Contract Law: Unenforceable Agreements and Exclusion Clauses, Lecture notes of Law

Download Contract Law: Unenforceable Agreements and Exclusion Clauses and more Lecture notes Law in PDF only on Docsity! RECENT DEVELOPMENTS IN THE LAW OF CONTRACTSt Emil J. Hayek* I. THE CONSTRUCTION OF CONTRACTS ...................... 600 A. Uncertainty ...................................... 600 B. Contracts of Indefinite Duration ................... 602 C. Formation of Contracts ........................... 605 II. PROMISSORY ESTOPPEL . ................................ 611 A. Sword/Shield Distinction .......................... 611 B. Reliance ........................................ 613 III. NON EST FACTUM ...................................... 614 A. Negligence ...................................... 614 B. Degree of Difference ............................. 615 IV. CONTRACTUAL TERMS ................................... 617 A. Terms - Their Construction and Effect ............. 617 B. Exemption Clauses ............................... 620 C. Collateral Contracts and Negligent Misrepresentations.. 631 1. Collateral Contracts ........................... 631 2. Negligent Misrepresentations .................... 635 V. DAMAGES .. ........................................... 637 A. Damages for Mental Distress ...................... 638 B. Aggravated and Punitive Damages .................. 639 C. Contract and Tort ................................ 640 t Revised version of a paper presented at the "Continuing Legal Education Programme" held at the Faculty of Law, Common Law Section, University of Ottawa, Oct. 21-22, 1983. * Faculty of Law, University of Ottawa. 599 Ottawa Law Review I. THE CONSTRUCTION OF CONTRACTS A. Uncertainty In the daily practice of the law, the most important subject is the construction of documents. Yet it is the subject on which opinions are still much divided. There are the "strict constructionists" on the one hand: and the "intention" seekers on the other hand. The strict constructionists go by the letter of the document. The "intention" seekers go by the purpose or intent of the makers of it.' Although words are the tools of the lawyer's trade, they may nevertheless fail, sometimes because of imprecision in the words them- selves. This is particularly so when we are concerned with documents drafted by non-lawyers. Lord Wright commented that "[b]usiness men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise."'2 It is therefore not surprising that courts are frequently called upon to construe documents which are uncertain or ambiguous.' It has been stated that the function of the courts is to construe the contract without constructing it. 4 In the leading Canadian case of Murphy v. McSorley, Mignault J. stated that "[t]he court cannot make for the parties a bargain which they themselves did not make in proper time." 5 A similar approach was used by the House of Lords in May & Butcher Ltd. v. The King.' This strict, constructionist approach was subsequently relaxed in the often-quoted judgment of the House of Lords in Hillas & Co. v. Arcos Ltd.,7 which was referred to and applied by the Court of Appeal in Foley v. Classique Coaches Ltd.,8 and the House of Lords in Scammell & Nephew Ltd. v. Ouston.9 In Hillas & Co. v. Arcos Ltd. Lord Wright stated, "It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the court should seek to apply the old maxim of English law, verba ita sunt intelligenda I A. DENNING, THE DISCIPLINE OF LAW 4 (1979). 2 Hillas & Co. v. Arcos Ltd., [1932] All E.R. 494, at 503, 147 L.T. 503, at 514 (H.L.). I See Scrimes v. Nickle, [1982] 1 W.W.R. 653, 130 D.L.R. (3d) 698 (Alta. C.A.), leave to appeal to S.C.C. denied 35 A.R. 180, 41 N.R. 572 (1982); G.S.B. Devs. Ltd. v. Chiulli, 15 B.C.L.R. 381 (S.C. 1979), affd 28 B.C.L.R. 157 (C.A. 1981), leave to appeal to S.C.C. denied 38 N.R. 380 (1981); Western Log Exch. Ltd. v. Soucie Constr. Ltd., 14 B.C.L.R. 293, 8 Bus. L.R. 1 (S.C. 1979), affd21 B.C.L.R. 57 (C.A. 1980); First City Invs. Ltd. v. Fraser Arms Hotel Ltd., [1979] 6 W.W.R. 125, 104 D.L.R. (3d) 617 (B.C.C.A.); Adam v. General Paper Co., 19 O.R. (2d) 574, 85 D.L.R. (3d) 736 (H.C. 1978); Anderson v. Chaba, 7 A.R. 469, 81 D.L.R. (3d) 449 (C.A. 1977). 4 Fridman, Construing, Without Constructing, a Contract, 76 L.Q.R. 521 (1960). 5 [1929] S.C.R. 542, at 546, [1929] 4 D.L.R. 247, at 250. 6 [1934] 2 K.B. 17, 103 L.J.K.B. 556 (H.L. 1929). 7 Supra note 2. 8 [1934] 2 K.B. 1, 103 L.J.K.B. 550 (C.A.). 9 [1941] A.C. 251, [1941] 1 All E.R. 14 (H.L. 1940). [Vol. 15:599 Contracts company purported to terminate the contract on six months notice. On appeal it was held that the contract was terminable on reasonable notice, even though the contract itself contained no provisions for termination by notice and contained the words "at all times hereafter." Two members of the English Court of Appeal held that it was the intention of the parties, gathered from all the circumstances, that the contract was terminable by reasonable notice. Lord Denning arrived at the same result but by altogether different reasoning: [TI]he rule of strict construction is now quite out of date. It has been supplanted by the rule that written instruments are to be construed in relation to the circumstances as they were known to or contemplated by the parties; and that even the plainest words may fall to be modified if events occur which the parties never had in mind and in which they cannot have intended the agreement to operate. 23 He stated further that "[i]f events occur for which [the parties] have made no provision, and which were outside the realm of their speculations altogether then the court itself must take a hand and hold that the contract ceases to bind."'24 In His Lordship's opinion agreements in perpetuity are unequal. He noted that costs go "up with inflation through the rooftops: and the fixed payment goes down to the bottom of the well .... Rather than tolerate such inequality, the courts will construe the contract so as to hold that it is determinable by reasonable notice."' 25 Whether one analyzes this approach as an enlarged concept of a doctrine of frustration or a new formulation of the rule of construc- tion does not really matter; the fact remains that Lord Denning is in effect making a contract for the parties; that is, he is constructing a contract, notwithstanding that he says "the courts will construe the contract" and he is introducing new rules of construction without direct judicial precedent. In passing it could be mentioned that Lord Denning attempted a similar "construction" of a contract in Gibson v. Manchester City Council, but was reversed on appeal to the House of Lords.26 Never- theless, as leave to appeal from the Court of Appeal decision in South Staffordshire was refused by the House of Lords Appeal Committee,27 the decision stands. Boise Cascade Canada Ltd. v. The Queen,28 a case decided by the Ontario Court of Appeal, has a strikingly similar factual situation. Again there was an agreement of 1905 to supply a town with power "to such an extent as the town may require" at a fixed price and the contract contained no provision as to its duration or for a right to terminate. Some seventy years later the town's population had increased five times 23 Id. at 774, [1978] 1 W.L.R. at 1395. 24 Id. at 775 [1978] 1 W.L.R. at 1395. 21 Id. at 775, [1978] 1 W.L.R. at 1395-96. 26 [1978] 2 All E.R. 583, [1978] 1 W.L.R. 520 (C.A.), rev'd [1979] 1 All E.R. 972, [1979] 1 W.L.R. 294 (H.L.). 27 Supra note 22. 28 34 O.R. (2d) 18, 15 Bus. L.R. 1, 126 D.L.R. (3d) 649 (C.A. 1981). 1983] Ottawa Law Review and the rate of consumption one hundred and thirty-three times, and the power company found the rate inadequate. It sought a declaration, inter alia, that the contract was terminable on reasonable notice. Mr. Justice Thorson (with Mr. Justice Brooke concurring) refused to follow the South Staffordshire case, when invited by counsel for the appellant to "make new law" in Ontario by adopting the approach favoured by Lord Denning. His Lordship agreed with the statement of the trial judge that the law of Ontario on this point is as stated by Viscount Simon in British Movietonews Ltd. v. London and District Cinemas Ltd.: The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made.29 The other issues sought in the declaration were that the appellant should be paid a reasonable price containing an element of profit and that the town was entitled only to a reasonable share of the output of the generating station. On the issue of price it was held that the language of the agreement made it abundantly clear that the fixed price was a maximum price which was not to be exceeded in any event. The third issue concerning the share was decided by reference to paragraph 13 of the agreement providing for the resolution of certain types of disputes by arbitration. Mine. Justice Wilson, who dissented in part, stated in the course of her judgment: Business agreements must be construed in a business-like way. And if that result cannot be reached through the process of interpretation of the agreement... then a provision to that effect should be implied into it in order to give it the "business efficacy" the parties must have intended it to have.30 This is a far more flexible approach to the construction of documents than that adopted by the majority and it echoes some of the views expressed by Lord Denning in the South Staffordshire case. On appeal to the Supreme Court of Canada, Mr. Justice Estey, speaking for the Court, affirmed the decision of the Court of Appeal regarding the price. 