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


Good, ol' fashioned judicial wisdom is hard come by in contract law but when it's there, you gotta use it.

We start off by quoting Mr. Justice Romer in Biggs v Hoddinott, [1898] Ch. D. 313:

"There is a great principle which I think ought to be adhered to by this court and by every court where it possibly can do so; that is to say that a man shall abide by his contracts and that a man's contracts should be enforced as against him."

Persons are required to abide by their contracts, to "discharge" their contractual obligations.

Doing so completes the contract and frees each party from it.

In some circumstances, the same is true for those parties who want to, and attempt to discharge their obligations, but are prevented from doing so by some action of the other party.

This interference with the contract (lawyers call it "repudiation") may free the party who is trying to perform from their contractual responsibilities.

Where the payment of a sum of money is one party's obligation, this must be done by offering legal currency. The creditor is not required to make change nor is the creditor required to accept a cheque (although you'd get a scowl or two from a Court if this is what your case was all about).

If contractual obligations are not respected, the delinquent party is said to be in breach of contract. Breach of contract allows a party to bring the party in default to court and to get the court to correct the situation, as best the court can.

The courts will intervene even if time for performance has not arrived where a side to a contract has given a clear indication that they do not intend on honouring the contract. This is known as the doctrine of anticipatory breach.

Because a contract is private law, the courts will not throw the full brunt of the law against a person found to be in breach of contract. On the other hand, as discussed below, a variety of tools are used by the courts in dealing with breach of contract and ensuring that the person who defaults on a contractual obligation adequately compensates the person who did not receive full contractual benefit.

Time Limits on Enforcing Contracts

It would make no sense if legal claims were allowed to exist forever. Signatories die and records are eventually lost.

For this reason, any claim for breach of contract must be brought before the court within a certain period of time.

This is called a limitation period and is usually set in a statute of limitations. Every jurisdiction has its own deadlines. For example, in the case of non-real estate contracts, the standard limitation may be six years from the date the party would have first been entitled to bring action (i.e. the date of breach).

A partial payment will set the limitation period clock back to the start.

The Statutes of Limitation protects contractors from debtors that disappear by suspending the limitation period for the time of hiding.

Contracts related to real estate have very special rules governing the time limits of legal action taken upon them and tend to vary from province to province.

Breach and Remedies

Breach of contract comes in many forms. You could have a complete breach, where one party completely refuses to deliver on any part of their undertaking. In other situations, a person may do most of what the contract requires but omit or refuse to do a small residual portion. This latter situation is called "substantial performance" and it has the effect of binding the other party to performance, at least in an equivalent portion.

The first thing a lawyer will look for when faced with a possible breach of contract situation is a clause in the contract that has already decided what happens if there is a breach (see comments on "liquidated damages" and "exclusion clauses" on previous page). These clauses are perfectly legal and will bind the parties.

Another important factor is that each party has a responsibility to mitigate their losses. That means that even if your contractual partner is not keeping their end of the bargain, you should try to keep your losses at a minimum.

For example, if you are fired in breach of your employment contract, you would be expected to try to find another job as soon as reasonable, to minimize your losses due to the breach. Or, if you sign a contract to deliver apples to another person, and that other person refuses to take delivery (in so doing, is in breach of contract), you would be well advised to try to sell the fruit elsewhere to minimize any damages that you suffer by the breach.

The law does not require a party to do cartwheels to minimize losses; just what can be reasonably done without incurring substantial costs. The English case, Yetton v. Eastwoods Froy Ltd. [1967] 1 W.L.R. 104 stated the general rule by saying that:

"If (the plaintiff in a breach of contract case) can minimize his loss by a reasonable course of conduct, he should do so, though the onus is on the defaulting defendant to show that it could be, or could have been, done and is not being, and has not been done."

Some of the cases below deal with mitigation of damages.

Specific Performance

There are several options available to the court in cases of breach of contract. The preferred remedy is damages (see below). Specific performance is exceptional and ordered only when an award of damages would be "inadequate." With land contracts, however, the courts have far greater direct authority and specific performance is the preferred remedy for breach of land contracts. The court would then order the delinquent party to perform his or her end of the bargain, if feasible, given the nature of the contracts and the irreplaceable character of the goods or services covered, and the ability of the court to enforce such an order.

This type of remedy has been called "coercive" and is obviously directed at getting the faulty party to fulfill their obligation. It is also a creation of equity which means it is very much a discretionary power of the court and it is subject to the tenets of equity, especially that which says that "he who comes to equity must come with clean hands."

