agreement in which some critical part of the contract matter (eg. price) is left undetermined is no contract at all. It is of course perfectly possible for two people to contract that they will sign a document which contains all the relevant terms, but it is not open to them to agree that they will in future agree upon a matter which is vital to the arrangement between them and has not yet been determined."

Foley v. Classique Coaches Ltd. [1934] 2 KB 1

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

Courtney and Fairbairn Ltd. v. Tolaini Brothers [1975] 1 WLR 297

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

Sudbrook Trading Estate v. Eggleton [1983] 1 AC 444

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

DeLaval Co. v. Bloomfield [1938] 3 DLR 405

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

Empress Towers Ltd. v. Bank of Nova Scotia, 73 DLR (4th) 400 (1991)

A tenant and landlord had a renewal contract that provided for a rent of "market rental prevailing ... as mutually agreed. If the Landlord and the Tenant do not agree upon the renewal rental within 2 months ... then this agreement may be terminated."

The landlord submitted an outrageous increase including a sum payable of $15,000. The court was asked if the renewal clause was void for uncertainty and decided that it was not. The court decided that the contract used the words "mutually agreed (which) carries with it an implied term that the landlord will negotiate in good faith .... and ... that agreement on a market rental will not be unreasonably withheld."

Meyer v. Davies (1989)
deal struck by phone

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

Knowlton Realty Ltd. v. Wyder, 23 DLR (3d) 69 (1972)

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

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

BC's Sale of Goods Act, at ¶12, as of 2007, provided that the price in a contract of sale may be fixed by the contract, or may be left to be fixed in manner thereby agreed, or may be determined by the course of dealing between the parties. Where the price is not determined ... the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

Consent

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

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

With children, contracts can be voided at their request if they are not beneficial to the child. One exception exists and that is a contract for necessaries of life (see, also, Contracts With Children, for more detail).

The rule was stated in a 1925 case, Miller v. Smith & Co., in which the judge said an " infant may bind himself to pay for his necessary meat, drink, clothing, medicines and likewise for his teaching or instruction."

Remember also that if a minor ratifies a contract upon reaching the age of majority, he or she is then bound to it.

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

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

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

A contract accepted under threat of physical, mental or economic harm, may be voided by the party so threatened. Acceptance must be freely given. The same is true for contracts entered into between persons in a relationship of power imbalance. The law calls this undue influence and it will be presumed in some cases such as parent-child, trustee-beneficiary or doctor-patient contracts.

The case law offers two varieties of undue influence.

Duress is a common law doctrine and, technically, includes the element of compulsion. Contracts executed under duress are voidable.

Undue influence per se is an equity remedy and involves the "unconscientious use by one person of power possessed by him over another in order to induce the other to enter a contract.

Duress falling short of the common law requirements may also constitute undue influence in equity (Brooks v. Alker 1975 DLR 577).

Gordon v. Roebuck, 92 DLR (4th) 670 (1992)

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

Geffen v. Goodman Estate,  [1991] 2 SCR 353

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

Justice La Forest declined to endorse Wilson's "commercial transaction" dicta, saying that this case did not even involve a commercial transaction. La Forest noted that the deceased had a "deep-rooted poor relationship" with her brothers which tended to negate the suggestion of undue influence.

Another category of contract situations where consent seems to be fatally affected are what the law calls unconscionable contracts.

This is a slippery area of the law which suffers from a lack of judicial unanimity. In essence, the theory is that the court will rescind contracts which are totally unfair and, while just short of being fraudulent, are considered unconscionable.

Although legal academics try to do so, it is difficult to intellectually differentiate this from the theory of undue influence discussed above because, in both cases, it deals with a power relationship imbalance and the taking advantage of this imbalance.

Also, opening up the flood-gates of judicial review of contracts on the grounds of unconscionability could result in a plethora of contracts being brought to court as every person who had improperly negotiated a contract would seek judicial relief.

Luckily, many provinces of Canada have enacted consumer protection legislation which allows the cancellation of consumer contracts within a certain time. This legislation was designed to cover most of the situations that the contract common law claim of unconscionability might have alleviated.

Morrison v. Coast Finance Ltd., 55 DLR (2d) 710 (1965)

A 79-year old widow was induced into mortgaging her home to allow two men to buy cars. "Undue influence attacks the sufficiency of consent ... that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against the weaker. On such a claim, the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of these circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and reasonable." The court held the finance company responsible because they "undertook the preparation of the documents" and took "advantage of her obvious ignorance and inexperience to further their respective business" raising a presumption of fraud. The mortgage was set aside.

Marshall v. Canadian Permanent Trust Company, 69 DLR (2d) 260 (1968)

According to doctors, John Walsh was "definitely not capable of transacting business" having just suffered a stroke. This did not stop Marshall from seeking and obtaining his signature on an offer to purchase Walsh's land. Two months later, Walsh's affairs were formally turned over to the administration of Canadian Permanent Trust, appointed under provincial mentally incapacitated persons legislation. The trust company refused to close the deal arguing that it was unconscionable. The court said there were two criteria to be met: "(1) that Walsh was incapable of protecting his interests; (2) that it was an improvident transaction for Walsh. With respect to (1), it is not material whether Marshall was aware of Walsh's incapacity. With respect to (2), the onus rests with the plaintiff (Marshall) to show that the price given for the land corresponded to its fair value." The plaintiff succeeded on both accounts and the contract was rescinded.

Lloyds Bank v. Bundy [1975] QB 326

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

Harry v. Kreutziger , 95 DLR (3d) 231 (1978)

A fishing boat was sold in a high pressured bid by the defendant. When "a claim is made that a bargain is unconscionable, it must be shown for success that there was inequality in the position of the parties due to ignorance, need or distress of the weaker, which would leave him in the power of the stronger, coupled with proof of substantial unfairness in the bargain. When this has been shown, a presumption of fraud is raised, and the stronger must show, in order to preserve his bargain, that it was fair and reasonable." The court then proceeded to rescind the contract because the "appellant was so dominated and overborne by the respondent that he was ... within the power of the respondent in these dealings." Another judge hearing the case agreed but for slightly different reasons, invoking "community standards of commercial morality." Both principles prosper in Canadian case law.

• >>> continued  >>> Chapter 3 ...

• DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

1. Contract Law - The Introduction
2. Privity, Consent and the Reasonable Man
3. Consideration & Deeds
4. Offer & Acceptance
5. Mistake, Rectification & Misrepresentation
6. Restraint of Trade, Assignment, Novation & Frustration
7. Interpretation of Contracts
8. Time Limits, Breach & Remedies


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