31 His Lordship quoted the dictum of Viscount Simon 32 and stated that the parties have specified the extent of their obligation in the terms of the agreement, and it cannot be said that they did not agree to be bound in the circumstances that have arisen. He found it unnecessary, therefore, to consider the controversial33 decision of the English Court of Appeal in the South Staffordshire case.3 4 As the Supreme Court of Canada followed the principles of con- struction stated in British Movietonews Ltd. v. London and District 29 [1952] A.C. 166, at 185, [1951] 2 All E.R. 617, at 625 (H.L. 1951). 30 Supra note 28, at 41, 15 Bus. L.R. at 32-33, 126 D.L.R. (3d) at 673. 31 Town of Fort Frances v. Boise Cascade Canada Ltd., 46 N.R. 108, 143 D.L.R. (3d) 193 (S.C.C. 1983), rev'g Boise Cascade Canada Ltd. v. The Queen, supra note 28. 32 Supra note 29. 33 Emphasis added. 34 Supra note 31, at 128, 143 D.L.R. (3d) at 209. [Vol. 15:599 Cinemas Ltd.," it follows that in contracts of indefinite duration the Canadian courts will not be able to provide relief where such contracts become inequitable due to the passage of time. Although the South Staffordshire case was not formally overruled, the Supreme Court, by refusing to consider it, clearly indicated its disfavour of Lord Denning's approach to contracts in perpetuity. C. Formation of Contracts It is commonplace that the basis of a contract is an agreement which usually results from the acceptance of an offer. There are, however, situations where there is clearly an agreement, but it cannot be readily analyzed into an offer and acceptance. There are other situations where it is not clear whether an agreement resulted from a set of negotiations or perhaps from an exchange of documents between the parties, and, if an agreement was reached, it is not always clear what its terms are. One example is the familiar "battle of forms". There are other instances when it is difficult to determine the mode of the formation of the agree- ment, as for example in the cases of vending machines selling goods, parking tickets and contracts of insurance, and in cases dealing with tenders. These matters were considered in three cases, by the English Court of Appeal, the House of Lords and the Supreme Court of Canada respectively. Butler Machine Tool Co. v. Ex-Cell-O Corp. (England)36 was a decision of the English Court of Appeal dealing with the "battle of forms". The "battle of forms" is often the result of the modern com- mercial practice of sending printed quotation forms and placing orders with conditions, frequently printed in small print on the reverse side. The businessmen do not read these conditions and if there is an agree- ment as to essential terms, such as quantity, price, delivery, usually contained on the front page of quotations and orders, they consider they have a contract. The question then arises which of the often con- tradictory conditions govern the contract? In this case, the sellers, Butler Machine Tool Company, started by making an offer. The offer, in the form of a quotation, contained in small print a clause that orders are accepted only subject to conditions stated in the quotation. One of the conditions was a price variation clause. The buyers, Ex-Cell-O, gave an order which stated, "Please supply on terms and conditions as below and overleaf."37 The sellers acknowledged the receipt of the official order and no doubt the contract was then concluded. But which set of conditions governed the contract? Lord Denning cited the trial judge who had held that the conditions, including the price variation clause, set in the seller's quotations, formed 11 Supra note 29. 36 [1979] 1 All E.R. 965, [1979] 1 W.L.R. 401 (C.A. 1977). 17 Id. at 967, [1979] 1 W.L.R. at 403. 1983] Contracts Ottawa Law Review decision has been adversely commented upon50 for its analysis of tenders and the treatment of mistake. In our discussion we are concerned only with the analysis of the legal nature of tenders. Pursuant to a call for tenders, a contractor submitted a tender together with the required tender deposit of $150,000. According to the rules applicable, this deposit would be forfeited if the tender were with- drawn, or if, after acceptance, the bidder did not execute the agreement to perform. After the opening of the tenders, but before any acceptance, the contractor discovered that, by mistake, an amount in excess of $700,000 was not included in the sum tendered. The contractor imme- diately notified the Water Resources Commission (who had called the tenders). The Commission nevertheless submitted to the contractor an agreement for the performance of the work tendered for the understated amount which the Commission knew to be the result of a mistake. The contractor refused to execute the agreement and the Commission retained the deposit, relying on the terms contained in the call for tenders, provid- ing for the forfeiture of the deposit where a tender is withdrawn or an agreement not executed. In the action for the recovery of the tender deposit, the Ontario Court of Appeal, reversing the trial judge, held "when that mistake is proven by the production of reasonable evidence, the person to whom the tender is made is not in a position to accept the tender or to seek to forfeit the bid deposit." 51 The Court of Appeal followed its own judgment in Belle River Community Arena Inc. v. W.J. C. Kaufmann Co.,52 holding that an offeree cannot accept an offer which he knows has been made by mistake which affects a fundamental term of the contract. This reasoning is based on a line of cases commencing with Smith v. Hughes (the oats case).53 The Supreme Court of Canada reversed the Court of Appeal. 54 According to Mr. Justice Estey, a call for tenders is an offer and the submission of a tender is the acceptance of that offer. Upon the submis- sion of the tender, a unilateral contract comes into existence. Mr. Justice Estey used the example, "I will pay you a dollar if you cut my lawn." 55 His Lordship noted that there is no obligation on anybody to cut the lawn and the promise to pay one dollar becomes binding only upon the performance of the invited act, that is, the cutting of the lawn. By analogy, the call for tenders creates no obligation on anybody and the lodging of a tender is the performance. Thus a unilateral contract arises auto- 50 Swan, Contracts-Mistakes-Irrevocable Tenders in the Construction Industry - The Queen v. Ron Engineering & Construction (Eastern) Ltd., 15 U.B.C.L. REV. 447 (1981); Blom, Mistaken Bids: The Queen in Right of Ontario v. Ron Engineering and Construction Eastern Ltd., 6 CAN. BUS. L.J. 80 (1981). 5' Ron Eng'r. & Constr. (Eastern) Ltd. v. The Queen, 24 O.R. (2d) 332, at 334, 98 D.L.R. (3d) 548, at 551 (C.A. 1979). 52 20 O.R. (2d) 447, 87 D.L.R. (3d) 761 (C.A. 1978). 53 L.R. 6 Q.B. 597, [1861-73] All E.R. Rep. 632 (1871). 54 Supra note 49. 55 Id. at 122, 119 D.L.R. (3d) at 274. [Vol. 15:599 Contracts matically on the filing of a tender in response to the call and such contract is governed by the terms contained in the call for tenders. The terms may contain provisions for the irrevocability of the tender, forfeiture of deposit, etc. This contract, which regulates solely. the formalities of the submission of a tender, is referred to by Estey J. as contract A. Acceptance of a tender results in another contract, dealing with the performance of the work tendered for, in this instance a construction contract. This contract is designated as contract B. This is certainly a novel approach to the formation of contracts by tender. The generally accepted view is that a call for tenders is a mere invitation to treat, to do business. A tender is an offer, the terms of which become a contract upon acceptance by the caller.56 Being an offer, such tender is revocable at any time before acceptance, unless it is under seal or consideration has been given. In respect of irrevocability, the judgment contains the following intriguing statement, "The significance of the bid in law is that it at once becomes irrevocable if filed in conformity with the terms and conditions under which the call for tenders was made and if such terms so provide." 57 As mentioned above, Estey J.'s theory is that a tender constitutes a uni- lateral contract regulated by the terms of the call. If such terms provide for the irrevocability of the tender, then it is irrevocable. This seems at first glance quite logical, accepting the theory of unilateral contract. The problem, however, is that it goes contrary to the traditional concept of irrevocability of offers not in the form of an option.58 Does it mean that every bid is irrevocable if the call so provides? Does this concept extend to any offer where either the offer states that it is irrevocable or the invitation asks for an irrevocable offer? If that is so, then this deci- sion of the Supreme Court has abolished some long established principles of common law. Mr. Justice Estey did not cite any cases or texts in support of his analysis of tenders as unilateral contracts. There are several problems arising from this new theory. Firstly, assuming that this new theory applies to tenders only, how does one distinguish between a tender and an offer? Is an offer transformed into a tender when it is so called? For example, A writes to several suppliers asking for tenders (or offers) to supply goods. Are their replies offers or tenders, depending on what they are called? What about the contracts? Do the replies, when accepted, become contracts for supply of goods, or are the replies only formal contracts of type "A" and is it necessary to execute an additional contract 56 Cf 9 HALSBURY, LAWS (4th) para. 230 and cases quoted therein; ANSON'S LAW OF CONTRACT, supra note 39, at 27, 51; CHESHIRE AND FiFOOT's LAW OF CONTRACT 39-40 (10th ed. M. Furmstrom 1976); FRIDMAN, THE LAW OF CONTRACT 55 (1976); and Canadian case law: Belle River Community Arena v. W.J.C. Kaufman Co., 20 O.R. (2d) 447, 87 D.L.R. (3d) 761 (C.A. 1978); Imperial Glass Ltd. v. Consolidated Supplies Ltd., 22 D.L.R. (2d) 759 (B.C.C.A. 1960). 