If specific performance requires court supervision, the court will be reluctant to order it. A court will not order a singer to perform against his or her will even if not doing so is a breach of contract. Nor will a court order specific performance for non-specific goods such as "grain" or "petroleum", since they can be replaced, albeit perhaps at a higher price (provincial Sale of Goods laws provide similar statutory guidelines on specific performance).

Mennonite Land Sales Co. Ltd. v. Friesen (1921) In this case, specific performance was requested of a court where the defendant had breached a contract for the sale of crop. The court declined since the goods were not "of so unique or special a character that money compensation is not adequate."


An injunction is another coercive legal remedy which can be used in some breach of contract cases where a direct order is required to stop a party from continuing an ongoing breach, such as misuse of leased premises.

One of the features of coercive remedies such as specific performance and injunctions, is that the failure of the defendant to comply, results in a form of contempt of a court order and gives the plaintiff access to public enforcement weapons such as fine or imprisonment.

Warner Brothers Pictures v. Nelson, [1937] 1 KB 209

Nelson (aka Bette Davis) suddenly walked away from an exclusive acting contract. The plaintiff sued and asked for an injunction preventing her from further breach. The court issued an injunction preventing the actress from acting for other companies. This did not force her to act for the plaintiff so it was thought to respect...

"...the principle that specific performance of a contract of personal service will never be ordered.... (Nor will the court) grant an injunction in the case of such a contract to enforce negative covenants if the effect of so doing would be to drive the defendant either into starvation or to specific performance of the positive covenants."

Geometrics & Geometrics Services (Can.) Ltd. v. Smith, 65 DLR (3d) 62 (1975)

An interlocutory injunction (restraining until trial) was sought. The court said:

"... the basic issues ... are balance of convenience, the irreparability of the damages and the question whether a prima facie case has been established."

The request was denied because the injury to the person sought to be restrained "could well be beyond compensation in damages" and there was no evidence of irreparable damage which could not be repaired, if proven, by damages.


Compensatory remedy is synonymous to the claim for damages. Instead of asking the court to require the faulty party to fulfill their obligation, the plaintiff asks the court to compensate him for out-of-pocket expenses caused by the breach. An order for damages is enforced privately by the judgment creditor. In some cases, the seizure of assets may be possible.

When it comes to damages, we enter a murky world of the law, a world which is still muddied by the influence of two distinct sets of criteria for assessing and ordering damages for breach of contract. The first set of rules comes from common law. The second set comes from a corollary body of law which developed in England in centuries past as a check on the cut-and-dry approach of the common law: equity. For example, where common law would bind a person to any contract given a signature apposed without duress, equity might weigh the relative positions and assess the "equitable" nature of the contract. The contract defence of undue influence and of unconscionability are equity-based, as is specific performance, and are good examples of remedies which rely on basic fairness rather than the strict rule of the law.

Damages are an attempt by the court to compensate the innocent party to the contract, the party that suffers the breach. The purpose is compensation not punishment so only real, actual damages can be ordered by the court. However, it seems that Canadian courts are no longer deaf to pleas for punitive damages in breach of contract cases. In wrongful dismissal cases based on breach of an employment contract, punitive damages are not uncommon.

Generally, there are two main methods of calculating damages:

  • The difference between what was contracted for and what was received. This is known as the diminution of value test. Provincial legislation makes it the prima facie rule in sale of goods contracts (eg. B.C.: "Where there is an available market for the goods in question, the measure of damages is to be ascertained, in the absence of evidence to the contrary, by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or if no time was fixed for acceptance, then at the time of the refusal to accept"). The diminution of value method is applied in sale of goods cases because the plaintiff is required to mitigate his or her damages. If mitigation is not possible or reasonable, the alternate "cost of performance test" can be applied (for example, a defective product can be fixed at a reasonable price). To illustrate the diminution of value method: if I contract that you will sell me apples for $1,000 on July 1. The goods are delivered on July 4 forcing me, on July 1, to buy apples elsewhere for $1,300. Damages are $300.
  • Whatever it costs to put the plaintiff in the position he would have been in had the defendant fully performed his contractual obligations. This is known as the cost of performance method. The defendant is ordered to pay the cost of fixing the defect, of completing the contract. This is the prima facie method for assessing damages in breach of contracts involving buildings. The court will not order damages based on the cost of rectification if those costs are unreasonable when compared to the diminution of value of the building caused by the breach.

