Avoiding Performance: Mistakes and Formation

Question 1

Unilateral Mistakes as to Terms

Remedy for Unilateral Mistake

Answer 1

Void ab Initio - The contract never happened, very harsh. therefore narrowly applied

Question 2

Assumptions

Smith v Hughes

Answer 2

• Test for void ab initio: one party must be mistaken as to the terms of the contract, and knew that the other party was mistaken to the terms of the contract, and capitalized on it (took advantage of it)
• Must be a mistake of the term of contract and not an assumption – pay attention to the words and the context – was something promised or was it just assumed?

Question 3

Terms

Hartog v Colin & Shields

Answer 3

• There is a duty to correct a mistake that is known to not be the real intention of the person making it, you cannot simply take advantage and ‘snap up’ the offer
• Look at objective factors indicating that the party knew of the mistake (prior correspondence, market price, context of the market)

Question 4

Tenders

McMaster University v Wilchair Construction

Answer 4

• Because of the A/B relationship the bidder cannot argue a unilateral mistake of contract A – but can argue the mistake was to render the bid non-compliant. If it was a non-compliant bid, then there is no contract A and the bidder can get their money back

Question 5

Tenders

R v Ron Engineering

Answer 5

• Point #1: Because of the creation of this two-staged analysis, if a tender submits a mistaken bid, he accepts unilateral contract A, and there is nothing to snap at if the bid is a mistake.
• Point #2: there could still be a unilateral mistake arguing in relation to unilateral contract B
  o When you submit your tenders, you are accepting unilateral contract A, but you are also simultaneously making an offer of bilateral contract B.
• If you submitted that bid, and realize that you made a major mistake, then you should just notify the owner of the mistake immediately. The owner would then not be able to select that bid, because if they did, the bidder could make an argument for unilateral mistake.

Question 6

Common Mistake

Types of Common Mistake

Answer 6

• Two types of common mistakes:
  o 1) common law common mistake (CLCM)
  o 2) equitable common mistake (ECM)
• It is a two-phased inquiry where one lies on top of the other
  o 1) If the CLCM test is satisfied, then the contract is void ab initio
  o 2) Even if that test is not satisfied, then you go to the alternative broader, wider, flexible, discretionary ECM. If the ECM test is satisfied, then the contract avoidable, it may be set aside in equity.
   The court will do if the test is satisfied, subject to any third party rights being affected.
• If third party rights are affected, then the ECM will not apply.

Question 7

Common Mistake

Bell v Lever Brothers

Answer 7

• Establishes Test for CLCM – Essentially different test/Difference in kind test:
• The mistake must be the mistake of both parties
• “the mistake is as to the existence of some quality which makes the thing without the quality essentially different from the thing it was believed to be”
• The inquiry is whether the thing actually contracted for is different in kind from what the parties assumed they were contracting for – difference in kind is distinct from difference in degree
• Just because the party would have made a different deal if they had known of the mistake is not enough to grant CLCM – question is whether minds met on the deal that was made regarding the terms and the subject matter

Question 8

Common Mistake

Easy to Satisfy CLCM

Answer 8

1. res extincta: “matter that has ceased to exist”
   - Deals with subject matter that is extinct and does not exist at the time of contracting.
2. res sua: “one’s own thing”, “one’s own property”
   - Deals with mistakes at to title (same idea as res extincta)
   - It happens when you promise to sell something that you do not own, even though you both assume that you own it.

Question 9

Common Mistake

McRae v Commonwealth Disposals Commission

Answer 9

• Limitation to CLCM: if one of the parties has either expressly or impliedly promised that the thing they are mistaken about is in fact true or takes responsibility for the mistake in some other way, then the doctrine of CLCM does not apply – cannot claim mistake about the subject matter not existing when the party impliedly promised its existence
• the ORP based on the parties conduct believe the thing is in fact true
• When one of the parties has taken responsibility for the thing being true then the doctrine of CLCM does not apply and the innocent party can sue for breach of contract
  ** beginning of risk allocation

Question 10

Common Mistake

Solle v Butcher

Answer 10

• The test for the equitable common mistake: It will be unconscientious for the contract to stand in equity, and therefore may be set aside (**and the court can also get creative with the remedy) if:
  1. the parties were under a common misapprehension (mistake) either as to the facts or the relative rights;
  2. provided that this misapprehension was fundamental; and
• ** a change in price will be considered a fundamental difference
  3. the party who seeks to set aside the contract is not at fault (means careless regarding the mistake)
  4. There’s no innocent third party