57 Supra note 49, at 122, 119 D.L.R. (3d) at 274-75. 58 Cf Goldsborough Mort. & Co. v. Quinn, 10 N.S.W. St. R. 170, 10 C.L.R. 674 (Full Ct. 1910); Dickinson v. Dodds, 2 Ch. 463, 24 W.R. 595 (C.A. 1876). 1983] Ottawa Law Review of type "B"? There are also problems with promise and consideration. The submission of a tender can well be perceived as the performance of an act, but in response to what promise? In the example given, the promise is the payment of one dollar, but what is the promise here? One possible argument is that the caller promises to receive and consider the tenders, but that appears to be a rather artificial construction of a promise. Another aspect is the consideration contained in the promise. A man cuts a lawn for the promise of one dollar; a contractor submits a tender - for what? The caller for tenders may or may not accept the tender; there is no obligation on his part crystallizing upon the submission of the tender. Again, one could argue that the contractor has the benefit of his tender being considered or that the caller has a duty or detriment of examining the tenders, but is this real consideration? Another conceptual problem is that requests for quotations, catalogues, price lists, display of goods, etc. are traditionally considered as invitations to do business and not as binding offers capable of acceptance. This is a well established principle of common law. The disposition of the case should be mentioned in passing. It was held that there was no mistake at the time when the unilateral contract "A" came into existence. The contractor intended to submit the tender in that form and substance. The mistaken estimate might have effect on the validity of contract "B", the construction contract, but that contract never came into existence. As the contractor refused to execute the construction contract "B", he forfeited the deposit under the terms of contract "A". It follows from the judgment that when a contractor makes a mistake in his tender under similar conditions, as to irrevoca- bility and forfeiture of deposit, he has no remedy, except possibly to execute contract "B" and then bring an action to have it declared void because of the mistake. While the Supreme Court reversed the deci- sion of the Court of Appeal, the Belle River case, which the Court of Appeal followed, was not expressly overruled, although it was probably overruled by implication. The Ontario Court of Appeal recently considered the problems of tenders and collateral contracts in Kawneer Co. Canada Ltd. v. Bank of Canada.9 The plaintiff tendered for the erection of an exterior glass curtain wall, part of the new Bank of Canada building. The Bank invited tenders based upon performance specification leaving it to the bidders to provide proposals which would satisfy performance criteria. The danger inherent in this type of invitation to tender is a practice called "low balling". A builder could submit an attractive low price but fail to supply the detailed design and engineering information required to meet the performance criteria. The plaintiff was aware of that and wanted to protect himself. He sought assurances that the main factors in the evaluations would be the completeness and competence of the bids and not the price. He sought such assurances at a meeting with the Bank's representative prior to tendering and he was satisfied that he received 59 40 O.R. (2d) 275 (C.A. 1982). [Vol. 15:599 Contiacts B. Reliance There is another aspect of the doctrine of promissory estoppel in respect of which Canadian courts hold firm; that is, that the promisee must have relied upon the promise to his detriment. The origin and formulation of this requirement are unclear. In Hughes v. Metropolitan Railvay Co. 79 this requirement was satisfied since the respondents refrained from carrying on repairs in reliance on the promise and thus breached the terms of a lease. Lord Cairns, in his formulation of the principle, referred to "the dealings which have thus taken place between the parties" 80 but not to any detriment to the promisee. There was clearly no detrimental reliance by the promisee in the High Trees case"' and the requirement of detriment was not even mentioned. Lord Denning himself later admitted that there was no detriment8 2 and, in Allen (W.J.) & Co. v. El Nasr Co.," rejected the requirement that there must be detriment, stating that all that is required is that one should have acted on the belief induced by the other party. 84 The Canadian courts, on the other hand, fairly consistently refer in their formulation of the requirements of promissory estoppel to detriment. Thus reference to detriment is found in Gilbert Steel Ltd. v. University Construction Ltd.,, Re Tudale Explorations Ltd. and Bruce,86 M.L. Baxter Equipment v. Geac Canada,87 to mention but a few recent cases. The Supreme Court of Canada affirmed the requirement of detriment in the Canadian Superior Oil case88 and Mr. Justice Estey in the recent case of Fort Frances v. Boise Cascade89 stated that it seems clear that promissory estoppel operates where a promise or representa- tion has been relied upon to the detriment of the person to whom it was directed. 90 It is to be noted that none of the above cases mention Lord Denning's expositions in the El Nasr case9' or the doubts about the requirement of detriment expressed in most leading texts.92 79 [1876-77] A.C. 439, [1874-80] All E.R. 187 (H.L. 1877). 10 Id. at 448, [1874-80] All E.R. at 191. 81 Supra note 65. '2 Denning, Recent Developments in the Doctrine of Construction, 15 MODERN L. REV. 1, at 6-8 (1982). 83 [1972] 2 Q.B. 189, [1972] 2 All E.R. 127 (C.A.). "I Id. at 213, [1972] 2 All E.R. at 140. 85 Supra note 68. 86 Supra note 70. 87 Supra note 74, at 152, 133 D.L.R. (3d) at 382. 18 Supra note 67, at 939, 12 D.L.R. (3d) at 253. 89 46 N.R. 108 (S.C.C. 1983). 90 Id. at 136-37. 91 Supra note 83. 92 See ANSON's LAW OF CONTRACT, supra note 40; G.H. TREITEL, THE LAW OF CONTRACT, 85, 94 (5th ed. 1979). 1983] Ottawa Law Review III. NON EST FACTUM Non estfactum, which is an abbreviation of a legal maxim Scriptum predictum non est factum suum, is a plea which permits one who has signed a written document, which is essentially different from that which he intended to sign, to plead that "it is not his deed" in contemplation of the law. 93 In its modern form the plea was stated by Mr. Justice Byles in Foster v. Mackinnon: It seems plain, on principle and on authority that, if a blind man or a man who cannot read, or who for some reason (not implying negligence) forbears to read, has a written contract falsely read over to him, the reader misreading to such a degree that the written contract is of a nature altogether different from the contract pretended to be read from the paper which the blind or illiterate man afterwards signs; then, at least if there be no negligence, the signature so obtained is of no force. And it is invalid not merely on the ground of fraud where fraud exists, but on the ground that the mind of the signer did not accompany the signature; in other words, that he never intended to sign, and therefore in contemplation of law never did sign, the contract to which his name is appended. 94 With the passage of time this formulation became encrusted with some interpretations which altered the original concept. Of these, two are most prominent, the negligence of the signor and the degree of difference required. A. Negligence It is clear from the law, as laid down in Foster v. Mackinnon, that a person who signed a document differing fundamentally from that which he believed it to be would be disentitled from successfully pleading non est factum if his signing was due to his own negligence. The word "negligence" in this connection had no special or technical meaning. It meant carelessness, and in each case it was a question of fact for the jury to decide whether the person relying on the plea had been negligent. This view of negligence l5ecame distorted in the case of Carlisle and Cumberland Banking Co. v. Bragg.95 In this case the defendant was induced by fraud to sign a guarantee believing that it was a mere proposal of insurance. Although the jury found that he was negligent, the trial judge considered that the finding of negligence was immaterial and the Court of Appeal upheld the view. As a result of this decision the negli- gence of the signor is irrelevant except as regards bills of exchange, where the original formulation in Foster v. Mackinnon 96 applies. Carlisle v. Bragg97 was adopted by the majority of the Supreme Court of Canada, 93 ANSON'S LAW OF CONTRACT, id. at 313. 94 L.R. 4 C.P. 704, at 711, 38 L.J.C.P. 310, at 315 (1869). 95 [1911] 1 K.B. 489, 80 L.J.K.B. 472 (1910). 96 Supra note 94. 97 Supra note 95. [Vol. 15:599 Contracts Mr. Justice Cartwright dissenting, in Prudential Trust Co. v. Cugnet.98 B. Degree of Difference Foster v. Mackinnon speaks of a written contract of a nature altogether different from the contract pretended. 