Hadley v. Baxendale, 156 ER 145 (1854)

• rule of remoteness and special circumstances

THE most cited case of all time when it comes to damages. A broken shaft was given to a carrier to bring to a repair shop. The carrier was not told that the absence of the shaft meant complete work stoppage for the owner. The carrier was in breach of contract by being several days late in delivery. Admitting to damages, the defendant nevertheless argued that the loss of profit damages were too remote. The court said that damages should be restricted to what...

"... may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probably result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily from a breach of contract under these special circumstances so known and communicated."

Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 2 KB 528

• reasonably foreseeable

A boiler was sold, broken upon leaving the premises of the vendor and then never delivered. The court issued six "propositions:"

  1. The rule that damages try to put the aggrieved party in the same position as if his contractual rights had of been observed, can be too harsh at times, because some damages are too unpredictable or improbable.
  2. Only damages which are "reasonably foreseeable" from the breach are recoverable.
  3. What was "reasonable" depends on the knowledge of the party that commits the breach.
  4. Knowledge can be imputed ("ordinary course of things") or of "special circumstances outside the ordinary course of things of such a kind that a breach ... would be liable for more loss."
  5. It is not necessary to prove that the wrongdoer contemplated the loss. "Parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result."
  6. It is not necessary to foresee "that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough ... if the loss ... is a serious possibility" ... "real danger" or "in the cards."

Kuofos v. C. Czarikow Ltd. (The Heron II), [1969] 1 AC 350

degree of risk

A ship, the Heron II, was nine days late with a cargo of sugar. During those nine days, the market price of sugar fell and the plaintiff asked for damages based on the price they could have obtained if the sugar had been delivered on time. The court could not agree saying that:

"... the crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realized that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation."

The court then allowed the damages but took the opportunity to reject part of the Victoria Laundry decision (see above) saying that while damages that are "likely" are recoverable, "serious possibility, real danger or in the cards" possibilities are not.

Bowlay Logging Ltd. v. Domtar Ltd., 87 DLR (3d) 325 (1982, BCCA)

• no real loss ... then nominal damages

Bowlay was hired by Domtar to log 10,000 cunit of timber. But Domtar was unable to provide enough trucks so Bowlay sued for breach and damages. But there was no evidence of loss. The claim was based merely on the total expenditures of Bowlay minus what it had already been paid by Domtar.

But Domtar argued that the loss was not a result of the breach. Bowlay, Domtar argued, ran a highly inefficient business and would have lost much more had Domtar not have pulled its trucks.

The court agreed. The plaintiff having elected to claim for expenses, was rebutted by the defendant showing that the plaintiff would have incurred a loss had it completed the contract (i.e. the defendant did the plaintiff a favour). Nominal damages of $250 were awarded Bowlay.

McRae v. Commonwealth Disposals Commission, [1951] HCA 79

• wasted expenses recoverable

In this case, defendant had sold an nonexistent tanker to plaintiff. Defendant had relied on anecdotal evidence to assert that a marooned oil tanker could be found in a certain area. After an exhaustive search, the plaintiff sued for breach and damages.

First, the court said that "the mere difficulty in estimating damages did not relieve a tribunal from the responsibility of assessing them as best it could."

Even though the Commission did not promise that a tanker could be salvaged, they did promise that one would be where they said it would be. The court made an analogy with a contract for the sale of sheep: if there are no sheep at the point of delivery, the buyer will be able to recover his expenses incurred and wasted in sending a truck to take delivery. But not all the heads of damages were accepted by the court.

For example, capital assets such as equipment bought before the date of the contract was not admissible, as was the case with ordinary shipping supplies. Reconditioning of the search vessel, some of which was done way before the contract, was also disallowed.

McRae tried, too, to press a claim for the equivalent value of a tanker found with oil aboard. The court rejected this claim as the defendant had not promised that a salvageable tanker would be found nor that it would have retained its oil cargo. Damages were awarded based on money the search vessel might have made if it had not been engaged in the futile search for the nonexistent tanker. {Note: this case is also discussed in page 5.}

Keneric Tractor Sales Ltd. v. Langille, [1987] 2 SCR 440

• equipment lease breached

"The general rule for the assessment of damages for breach of contract is that the award should put the plaintiff in the position he would have been in had the defendant fully performed his contractual obligations."