Question 11

Common Mistake

Great Peace Shipping v Tsavliris Salvage

Answer 11

1. There must be a common assumption as to the existence of the state of affairs that are contracted
2. There must be no warranty (an implied promise) by either party that the state of affairs exists (McCrae)
   - Broader idea of risk allocation which prevents one from suing
   - Walk through evolution of risk allocation (McCrae, Miller, Le)
3. The non-existence of the state of affairs must not be attributable to the fault of either party (attributable to the fault of the person arguing for a mistake)
   - Articulate the evolution of fault (Miller and Lee
4. The non-existence of the state of affairs must render performance of the contract impossible
   - This is the essentially different test
   - In light of the mistake, is the contract now devoid of purpose?
5. The mistake that is being dealt with can relate either to the subject matter or background circumstances surrounding the performance of the contract that were thought to exist when the contract was formed?

Question 12

Common Mistake

Miller Paving Ltd v B. Gottardo Construction

Answer 12

• Rephrases the test to establish CLCM from Lever Brother:: in order to make out an actionable common law common mistake, you must show that the subject matter of the contract has become something essentially different from what it was believed to be
• Threshold matters:
  o 1) Risk allocation: if the risk that the thing is false has been allocated in the contract to either of the parties, then you can’t have either type of mistake.
   When a risk has been allocated to Party A that they could be wrong about the false assumption, then there can be neither CLCM nor ECM as a threshold matter.
   The text of the contract and industry custom can allocate the risk impliedly
  o 2) Fault: if the party who is seeking to argue mistake is at fault for the mistake, then you can’t have either type of mistake.
   In any event that it is Party A’s fault for the mistake, then there can be neither CLCM nor ECM.

Question 13

Common Mistake

Lee v 1435375 Ontario

Answer 13

• Doctrine of caveat emptor: general legal principle of buyer beware
• look at how easy the thing is to verify, how important the thing is?
  Takes an expansive view on the ideas of risk allocation and fault (expanding to include omission)– has the effect of shrinking the operation of both types of mistakes
• General legal principle of buyer beware means that the risk is allocated to the purchaser to satisfy themselves as to the facts that are important to them

Question 14

Common Mistake

Examples of Risk and Fault

Answer 14

Risk evolves:
- Implied warranty (McCrae)
- Allocation based on custom (commercial custom) (Miller)
- Allocation based on legal principle (caveat emptor)
Fault evolves:
- If you are inducing the error in a careless matter then you are at fault (McCrae – just heard gossip about a boat and didn’t fact check
- Can’t just induce the error but has to be careless (sole)

Question 15

Non Est Factum

Saunders v Anglia Building Society

Answer 15

• Creates a two-step test to establish the mistake of non est factum:
  o 1) The document that is signed must be radically, totally, or fundamentally different from what the person thought they were signing.
   It’s not enough to sign something and not know what it says, you have to show that the effect of the contract is radically different.
   This is a very high standard.
  o 2) The mistaken party was not careless in signing the document
   They were not careless in failing to read it

Question 16

Non Est Factum

Marvo Color Research

Answer 16

• Emphasizes step 2 from Saunders- if you are a literate person, and you had an opportunity to read the document and simply chose not to because of laziness or inattention, that will be sufficient carelessness to prevent you from satisfying the second step of the non est factum test

Question 17

Rectification of Mistake

Sylvan Lake Golf and Tennis Club v Performance Industries

Answer 17

To establish a rectification of mistake, the claimant must:
* 1) Prove that there is a prior oral agreement b/t the parties, that precedes the written agreement.
* 2) Prove two sub-steps:
o a) the written agreement does not accord with the prior oral agreement; and
o b) the party resisting rectification either knew or ought to have known at the time that the written agreement did not accord with the oral agreement.
 Actual subjective fraud: the party who resists rectification puts the document in front of you knows that the contract does not reflect the deal that you agreed to orally, and hopes that you just sign it, with ill-intention.
 Constructive equitable fraud: the party who resists rectification ought to have known that the written agreement does not accord with the prior oral agreement, but without ill-intention.
* 3) Identify with precision the exact term of the oral agreement that is different from the written agreement.
o This is extremely narrow. Example: “Please insert this and delete that”
* 4) Demonstrate that steps 1 through 3 are satisfied at a level of convincing proof. Meaning, proof on a balance of probabilities with good evidence at each step.
* 5) Once the actual test is satisfied, the court will consider the magnitude of any carelessness on behalf of the plaintiff. If the plaintiff is careless, the court may not grant the remedy. Generally:
o If the defendant committed actual subjective fraud, then no amount of carelessness will bar the plaintiff from seeking rectification.
o If the defendant committed constructive equitable fraud, then the court will consider carelessness on the plaintiff’s part, which may prevent rectification.