99 Over a period of time a distinc- tion between nature and contents of the document crept in, 00 making the plea successful only where there was a mistake as to the essential nature of the document as distinct from the mistake as to the contents. The doctrine of non estfactum was thoroughly examined and restated by the House of Lords in Saunders v. Anglia Building Society.'0' The decision may be summarized as follows: 1. The law was put back to the position in which it was after Foster v. Mackinnon. In particular the formulation of Byles J. in that case was approved as containing the essential features of the doctrine and not requiring any radical transformation. 2. Carlisle v. Bragg was overruled and held to be wrong in reasoning and decision. The word "negligence" in this context does not have the same meaning as in tort; it means carelessness and in each case it is a question of fact whether a person pleading non estfactum has been negligent. When negligence (that is, carelessness) is found, then non est factum is not available. 3. The distinction between nature and contents was disapproved and the House of Lords laid down a new test of the difference. It was suggested that the difference between the document signed and the document as misrepresented must be "radical", "fundamental", "serious", "very substantial", or "total". 4. It was explained that it is inaccurate and misleading to say that the plea of non estfactum operates by way of estoppel. It is not a true estoppel, but an illustration of the principle that no man can take advantage of his own wrong. Several Canadian courts have dealt with the plea of non estfactum since the House of Lords decision. In Commercial Credit Corporation Ltd. v. Carroll Brothers Ltd.,102 the question whether Saunders v. Anglia Building Society 03 applies in Canada was not decided, but in a number of subsequent cases the principles laid down by the House of Lords were followed. °4 98 [1956] S.C.R. 914, 5 D.L.R. (2d) 1. 99 Supra note 79. 100 Cf. Howatson v. Webb, [1907] 1 Ch. 537, 77 L.J.ChD. 32, affd [1908] 1 Ch. 1; Markham Finance Ltd. v. Howard, [1963] 1 Q.B. 904. 101 [1971] A.C. 1004, [1970] 3 All E.R. 961 (H.L. 1970), affg Gallie v. Lee, [1969] 1 All E.R. 1062 (C.A.). 102 20 D.L.R. (3d) 504 (Man. C.A. 1971). 103 Supra note 101. 104 Cf Canadian Imperial Bank of Commerce v. Kanadian Kiddee Photo Ltd., [1979] 3 W.W.R. 256 (B.C.C.A.); Royal Bank of Canada v. Poisson, 26 O.R. (2d) 717, 1983] Ottawa Law Review the contract? Lord Diplock stressed that it was really the event resulting from the breach, or to put it in other words, the seriousness of the consequences of the breach and not the breach itself, which relieved the party from further performance. He then continued that there are many simple contractual undertakings where it may be predicated that every breach of such undertaking will result in the loss of substantially the whole benefit of the contract, that there are other undertakings where the opposite applies, and finally that there is a third category where one cannot so predicate. For this third category, the term innominate or indeterminate was later used. For terms of this class, the consequences of a breach cannot be predicated and, unless provided for expressly in the contract, the legal consequences will be determined by the events resulting from the breach. This tripartite division of contractual terms was followed in subsequent cases, most notably in Cehave N.V. v. Bremer 119 where the Court of Appeal applied and further analyzed the Hongkong Fir case. However, Lord Diplock's analysis gradually came to be interpreted in a way not probably intended; specifically, unless a term was expressly designated as a condition, it was an innominate term and there was no right to repudiate the contract unless there was a loss of substantially the whole benefit of the contract. That this interpretation was not intended by Lord Diplock is obvious from his judgment in Photo Production Ltd. v. Securicor Transport Ltd.,12 where he distinguished between fundamental breach and a breach of a condition. The first term, fundamental breach, is to be confined to an event whereby the other party is deprived of substantially the whole benefit of the contract. The term "condition" is to be used where the parties have agreed, either expressly or by implica- tion of law, that any particular failure to perform, irrespective of the gravity of the consequences, shall entitle the party not at fault to put an end to his performance. The case of Bunge Corporation v. Tradax SA' 2' gave the House of Lords an opportunity to re-examine Lord Diplock's analysis. The facts are simple: Bunge entered into a contract with Tradax for the purchase of 15,000 tons of soya beans to be delivered in three consignments. The buyers were required to provide a ship at a nominated port and to give at least fifteen consecutive days notice of the readiness of the vessel. Bunge gave only fourteen days notice on the second consignment and Tradax repudiated the contract. The contract was silent as to the legal nature of this clause. Counsel for Bunge, relying on Lord Diplock's judgment in the Hongkong Fir case,1 22 submitted that as the term was not expressly stated to be a condition, it must be an innominate term and therefore the innocent party can repudiate only where it has been deprived of substantially the whole benefit of the contract. Counsel 119 [1976] Q.B. 44, [1975] 3 All E.R. 739 (C.A. 1975). 120 [1980] A.C. 827, at 848-50, [1980] 1 All E.R. 556, at 566-67 (H.L.). 121 Supra note 115. 322 Supra note 114. [Vol. 15:599 Contracts further relied on an ensuing passage from the same judgment, which stated that "legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend on the nature of the event to which the breach gives rise." 23 Counsel argued that there was no express provision in the contract, the event resulting from the breach did not deprive the sellers of substantially the whole benefit of the contract and hence there was no right to repudiate. The House of Lords unanimously rejected this argument. Lord Roskill found nothing in the judgment of Diplock L.J. in the Hongkong Fir case which would suggest any departure from the basic and long- standing rules used for determining whether a particular term in the contract was or was not a condition. 124 In this connection, Roskill L.J. quoted Bowen L.J. in Bentsen v. Taylor to the effect that the only way of deciding that question is to look at the contract in the light of sur- rounding circumstances and then infer the intentions of the parties from the instrument itself.' 25 Lord Roskill stated that he did "[n]ot believe that [Lord Diplock] ever intended his judgment to afford an easy escape route from the normal consequences of rescission to a contract breaker who had broken what was, on its true construction, clearly a condition of the contract by claiming that he had only broken an innominate term." ' 26 He then suggested that the passage from the Hongkong Fir case regarding an express provision in a contract for the breach of an innominate term'27 should be amended by adding "or impliedly" after "expressly". 1 28 Lord Roskill supported this recommendation by reference to Lord Diplock's judgment in Photo Production where Lord Diplock stated that a contractual term is a condition where the parties have so agreed, either expressly or by implication.129 Having thus explained the construction of the term "condition", the House of Lords held that stipulations as to time in mercantile contracts should be treated as conditions because of the need for certainty in such contracts. Further, where performance of an undertaking by one party is a condition precedent to the performance by the other party, such an undertaking should be treated as a condition. 130 This judgment re-affirmed Lord Diplock's analysis of contractual terms and further clarified it as regards innominate terms. Such terms are to be treated as conditions, thus giving the right to repudiate the contract, where on a true construction of the contract it appears that this was the intention of the parties and is not restricted to situations where the innocent party has been deprived of substantially the whole benefit of the contract. 2I Id. at 70, [1962] 1 All E.R. at 487 (emphasis added). 124 Supra note 115, at 549, [1981] 1 W.L.R. at 725. 125 Supra note 117, at 281, 63 L.J.Q.B. at 18. 126 Supra note 115, at 550, [1981] 1 W.L.R. at 725-26. 127 Supra note 114, at 70, [1962] 1 All E.R. at 487. 128 Supra note 115, at 550, [1981] 1 W.L.R. at 726. 129 Supra note 120, at 849, [1980] 1 All E.R. at 566 (emphasis added). 130 Supra note 115, at 553, [1981] 1 W.L.R. at 729. 