The defendant rented farming equipment from Keneric. Keneric assigned the lease to the manufacturer as security on the purchase of the equipment. Langille stopped paying midway through the lease. The court decided that "a lessor who terminates a chattel lease by virtue of a provision in the lease allowing him to do so, is limited in his remedies to the rent due at the time of the termination.... When one party repudiates the contract and the other party accepts the repudiation, the contract is at this point terminated or brought to an end."

The court also stated that whether the contract was repudiated by the lessee or terminated by the lessor because of breach, "makes no difference to the assessment of damages." Keneric had, in their contract with the manufacturers, a penalty clause, which they paid, and which they sought to recover from Langille. Langille was aware that their lease with Keneric had been used as security and so the compensation for these payments was not remote enough to be excluded.

Sunshine Vacation Villas Ltd. v. Hudson's Bay Company, 13 DLR (4th) 93 (BCCA, 1984)

• allowable expenses

Hudson's Bay reneged on a deal to allow the plaintiff to become the exclusive travel agency in several of its western Canada stores. In this case, the court stated that a plaintiff may choose between a claim for "expenses rendered futile by the breach" or the normal measure of damages (i.e. put the plaintiff in the position he would have been in had the defendant fully performed his contractual obligations).

Since, as had been done in Bowlay, the plaintiff had elected to proceed on the basis of "incurred and wasted expenses ... the onus of establishing ... that the amount of the expenditure to the date of breach was less than the net loss which would have been incurred had the contract been completed." The court accepted the amounts submitted as lost capital including the $80,000 initial investment by the investors and the line of credit balance of $115,000

Chaplin v. Hicks, [1911] 2 KB 786

• loss of chance

A contestant in a beauty contest complained that although she was one of fifty finalists, the final selection appointment was given on such short notice that she did not receive the letter on time to make the appointment. In defence, the argument was that the chances of the contestant to win, in any case, were impossible to assess.

But the court said that the "fact that damages cannot be assessed with certainty does not relieve the wrong-doer of the necessity of paying damages for his breach of contract."

Giles v. Edwards, 7 TR 181; also at 101 ER 920 (1797)

This old and short English case involved a man who, one-sixth of the way through the job, reneged on an agreement to cut firewood. The plaintiff sued to recover the advance payment. The court said yes, that the plaintiff "had a right to put an end to the whole contract and recover back the money that they had paid under it. They were not bound to take a part of the wood only." This has become known as "restitution."

Hunt v. Silk, 5 East 449; also at 102 ER 1142 (1804)

Another old, short but important English contract law case involving a 19-year lease signed on the condition that certain repairs be done. The tenant moved in and then moved right out again when it became apparent that the repairs would not be forthcoming. He asked the court for the return of his down payment of £10.

The court denied restitution because the plaintiff had begun to receive the benefit of the contract: a few days occupation, "a part execution of the agreement."

A.V.G. Management Science Ltd. v. Barwell Developments Ltd., [1979] 2 SCR 43

• Bain v. Fotherhill is out

A vendor sold the same land twice believing that the first deal had fallen through. The error was done in good faith; there was no attempt at fraud. The case gave Canada's Supreme Court the opportunity to review the applicability of the rule in Bain v. Fotherhill. This was an English case which said that the purchaser may decline to take the land and be excused from the contract, if the vendor fails to produce a good title. But the court added that nor was the purchaser entitled to damages unless there was evidence of fraud or bad faith.

In this case, Canada's Supreme Court decided that the rule was no longer applicable in Canada, because of vastly improved land title registration systems, particularly where the Torrens System was in place.

Nu-West Homes Ltd. v. Thunderbird Petroleums Ltd., 59 DLR (3d) 292 (1975)

• building contract

Nu-West failed miserably at constructing a house for Thunderbird, causing serious dispute between the two parties (the defendant complaining about serious deviations), to the point where Nu-West stopped construction. The evidence showed that Thunderbird then hired another contractor to finish the job and was advised that even the concrete foundation would have to be removed and redone to correct some deficiencies.

The general rule is that "the owner of the building is ... entitled to recover such damage ... as will put him in a position to have just the building he contracted for." But where "the cost of rectification is great in comparison to the nature of the defect, the court will not force a slavish following of the precise specifications of the contract .... The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."

The evidence showed that in other respects, Thunderbird accepted some minor defects instead of tearing the whole place down and so the court assessed the damages to include the cost of removing the concrete floor.