Question 18

Rectification of Mistake

Canada v Fairmont Hotels

Answer 18

• The intermediate standard in step 4 between civil and criminal is no longer – just needs to be proven on a balance of probabilities but justice brown writes that the standard of proof for rectification is still higher than a balance of probabilities
• Cannot use rectification of mistake for a do-over
• Not a mulligan

Question 19

Frustration

Common Mistake v Frustration

Answer 19

• Difference between contractual obligation and reality
• idea of common mistake is the impossibility of performance test (different in kind test), (being called upon to perform something essentially different than what was agreed to).
• Idea of frustration is radical difference or difference in nature of the contractual obligation because of supervening event.
• Comparison of remedies
• CLCM: void ab initio in CL or avoidable in equity
• frustration: the contract has been frustrated. It is a judicial policy that gives you an excuse for non-performance. Obligations are cancelled going forward. The parties are released from each other.

Question 20

Frustration

Paradine v Jane

Answer 20

• Reflects old pre-frustration thinking. There was no such thing as frustration at this time. A deal is a deal and you should have put a condition/clause in the contract if you wanted a way out. The court is not going to judicially input one in for you.

Question 21

Frustration

Taylor v Caldwell

Answer 21

• Where the nature of the contract has an implied condition of continued existence of the thing being contracted for, if the thing ceases to exist, the parties are both excused from performance of the contract.
• Recognizes that there is frustration, but the rationale in this case is very different than today.
  o Court is conservative. Frustration turn on implied terms: both implied term that the music hall would exist, and if the hall burns down you would release each other from the contract. The modern approach recognizes that this was a fiction. The parties never contemplated that the hall might burn down, it’s a fiction.
   Released because there is an implied term b/t the parties that if the hall burns down, the parties will be released from performance of the contract.
  o Today- frustration is a judicial policy to excuse the parties of performance.

Question 22

Frustration

Davis Contractors Ltd v Fareham UDC

Answer 22

• Creates the test for frustration- modern construction approach:
  o 1) Construct the contract: what are you contracting for? what are the mutual promises at the time of the formation of the contract, in light of the prevailing circumstances?
  o 2) Construct the supervening event: what was the supervening/frustrating event?
  o 3) Compare: Is the party now being called upon to perform an obligation that is radically different, in kind or in nature, from which they initially agreed to do because of the supervening event?
  o Limits that also must be considered:
   A) allocation of fault: the party seeking frustration cannot be at fault for the supervening event that changed the circumstances; and
   B) allocation of risk: if the party seeking frustration has assumed the risk of the changed circumstances, then frustration is not available.
• If you assumed the risk that you would perform in light of the new circumstances, then you cannot claim frustration.
• If the supervening event is foreseeable, then frustration will not apply
• Factors that may indicate that one party has assumed the risk of the changed circumstances:
  o Commercial reality or industry norms
  o Foreseeability of the supervening event. Frustration only deals with truly unforeseeable happenings.
  o Fixed-term or fixed-price contract
  o A penalty clause for failing to meet a deadline

Question 23

Frustration

Capital Quality Homes Ltd v Calwyn Construction

Answer 23

Application of modern construction approach

What does risk allocation mean??
- Was the supervening event foreseeable, such that he bore the risk and as a result, the doctrine of frustration would not be available
- Was it foreseen as represented in the contract (some kind of clause or something to show that they anticipated the supervening event like in Davis)

Question 24

Frustration

Edwinton Commerical v Tsavliris Russ

Answer 24

The Sea Angel

Clarifies foreseeability:
- Foreseeability here means likely as a real possibility to occur, meaning that the supervening event is one which an ordinary person of ordinary intelligence would regard as likely to occur.
- A foreseeable event entails that the contracting parties would be expected to turn their minds to the possibility, and thereby allocate the risk to one of the two parties
The court emphasizes some things in relation to the radically different test from 2(b) of the test:
- Frustration is not lightly invoked. The radically different test is very narrow and difficult to satisfy because it undermines freedom of contract, and should only be done so out of fairness.
- Frustration will not be invoked if performing in light of the changed circumstances is still possible, but merely more onerous, time consuming, or expensive.
- In contrast, what you are looking for is that the nature of the obligation has changed. (ex: renting out a burned down dance hall; conveying 1 fee simple rather than 26 fee simples)

Question 25

Frustration

Maritime National Fish v Ocean Trawlers

Answer 25

• Example of modern construction approach being applied and failing for fault and risk allocation.