1983] Ottawa Law Review B. Exemption Clauses The emergence of standard form contracts or contracts of adhesion, as they are sometimes called, encouraged the increasing use of exemption (or exclusionary) clauses. The courts had to react to the frequent use and abuse of these clauses and one of the problems that preoccupied the courts in the second half of this century was whether an exemption clause should be available when a fundamental breach occurred. For example, a person enters into a contract with a security company to protect his property. One of the employees of the company starts a fire which destroys that property. The contract contains a clause exempting the company from virtually any liability. Could the clause be invoked against what is undoubtedly a fundamental breach?' After all, the contract was to secure the protection and not the destruction of the property. Two theories have held sway, the "rule of law" and the "construction" theory. The "rule of law" theory holds that it is a rule of substantive law that a fundamental breach destroys the effectiveness of an exemption clause. The "construction" theory holds that whether an exemption clause exempts a party from liability on the occurrence of a fundamental breach is a question determined on the true construction of the contract. The "rule of law" theory was put forward by Lord Denning in such cases as Karsales (Harrow) Ltd. v. Wallis, 32 Harbutt's Plasticine Ltd. v. Wayne Tank & Pump Co.'33 and in his Court of Appeal judgment in Photo Production.'34 The "construction" theory was very clearly stated by Pearson L.J. in U. G. S. Finance Ltd. v. National Mortgage Bank of Greece and National Bank of Greece,'35 and examined at length and adopted by the House of Lords in the Suisse Atlantique case.' 36 Both theories were followed in a number of Canadian and English decisions. After the Suisse Atlantique judgment in 1966, the courts paid lip service to the "construction" theory, but the "rule of law" theory continued to be followed in some judgments.11 7 It was reintroduced by Lord Denning in the Harbutt's Plasticine case and in the Court of Appeal decision in Photo Production. The "construction" theory was reaffirmed by the unanimous decision of the House of Lords in Photo Production Ltd. v. Securicor 38 which overturned the Court of Appeal judgment and overruled the Harbutt's Plasticine case. The House of Lords held that there is no "rule of law" by which exemption clauses are eliminated, regardless of their terms, where there has been a fundamental breach of contract. The question of whether an "I Supra note 120. 132 [1956] 2 All E.R. 866, [1956] 1 W.L.R. 936 (C.A.). 133 [1970] 1 Q.B. 447, [1970] 1 All E.R. 225 (C.A. 1969). 134 [1978] 3 All E.R. 146, [1978] 1 W.L.R. 856 (C.A.). " [1964] 1 Lloyd's Rep. 446, 107 Sol. J. 552 (C.A. 1963). 136 Suisse Atlantique Soci&6 d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale, [1967] 1 A.C. 361, [1966] 2 All E.R. 61 (H.L. 1966). 137 See, e.g., Mendelssohn v. Normand Ltd., [ 1969] 2 All E.R. 1215, [1969] 3 W.L.R. 139 (C.A.). 138 Supra note 120. [Vol. 15:599 Contracts courts and abandoned by Securicor. The only issue before the House of Lords was the effectiveness of the second clause which purported to limit the liability to a maximum of £1,000 for any one claim and £10,000 for any aggregate of claims. Lord Wilberforce stated: Whether a condition limiting liability is effective or not is a question of construction of that condition in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and, in such a contract as this, must be construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think the appellants have striven to do. The relevant words must be given, if possible, their natural, plain meaning. Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion; this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure.1 45 This passage was quoted with approval by Lord Denning in his Court of Appeal judgment in the Finney Lock Seeds case. 146 Lord Fraser emphasized the distinction between the exclusion clauses and clauses merely limiting liability: There are later authorities which lay down very strict principles to be applied when considering the effect of clauses of exclusion or of indemnity: see partic- ularly the Privy Council case of Canada Steamship Lines Ltd. v. R. . . . where Lord Morton, delivering the advice of the Board summarised the principles in terms which have recently been applied by this House in Smith v. UMB Chrysler (Scotland) Ltd. .... In my opinion these principles are not applicable in their full rigour when considering the effect of conditions merely limiting liability. Such conditions will of course be read contra proferentem and must be clearly expressed, but there is no reason why they should be judged by the specially exacting standards which are applied to exclusion and indemnity clauses. The reason for imposing such standards on these conditions is the inherent improbability that the other party to a contract including such a condition intended to release the proferens from a liability that would otherwise fall on him. But there is no such high degree of improbability that he would agree to a limitation of the liability of the proferens, especially when, as explained in condition 4(i) of the present contract, the potential losses that might be caused by the negligence of the proferens or its servants are so great in proportion to the sums that can reasonably be charged for the services contracted for. It is enough in the present case that the condition must be clear and unambiguous.1 47 Lord Fraser's formulation of the distinction between exclusion and limitation clauses was quoted with approval by the House of Lords in the Finney Lock Seeds case.i4 1 However, Lord Denning in his Court of Appeal judgment in the same case, 149 referred to what Lord Sumner said fifty years ago: "There is no difference in principle between words 45 Supra note 143, at 102-03, [1983] 1 W.L.R. at 966. 146 [1983] 1 Q.B. 284, at 296, [1983] 1 All E.R. 108, at 113 (C.A. 1982). "I Supra note 143, at 105-06, [1983] 3 W.L.R. at 970. 141 Supra note 144, at 741, [1983] 3 W.L.R. at 168 (Lord Bridge). 149 Supra note 146, at 301, [1983] 1 All E.R. at 116. See also text at note 173 infra. 1983] Ottawa Law Review which save them from having to pay at all and words which save them from paying as much as they would otherwise have had to pay."150 Canada Steamship Lines Ltd. v. The King,15' referred to by Lord Fraser, contains a well-known passage by Lord Morton, summarizing the principles to be applied in determining whether an exemption clause extends to the liability for negligence. In Finney Lock Seeds, Kerr L.J. paraphrased this passage as follows: (1) If the contract contains an express exemption from the consequence of negligence for which the party in default would otherwise be responsible, then effect must be given to it. (2) If there is no express reference to negligence, then the court must consider whether the words used are nevertheless wide enough, in their ordinary meaning, to cover loss or damage due to negligence; but any doubt in this connection must be resolved against the defaulting party. (3) However, even if the words used are wide enough for this purpose, the court must consider whether liability for the loss or damage in question may arise on some ground other than that of negligence, which ground is not so fanciful or remote that the party in default cannot be supposed to have desired protection against it. 1 2 Lord Fraser, who expressed the view that these principles are not applicable in their full rigour in limitation clauses,153 held that the limitation clause in Ailsa Craig referring to "[a]ny liability... whether under the express or implied terms of this Contract or at Common Law, or in any other way" extended to negligence. Lord Fraser explained further that liability at common law is undoubtedly wide enough to cover liability including the negligence of the proferens himself.154 The judgment of the House of Lords in Ailsa Craig may be summarized as follows: 1. The effectiveness of an exemption clause is a question of construction and must be decided in the context of the contract as a whole.,55 2. The words must be given their plain natural meaning and one must guard against strained construction. 5 6 3. Distinction should be made between clauses limiting liability and clauses excluding liability. The limitation clauses are not to be construed as rigidly as total exclusionary clauses.157 4. The clauses limiting or excluding liability must be construed contra proferentem. 58 5. The principles for determining whether a clause includes liability for negligence, summarized in Canada Steamship Lines Ltd. v. The 150 Atlantic Shipping and Trading Co. v. Louis Dreyfus & Co., [1922] 2 A.C. 192, [1922] 1 All E.R. Rep. 559, at 563 (H.L.). 151 [1952] A.C. 192, [1952] 1 All E.R. 305 (P.C.). 152 Supra note 146, at 312, [1983] 1 All E.R. at 124-25. 153 Supra note 143, at 105-06, [1983] 1 W.L.R. at 970. 154 Id. at 107, [1983] 1 W.L.R. at 972. 155 See text at note 145 supra. 156 Id. "I Id. and see text at note 147 supra (Lord Fraser). 158 Id. [Vol. 15:599 King'59 and applied in Smith v. UMB Chrysler (Scotland) Ltd.60 were approved, but should not be applied rigidly. 6 ' Lords Wilberforce and Fraser found the limitation clause to be clear and unambiguous, and therefore the liability of the Securicor company was effectively limited. In addition, Lord Fraser expressly found that the limitation clause covered negligence.' 62 Lords Elwyn-Jones, Salmon and Dowry concurred with both judgments. The Finney Lock Seeds case 163 provided the Court of Appeal and the House of Lords with an opportunity to analyze the impact of the two Securicor cases. 64 The facts are simple. Seed merchants supplied seeds which were totally different from those ordered and which proved to be unmerchantable. The defect was not obvious. The farmers planted the seeds and suffered damages of some £100,000. The seed merchants claimed the protection of an exemption clause. The exemption clause was one of long standing in the seed trade and was very wide. It provided for the replacement of defective seeds or the refund of money, but excluded all liability for any loss or damage arising from the use of the seed, for any consequential loss and for any other loss or damage whatsoever. Two issues were involved. The first, the common law issue, was whether the clause on its true construction was effective to limit the liability of the seed merchants to the refund of the price of the seeds. The second issue, the statutory one, was whether, if the common law issue was decided in favour of the seed merchants, they were nevertheless precluded from relying on this limitation under the provisions of the modified section 55 of the Sale of Goods Act 1979,165 which states that in a contract of sale of goods, any term is not enforceable to the extent that it is shown that it would not be fair or reasonable to permit reliance on the term. This second issue is of no relevance in Canada, as none of the provincial Sale of Goods Acts contains provisions similar to the amended section 55 of the United Kingdom Act. The trial judge, Parker J., held that the exemption clause did not cover the breach on the ground that what was delivered was fundamentally different from what was ordered. 