Groves v. John Wunder Co., 286 NW 235 (1939)

• cost of performance

This was a famous American contract law case in which land was leased to a competitor on the condition that he leave the ground on "uniform grade." The contract was breached "deliberately." The value of the land was about $15,000 but the cost of grading the land as had been promised was $60,000.

But the court ordered the $60,000 in damages saying that "in a case such as this, the owner is entitled to compensation for what he has lost, that is, the work ... which he has been promised and of which he has been deprived by the contractor's breach."

Sunshine Exploration Ltd. Dolly Varden Mines Ltd., [1970] SCR 2

Sunshine was to explore and develop mining land owned by Dolly Varden but failed and breached the contract. Sunshine stood to gain a half-interest in the land if it completed the contract but this reverted back to Dolly Varden on breach. Dolly Varden sued Sunshine and then contracted with another company to develop the same land.

The Supreme Court came down hard on Sunshine, saying that Dolly Varden could retain the half-interest and that Sunshine had to pay, in damages, "equivalent to the cost of doing the work" and that the agreement with the third-party was not a factor in assessing damages. The net result of this case was that Dolly Varden gained more then he would have had Sunshine performed the contract.

Scyrup v. Economy Tractor Parts Ltd., 40 DLR (2d) 1026 (1963)

• foreseeability part II

Scyrup ordered equipment from Economy advising them that it was needed in a hurry and to complete a job on behalf of a customer. Repairs needed on the faulty equipment caused Scyrup to lose the contract with the third party.

The court said that the rules laid down Victoria Laundry case is that knowledge, whether imputed or "special", revolved around the reasonable foreseeability of the damages and in this case, the loss of the contract with the third party. Whether on the basis of reasonable foreseeability, or on the basis of the Hadley rule, the defendant was liable to compensate Scyrup for loss of the contract.

Jarvis v. Swan Tours Ltd., [1973] 1 QB 233

• mental distress

This English decision seemed to reverse an earlier holding from Addis v. Gramaphone [1909] AC 488, which said that non-financial damages had no place in a breach of contract action. In Jarvis, a holiday was a disaster for a customer due to the breach of contract of the tour organizer.

The court held that the injury was in the reasonable contemplation of the parties (in other words, that they conform to the normal rules for remoteness of damage in contract) and that while mental distress damages are normally not available in breach of commercial contract cases, they were in non-commercial contract cases.

Vorvis v. I.C.B.C., [1989] 1 SCR 1085

punitive damages

A lawyer was dismissed in a rather heavy-handed way from a British Columbia Crown corporation giving the Supreme Court of Canada a chance to review if punitive damages were available in wrongful dismissal cases. Yes, said the court, but very rarely and only "in respect of conduct which is of such a nature as to be deserving of punishment because of its harsh, vindictive, reprehensible and malicious nature.... extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment."

In this case, the majority of the Supreme Court did not think that the conduct deserved punitive damages. The court noted that punitive damages are not compensatory in nature. Aggravated damages are different and are compensatory in nature, taking into account "intangible injuries." The court endorsed the Jarvis precedent (see above) "that aggravated damages may be awarded in actions for breach of contract in appropriate cases."

Asamera Oil Corporation v. Sea Oil & General Corporation, [1979] 1 SCR 633

• shares and mitigation

In this Supreme Court of Canada case, a 1957 contract to return shares in 1960 was breached. The defendant argued that once it became clear that the shares were not forthcoming, the plaintiff should have bought other shares to mitigate his damages, particularly since the value had increased so much that had the plaintiff of done so, the profit would have covered any subsequent loss.

But Canada's highest court agreed with the plaintiff's arguments that shares are highly speculative investments and that to mitigate by buying other shares would have been extremely risky. The duty to mitigate, in ordinary sale of goods cases, was clear: "a plaintiff is entitled to recover damages for the losses he has suffered but the extent of those losses may depend on whether he has taken reasonable steps to avoid their unreasonable accumulation" and "it is for the defendant to carry the (evidentiary) burden of that issue."

The traditional rules about mitigation of damages "are inapplicable to nondelivery of share" cases. The court was also of the view that the value of the shares, for the purposes of assessing damages, should be the date of the breach unless the plaintiff purchased other shares to attempt to mitigate losses, in which case the claim for damages would have been based on the date of the trial.

White and Carter (Councils) Ltd. v. McGregor, [1962] AC 413

• repudiation and mitigation

An employee executed a 3-year contract with a local waste disposal firm for the rental of advertising space on receptacles. The contract had a clause that if any payment was late, the whole 156 weeks worth was immediately payable. When he discovered it, the business owner was furious with the contract and repudiated it, refusing to pay. The court:

"If one party to a contract repudiates it in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the innocent party has an option. He may accept that repudiation and sue for damages for breach of contract, whether or not the time for performance has come; or he may ... disregard or refuse to accept it and then the contract remains in full effect."

Wroth v. Tyler, [1974] Ch. 30

• when calculated

A house vendor backed out before closing because his wife suddenly placed a lien against the property under matrimonial property legislation. The purchasers sued. The situation was made more peculiar because the value of the property increased dramatically, doubling by the date of trial.

"The normal rule is that the general damages to which the purchaser is entitled for breach of a contract for the sale of land are basically measured by the difference between the contract price and the market price of the land at the date of the breach, normally the date fixed for completion."

But the court did not see this rule as "inflexible" and that "the sale of a house is a case par excellence in which the court has jurisdiction to entertain an application for ... specific performance."

But the matrimonial property issue prevented the court from ordering specific performance. So where specific performance is unavailable through no fault of the plaintiff, the court can order the equivalent in money. The court felt that the increase of value of the house was foreseeable and they awarded damages of £5,500, which represented the increase in value of the property as of the date of trial, in lieu of specific performance.

Miliangos v. George Frank (Textiles) Ltd., [1976] AC 443

• foreign currency

An international contract was breached, the contract stipulating that payment was to be in Swiss funds. The English court had to set a date of conversion. The old rule (in a case known as Havanas Railways) held that the date of breach was the date of conversion. The English court said that the court could choose any conversion date that best served justice and, in this case, they chose the "date of payment ... the date when the court authorizes enforcement of the judgment."

Shatilla v. Feinstein, [1923] DLR 1035

• penalty clause rejected

A salesman breached a no-competition agreement, which provided for payment of $10,000 "as liquidated damages, and not as penalty." The court said that "when the damages which may arise out of a breach of a contract are in their nature uncertain, the law permits the parties to agree beforehand as to the amount to be paid in case of a breach." Whether the agreement is a penalty clause or not will be decided on a case-by-case basis. If a fixed sum is given on the breach of a number of obligations, as was the case here, there is a presumption that this is not a liquidated damage clause but a penalty clause (courts will not enforce a penalty clause).

This presumption can be rebutted if it can be shown that it has been carefully thought out provided, still, that it is not "extravagant or unreasonable." The danger lies, however, in that "the strength of the chain must be taken to its weakest link and if it can be seen clearly that the loss in one particular breach could never amount to the sum stated, then the conclusion is that the sum is a penalty may be reached." The clause was considered to be a penalty clause and thrown out.

Thermidaire Corp. v. H. F. Clarke Ltd., [1976] 1 SCR 319

liquidated damages excessive

In this case, a liquidated damage clause provided, rather than a set sum, a formula, "an amount equal to the gross trading profit realized through the sale of ... competitive products."

The court let the appellant off the hook and voided the clause as it was "a grossly excessive and punitive response to the problem to which it was addressed." A liquidated damages clause "must yield to judicial appraisal of its reasonableness in the circumstances." The power to relieve from penalty clause is of equity and it does not relieve from liability from normal damages "which a court would fix if called upon to do so."

J. G. Collins Insurance Agencies Ltd. v. Elsley, [1978] 2 SCR 916

liquidated damages

A clause in the contract provided for "$1,000 as and for liquidated damages." Striking down a penalty clause, the court stated, is a blatant interference with the freedom to contract, and should only be done "for the purpose of providing relief against oppression.... If the actual loss turns out to exceed the penalty, the normal rules of enforcement of contract should apply to allow recovery of only the agreed sum."

Stockloser v. Johnson, [1954] 1 All ER 630

• forfeiture clause

The contract stated that the vendor would remain full owner until and unless every last instalment was paid. Upon default, the plaintiff sought to recover the instalments. But the court disagreed and let the vendor keep the instalments, partly because "there is an express clause, a forfeiture clause ... permitting him to keep it."

Where there is no forfeiture clause, if the seller rescinds the contract, then he must refund the instalments and can then sue for damages. Where there is a forfeiture clause, then no recovery is possible except under equity if it can be proven that the clause is "of a penal nature, in the sense that the sum must be out of all proportion to the damage; and, secondly, it must be unconscionable for the seller to retain the money."

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