66 This reasoning did not find favour with the Law Lords. Lord Diplock commented that Parker J. placed a strained and artificial meaning 6 7 on the exemption clause. Lord Bridge criticized the reasoning of Parker J., and that of Oliver L.J. in the Court of Appeal, as coming "dangerously near to reintroducing by the back door the doctrine of 'fundamental breach', which this House in the 15 Supra note 151. 160 [1978] 1 All E.R. 18, [1978] 1 W.L.R. 165 (H.L. 1977). ,6, See text at note 147 supra (Lord Fraser). 161 See text at note 154 supra. 113 Supra note 146. 164 Supra note 144. 165 U.K. 1979, c. 54. 166 [1981] 1 Lloyd's Rep. 476 (Q.B.). 167 Supra note 144, at 739, [1983] 3 W.L.R. at 165. Contracts1983] Ottawa Law Review (1) There is no rule of law that the effect of a fundamental breach of contract, whether or not accepted by the innocent party as a repudiation, is to preclude reliance on an exclusion clause in the contract inserted for the protection of the party in breach. (2) The effect of an exclusion clause has to be ascertained simply by construing the contract as a whole. What has to be determined is whether, as a matter of construction, the clause applies to excuse or limit liability for the particular breach which has occurred, whether "fundamental" or otherwise. (3) There is a presumption that any breach of the primary obligations of the contract will result in continuing secondary obligation on the party in breach to pay compensation for the breach. A clause in the contract excluding, modifying or limiting that secondary obligation is, therefore, to be construed restrictively and contra proferentem. (I add in parenthesis that, with deference to Lord Denning M.R., I find the analysis adopted by Lord Diplock in the Photo Production case a helpful one, so long as it is borne in mind that the purpose of a contract is performance and not the grant of an option to pay damages.) (4) The contract has to be construed as a whole, for the exclusion clause is part of an entire contract and may, as a matter of construction, be an essential factor in determining the extent of the primary obligation. Thus, for instance, the Photo Production case was not a case of a clause excluding liability for a fundamental breach of the contract but of a clause which, on its true con- struction, demonstrated that there had been no breach at all of the primary obligation, which was simply to exercise reasonable care. (5) Since such clauses may not only modify or limit the secondary obligation to pay damages for breach but may also show the extent of the primary obligation, a clause totally excluding liability tends to be construed more restrictively than a clause merely limiting damages payable for breach, for a total exclusion of liability, if widely construed, might lead to the conclusion that there was no primary obligation at all and thus no contract. This is to say no more than that, when it is called on to construe a commercial document clearly intended by both parties to have contractual force, the court will lean against a construction which leads to an absurdity. (6) Where the language used is unclear or susceptible fairly of more than one construction, the court will construe it in the manner which appears more likely to give effect to what must have been the common intention of the parties when they contracted. But, where, even construing the contract contra proferentem and allowing for the presumption of the continuance of a secondary obligation to pay damages for breach of the primary contractual duty, the language of the contract is clear and is fairly susceptible of only one meaning, the court is not entitled to place on an exclusion clause a strained construction for the purpose of rejecting it. 179 On the common law issue, Oliver L.J. held, after analyzing the clause, that it would be making commercial nonsense to suggest that the parties intended the clause to operate in the circumstances of this case and he further agreed with Kerr L.J. that the merchants were negligent and there was nothing in the clause to protect them from their negligence. 80 Having thus decided the common law issue against the merchants, it was not necessary to deal with the statutory issue, but Oliver L.J. stated that, if 171 Id. at 303-04, [1983] 1 All E.R. at 118-19. 110 Id. at 306, [1983] 1 All E.R. at 120. [Vol. 15:599 Contracts necessary, he would be prepared to hold "that reliance on the clause... would not be fair and reasonable". 181 Lord Kerr observed that Photo Production laid to rest the doctrine of fundamental breach and that it does not survive under the guise of a rule of construction. His Lordship stated that the principle, put forward in Ailsa Craig, that clauses which provide for total exclusion are to be construed more strictly than limitation clauses, is only a guideline to construction. 112 Following these guidelines, and also applying the principles laid down by Lord Morton in Canada Steamship Lines Ltd. v. The King,'8' Kerr L.J. held that the breach could not have arisen without negligence and there was nothing in the clause which would protect the merchants against their own negligence. On the statutory issue, Kerr L.J. held that it would not be fair or reasonable to allow the merchants to rely on the clause. 184 On further appeal to the House of Lords, the decision of the Court of Appeal was affirmed. 8 5 The opinion of the House was delivered by Lord Bridge with whom Lords Diplock, Scarman, Roskill and Brightman concurred. Lord Bridge set out the two issues, one common law and the other statutory, and in dealing with the common law issue, first made reference to the two Securicor cases. In his words: The Securicor 1 case gave the final quietus to the doctrine that a "fundamental breach" of contract deprived the party in breach of the benefit of clauses in the contract excluding or limiting his liability. The Securicor 2 case drew an important distinction between exclusion and limitation clauses.8 6 He then expressed an opinion that the judgments of the trial judge and of Oliver L.J. in the Court of Appeal came dangerously close to reintroducing by the back door the doctrine of "fundamental breach". The trial judge had discussed what Lord Bridge called the "peas and beans" cases, those in which it has been held that exemption clauses do not apply when there has been a contract to sell one thing and quite another thing has been delivered. This was not the case here, since the contract refers to seeds and seeds were sold and delivered. Lord Oliver arrived at the conclusion that the exemption clause was applicable only where the seeds supplied were of the correct description but defective in quality. According to Lord Bridge, this conclusion can only be arrived at by the process of "strained construction" disapproved of in the two Securicor cases. The relevant clause, read as a whole, unambiguously limits the liability to replacement of the seeds or refund of the price. Lord Bridge also disagreed with Kerr L.J. (with whose reasoning Oliver L.J. concurred), that the exemption clause did not cover negligence. His 181 Id. at 308, [1983] 1 All E.R. at 124. 182 Id. at 309-10, [1983] 1 All E.R. at 122-23. 183 Supra note 151, at 208, [1952] 1 All E.R. at 310. See also text at note 152 supra. 184 Supra note 146, at 312-13, [1983] 1 All E.R. at 124-25. "I Supra note 144. 186 Id. at 741, [1983] 3 W.L.R. at 168. 1983] Ottawa Law Review conclusion was that the exemption clause unambiguously limited the liability, and there is no principle of construction which can properly confine the clause to breaches arising without negligence."8 7 Having decided the common law issue in favour of the appellant seed merchants, Lord Bridge, dealing with the statutory issue, concurred with the unanimous decision of the Court of Appeal that "it would not be fair or reasonable to allow the appellants to rely on the contractual limitation of their liability." "8 Lord Diplock, in his brief opinion, concurred with Lord Bridge. He stressed the dangers of placing on the language of the exemption clause a strained and artificial meaning and he repeated Lord Denning's view that: [T]he passing of the Supply of Goods (Implied Terms) Act 1973 and its successor, the Unfair Contract Terms Act 1977, had removed from judges the temptation to resort to the device of ascribing to the words appearing in exemption clauses a tortured meaning so as to avoid giving effect to an exclusion or limitation of liability when the judge thought that in the circum- stances to do so would be unfair. 189 The following conclusions may be drawn from the two Securicor cases and the Finney Lock Seeds case: 1. Exemption clauses should be given effect according to their plain, natural meaning and strained, tortured construction to prevent their application is to be avoided. In this respect, the law may have gone the full circle, back to "the heyday of the freedom of contract". 2. It is unlikely that Lord Denning's proposed test of reasonableness will be followed, except perhaps as a general guide of construction as to what is a reasonable interpretation of the exemption clause, but this has always been a general rule of construction. 3. The effect of the distinction between the total exclusionary and limitation clauses, proposed in Ailsa Craig, is difficult to assess. The purpose of the distinction is to provide a less strict interpretation of the limitation clauses. If this is done, then a modification is grafted on the rule of giving the exemption clauses their plain, natural meaning. You cannot have both at the same time. In principle and in effect, there is no real difference between a clause which excludes a liability altogether and a clause which limits it to, say, $200, or, as in the Finney Lock Seeds case, to 0.33% of the damage suffered. It is submitted that this distinction is not well founded. In Canada, although the courts have not analyzed the exemption clauses in as great a depth as their United Kingdom counterparts have, some recent decisions indicate that the courts will uphold exemption 117 Id. at 740-42, [1983] 3 W.L.R. at 169. "I Id. at 744, [1983] 3 W.L.R. at 172. 119 Id. at 739, [1983] 3 W.L.R. at 165-66. There is no similar legislation in Canada. As this was probably Lord Denning's last judgement before the Appellate Committee of the House of Lords, Lord Diplock used this opportunity to pay a tribute to Lord Denning's unique and eminently readable style of exposition and his outstanding contri- bution to the development of the common law. [Vol. 15:599 They create a new head of liability, as in tripartite agreements, where a representor becomes liable in respect of a statement inducing a promisee to enter into a contract; a typical example being the.liability of a manu- facturer for statements inducing purchasers to buy his products from a retailer. 98 They convert a representation into a warranty, for example a statement which is not incorporated into a contract is treated as an independent warranty. 199 They override the terms of the main contract, especially exemption clauses.2 00 It is inevitable that the concept of collateral contracts clashes with the rule of parol evidence. The rule of parol evidence states that where there is a written contract, parol (or extrinsic) evidence is inadmissible to contradict the terms of the written contract. Yet it is the very nature of collateral contracts that they supplement, change or contradict the terms of the main contract, and it frequently happens that the main contract is in writing whilst the collateral contract is an oral assertion. English courts invariably rule that the collateral contracts prevail over the terms of the main contracts and disregard the rule of parol evidence. Thus, in Couchman v. Hill, Scott L.J. held "there was clearly an oral offer of a warranty which overrode the stultifying condition in the printed term. ..".01 A similar decision was reached in Harling v. Eddy, where Sir Raymond Evershed, M.R. quoted with approval the above statement of Scott L.J.,0 2 and Denning L.J. stated: "In my opinion, the law is that if a seller of goods by auction gives an express oral warranty, he cannot escape from his responsibility for it by saying that the catalogue contained an exempting clause."'20 3 Although these two cases concern sales by auction, there is no reason why these dicta should not have general application. A definite pronouncement on the conflict between collateral contracts and parol evidence was made in Mendelssohn v. Normand Ltd., where Lord Denning stated: Such a statement is binding on the company. It takes priority over any printed condition. There are many cases in the books when a man has made, by word of mouth, a promise or a representation of fact, on which the other party acts by entering into the contract. In all such cases the man is not allowed to repudiate his representation by reference to a printed condition, see Couchman v. Hill [1947] K.B. 554; Curtis v. Chemical Cleaning and Dyeing Co. [1951] 1 K.B. 805; and Harling v. Eddy [1951] 2 K.B. 739; nor is he allowed to go back on his promise by reliance on a written clause, see City and 198 Cf. cases cited note 197 supra. 199 Cf. Murray v. Sperry Rand Corp., supra note 197; Sodd Corp. v. Tessis, supra note 197; Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd., supra note 195; Harling v. Eddy, [1951] 2 K.B. 739, [1951] 2 All E.R. 212 (C.A.); Couchman v. Hill, [1947] K.B. 554, [1947] 1 All E.R. 103 (C.A. 1946); Hopkins v. Tanqueray, 15 C.B. 139, 139 E.R. 369 (C.P. 1854). 200 Cf. Mendelssohn v. Normand, supra note 137; Harling v. Eddy, supra note 199; Couchman v. Hill, supra note 199. 20, Couchman v. Hill, supra note 199, at 558, [1947] 1 All E.R. at 105. 202 Harling v. Eddy, supra note 199, at 744, [1951] 2 All E.R. at 216. 203 Id. at 746, [1951] 2 All E.R. at 217. 1983] Contracts Ottawa Law Review Westminster Properties (1934) Ltd v. Mudd [1959] Ch. 129, 145 by Harman J. The reason is because the oral promise or representation has a decisive influence on the transaction - it is the very thing which induces the other to contract - and it would be most unjust to allow the maker to go back on it. The printed condition is rejected because it is repugnant to the express oral promise or representation. As Devlin J. said in Firestone Tyre andRubber Co. Ltd. v. Vokins & Co. Ltd. [1951] 1 Lloyd's Rep. 32, 39: "It is illusory to say: 'We promise to do a thing, but we are not liable if we do not do it'." To avoid this illusion, the law gives the oral promise priority over the printed clause. 2 04 Lord Justice Phillimore in the same case expressed a similar view: Whether you regard that promise as a representation or whether you regard it as a collateral term of the contract, or whether you regard the contract as being oral and partly in writing in the shape of the ticket, it seems to me it can make no real difference."°5 This attitude of the English courts is in accordance with the present commercial practice, where great reliance is placed on verbal undertakings and the written contract is frequently looked upon as not amounting to more than a formal necessity or perhaps even a nuisance. The reason- ing of Mendelssohn v. Normand Ltd. has found favour in a number of Canadian cases.2°6 There is, however, the controversial decision in Hawrish v. Bank of Montreal,"7 where the Supreme Court of Canada adopted a strict formalistic attitude, holding that a collateral agreement cannot be established where it is inconsistent with or contradicts the written agree- ment. This decision was followed on this point in Bauer v. Bank of Montreal,"8 and in Carman Construction Ltd. v. C.P.R.,2°9 both Supreme Court of Canada decisions. Two recent decisions dealing with collateral contracts should be briefly examined because of their impact. In Esso Petroleum Co. v. Mardon,21 0 an English Court of Appeal case, a service station operator entered into a contract for lease of a service station, relying on a statement by the lessor, a petroleum company, about the "estimated annual consumption" of petrol. This statement was made negligently and the actual consumption was well below the estimate. Lord Denning (Ormrod and Shaw L.J.J. delivering concurring judgments) held that the statement constituted both a collateral contract and a negligent misrepresentation under the Hedley Byrne doctrine. 204 Supra note 139, at 183-84, [1969] 2 All E.R. at 1218. 205 Id. at 186, [1969] 2 All E.R. at 1220. 206 See, e.g., Findlay v. Couldwell, [1976] 5 W.W.R. 340, 69 D.L.R. (3d) 320 (B.C.S.C.); J. Evans & Sons (Portsmouth) Ltd. v. Andrea Merzario Ltd., [1976] 2 All E.R. 930, [1976] 1 W.L.R. 1078 (C.A. 1975); Canadian Acceptance Corp. v. Mid-Town Motors Ltd., 72 W.W.R. 365 (Sask. Dist. Ct. 1970). 207 [1969] S.C.R. 515, 2 D.L.R. (3d) 600. 208 [1980] S.C.R. 102, at 113, 33 C.B.R. (N.S.) 291, at 300. 209 18 Bus. L.R. 65, 136 D.L.R. (3d) 193 (1982). 210 Supra note 197. [Vol. 15:599 Contracts Murray v. Sperry Rand Corporation is a well reasoned and well researched decision of the Ontario High Court.2 ' During the negotiations for the purchase of a forage harvester, a farmer was given a sales brochure issued by the manufacturers. The farmer explained to the dealer and to a representative of the Canadian distributor his type of farming and was given assurances that the machine would perform as described in the sales brochure and would be ideally suited for his type of farming. The machine did not perform - at best it was able to cut and chop sixteen tons per hour although the sales brochure advertised forty-five to sixty tons per hour. Mr. Justice Reid found that the oral statements by the dealer and the distributor and the sales brochure of the manufacturer constituted collateral contracts. In addition, the dealer was liable for breach of implied conditions of fitness and merchantable quality.21 2 There was an exemption clause in the contract of sale between the farmer and the dealer. Clearly such a clause could not nullify the collateral warranties of the manufacturer and the distributor, but it could exempt the dealer. Mr. Justice Reid did not have to decide the question of whether a disclaimer clause in the main contract nullifies the collateral warranty, because he found that the representations to the farmer were fundamental to the contract. The failure of the machine went to the root of the contract and the disclaimer clause would not protect against breach of a fundamental term of the contract. This is somewhat circuitous reasoning, but from the subsequent quotations from, and references to, cases it appears that the judge meant that exemption clauses are not available where a breach goes to the root of the contract. It is to be noted that this judgment predates the House of Lords decision in Photo Production.21 3 2. Negligent Misrepresentations The concept of negligent misrepresentation, actionable in tort, had its genesis in the House of Lords judgment in Hedley, Byrne & Co. v. Heller & Partners Ltd. ,214 although the concept was put forward by Lord Denning, but not approved by the majority of the English Court of Appeal, in Candler v. Crane, Christmas & Co. 2 15 The principle in Hedley Byrne is that where a person "possessed of a special skill under- takes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of, or by the instrumen- tality of, words can make no difference. ' 216 This concept has been narrowed by the decision of the Privy Council in Mutual Life v. Evatt,217 in which a majority of the Privy Council gave a fairly narrow construction 211 Id. 212 Sale of Goods Act, R.S.O. 1980, c. 462, subs. 15(1) and 15(2). 2 See text accompanying notes 138 and 139 supra. 214 Supra note 193. 215 [1951] 2 K.B. 164, [1951] 1 All E.R. 426 (C.A.). 216 Supra note 193, at 502-03, [1963] 2 All E.R. at 594 (Lord Morris of Borth-y-Gest). 217 [1971] A.C. 793, [1971] 1 All E.R. 150 (P.C. 1970) (Aust.). 1983] Ottawa Law Review relations, to expand the scope of liability and to emphasize the concept of fairness rather than that of commercial certainty. 23' A. Damages for Mental Distress The principle that damages for mental distress are recoverable where they were reasonably forseeable at the time the contract was entered into has been reiterated in a series of recent decisions. The breakthrough of the orthodox view that damages for injured feelings are not recoverable for breach of contract 232 was the case of Jarvis v. Swans Tours Ltd. ,233 an English Court of Appeal decision. This case was applied in Canada in Newell v. Canadian Pacific Airlines Ltd.234 and Pilon v. Peugeot Canada Ltd.2 35 The whole problem of damages for mental distress and punitive damages was recently extensively canvassed by Mr. Justice Linden in Brown v. Waterloo Regional Board of Commis- sioners of Police.236 Regarding damages for mental distress, Linden J. stated that they are recoverable if they were within the contemplation of the parties at the time they entered the contract. It is not normally contemplated that mental suffering will result from a breach of an ordinary commercial contract, but where the contract affects "personal, social or family interests", the likelihood of such occurrence may be foreseen.237 Thus, in contracts of employment, damages for mental distress are recoverable where they were reasonably foreseeable at the time the contract was entered into and if they resulted from the breach of such contract.238 Brown v. Waterloo Regional Board of Commissioners of Police was followed in Grant v. McMillan Bloedel,2 39 Fulton v. Town of Fort Erie,240 Bohemier v. Storwal International Inc. ,241 and Cleary v. Cabletronics Inc.,242 where the Courts held that a claim for damages for loss of repu- tation may be made in an action for damages for wrongful dismissal. The Ontario Court of Appeal, speaking through Mr. Justice Weatherston, overruled Linden J.'s award of $10,000 for mental suffer- ing. Mr. Justice Weatherston reviewed the development of damages for mental distress, concluding "hat there may be circumstances where a 231 Cf. Grosman & Marcus, New Developments in Wrongful Dismissal Litigation, 60 CAN. B. REV. 656 (1982); Swinton, Foreseeability: Where Should the Award of Con- tract Damages Cease?, in STUDIES IN CONTRACT LAW 61 (B. Reiter & J. Swan eds. 1980). 232 Addis v. Gramophone Co., [1909] A.C. 488, 101 L.T. 466 (H.L.). 233 Jarvis v. Swans Tours Ltd., [1973] Q.B. 233, [1973] 1 All E.R. 71 (C.A. 1972). 234 14 O.R. (2d) 752, 74 D.L.R. (3d) 574 (Co. Ct. 1976). 235 29 O.R. (2d) 711, 114 D.L.R. (3d) 378 (H.C. 1980). 236 37 O.R. (2d) 277, 136 D.L.R. (3d) 49 (H.C. 1982). 237 Id. at 284, 136 D.L.R. (3d) at 56. 238 Id. at 285, 136 D.L.R. (3d) at 57. 239 83 C.L.L.C. para. 14,002 (Ont. H.C. 1982). 240 40 O.R. (2d) 235, 142 D.L.R. (3d) 487 (H.C. 1982). 241 40 O.R. (2d) 264, 142 D.L.R. (3d) 8 (H.C. 1982). 242 39 O.R. (2d) 456, 140 D.L.R. (3d) 110 (H.C. 1982). [Vol. 15:599 Contracts breach of contract will give rise to a claim for damages for mental distress, and quoting with approval paragraph 341 of the Restatement of the Law of Contracts: There is sufficient authority to justify the statement that damages will be awarded for mental suffering caused by the wanton or reckless breach of a contract to render a performance of such a character that the promisor had reason to know when the contract was made that a breach would cause such suffering, for reasons other than pecuniary loss. 243 Whilst recognizing the appropriateness of the award of damages for mental distress in special circumstances, the Court of Appeal over- ruled Linden J. on a technical ground that the actions of the Board in dismissing the respondent as a Chief of Police were not actionable.244 It would thus appear that the main thrust of Linden J.'s judgment, favouring the award of damages for mental distress in certain wrongful dismissal situations, was not affected by the Court of Appeal reversal. B. Aggravated and Punitive Damages Mr. Justice Linden in Brown245 draws a distinction between aggravated damages, the aim of which is to "soothe a plaintiff whose feelings have been wounded" and are not meant to punish the defendant, and punitive damages, which are intended to punish and deter.246 His Lordship further stated that the need for aggravated damages was recognized in the Pilon case, 247 and that he would have awarded them in the present case, except for the fact that they had already been awarded on the basis of mental distress. The principle that punitive damages are not awarded for breach of contract 2 48 has not been observed in several recent cases. In Nantel v. Parisien,249 Mr. Justice Galligan awarded punitive damages for a breach of contract of lease, and in Brown Linden J. concluded that punitive damages may be awarded as a deterrent in those rare situations where a contract has been breached in a high-handed, shocking and arrogant fashion. In Centennial Centre of Science and Technology v. VS Services Ltd.,251 a motion to amend pleadings to include a claim for punitive damages in an action for breach of contract was allowed by Mr. Justice DuPont on the ground that "it is impossible that the law may indeed have evolved to the point where punitive damages ought now to be awarded in the exceptional case of wilful, wanton, malicious, or other 243 (Unreported, Ont. C.A., 14 Sept. 1983). 244 Id. 245 Supra note 236. 246 Id. at 288, 136 D.L.R. (3d) at 61. 247 Supra note 235. 248 See ANSON'S LAW OF CONTRACT 550 (25th ed. A. Guest 1979); G. FRIDMAN, THE LAW OF CONTRACT 564 (1976). 249 18 C.C.L.T. 79, 22 R.P.R. 1 (Ont. H.C. 1981). 250 Supra note 236, at 293, 136 D.L.R. (3d) at 66. 251 40 O.R. (2d) 253, 31 C.P.C. 97 (H.C. 1982). 1983] Ottawa Law Review deliberate unconscionable conduct. .252 C. Contract and Tort A tendency to narrow the distinction between damages in contract and damages in tort is apparent in a number of cases. The established law is that in the case of breach of contract the remoteness of damage must be determined according to the rule laid down in Hadley v. Baxendale,253 which has been interpreted as meaning that the loss must be reasonably contemplated as arising in a great majority of cases. In tort, the test for remoteness is that of foreseeability, which involves a lesser degree of probability. Dicta attempting to narrow this distinction were made in the Victoria Laundry case.254 In Koufos v. C. Czarnikow Ltd.,255 some of the dicta of Asquith L.J. in Victoria Laundry were criticized; their Lordships were in agreement that a distinction should be maintained between "likelihood of happening" in contract and "foreseeability of happening" in tort. In H. Parsons Ltd. v. Uttley Ingham & Co.,256 Lord Denning put forward a proposition that in loss of profit cases the test of "reasonable contem- plation" that is the contract test, should be maintained, but in physical damage cases the test of "foreseeability", that is the tort test, should be applied. Lords Orr and Scarman were not satisfied that such a distinction was sufficiently supported by the authorities, but expressed views that the distinction between "reasonable contemplation" and "forseeability" is to a great extent semantic only. This tendency to narrow the gap between contracts and torts is evident in recent literature257 and in cases discussed above under the headings, Damages for Mental Distress and Aggravated Damages. In Canlin Ltd. v. Thiokol Fibres Canada Ltd.,58 Cory J.A., speaking for the Ontario Court of Appeal, stated that "there is no difference between what a reasonable man might reasonably contemplate and what a reasonable man might reasonably foresee",259 and referred to the Parsons case. 260 This case also confirmed the principle that damages for loss of future profits may be recoverable in an action for a breach of warranty. A number of authorities were reviewed, with the main emphasis placed on Parsons and Sunnyside Greenhouses Ltd. v. Golden West Seeds Ltd. 261 252 Id. at 256, 31 C.P.C. at 101 (emphasis added). 253 9 Ex. 341, 156 E.R. 145 (1854). 254 Victoria Laundry v. Newman Indus. Ltd., [1949] 2 K.B. 528, [1949] 1 All E.R. 997 (C.A.). 255 [1969] 1 A.C. 350, sub nom. The Heron II, [1967] 3 All E.R. 686 (H.L. 1967). 256 [1978] Q.B. 791, [1978] 1 All E.R. 526 (C.A. 1977). 257 See generally supra note 231. 258 40 O.R. (2d) 687, 142 D.L.R. (3d) 450 (C.A. 1983). 259 Id. at 695, 142 D.L.R. (3d) at 459. 260 Supra note 257. 261 [1972] 4 W.W.R. 420, 27 D.L.R. (3d) 434 (Alta. C.A.), affd [1973] 3 W.W.R. 288, 33 D.L.R. (3d) 384 (S.C.C.). [Vol. 15:599