Chapter 8Consideration and Privity

REVIEW QUESTIONS

1. A gratuitous promise is a promise that is not supported by consideration. A person

who makes such a promise undertakes to give something for nothing. The promise could
constitute consideration for the purposes of a contract, but it is not matched by any
consideration by the promisee.

A gratuitous promise normally is not enforceable in the law of contract. The common law
system long ago decided that it would enforce only those promises that are contained in
bargains. A bargain requires that consideration, or value, be provided on each side of a
transaction.

There are, however, exceptions to the general rule. (1) A seal is not consideration, but it is
treated as a sufficient substitute for consideration. As a result, a promise under seal is
enforceable even though the promise did not receive it in exchange for any consideration.
(2) The doctrine of promissory estoppel also provides an exception to the general rule
regarding gratuitous promises. That doctrine says that a person who makes a promise
may be estopped or prevented from going back on the promise. The promise therefore
may be enforced even though it is not supported by the promisees consideration. In
Canada, however, the doctrine of promissory estoppel applies only within the confines of
an existing contract. It therefore may lead to enforcement of a gratuitous promise to vary
the terms of an existing contract, but it cannot lead to the creation of a wholly new
agreement.

2. There are a number of ways for a person to enter into an enforceable contract
without receiving any benefit from the agreement.
Suffering a Detriment The creation of a contract generally depends upon
consideration. Consideration usually exists because each party gives, or promises
to give, a benefit to the other. However, consideration can also exist if a party
suffers or promises to suffer a detriment to itself. For instance, if one party suffers
a detriment by agreeing to give up smoking and the other party promises to pay
$1000, a contract has been created even though the second party has not received
any (direct) benefit from the first partys promise.
Third Party Beneficiaries Likewise, while each party is generally required to
provide consideration, it is not necessary that each party receive consideration.
For example, Anne and Bryce can have a contract where Anne promises to
transfer her car to Claire and Bryce promises to pay $5000 to Doug. Positive
benefits are provided on either side of the contract, but not to the other contractual
party. (Of course, as third party beneficiaries, Claire and Doug may find it
difficult or impossible to enforce the promises in their favour.)
Seals A seal is a mark that is placed on a written contract to indicate a partys
intention to be bound by the terms of that document even though the other party
may not have given consideration. Although the parties will not have engaged in
the usual bargaining process, a seal acknowledges the parties awareness that they
have entered an enforceable agreement.

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3. The law will not enforce gratuitous promises. Enforcement is available only if a promise
effectively was purchased through the provision of consideration. As a result, a contract generally
requires that consideration be provided on each side of an agreement. Interestingly, however, as
long as each side provides some consideration, the law does not care that one side may be providing
far more or less than the other.

Sufficient consideration is any consideration that is capable of supporting an enforceable agreement.

That concept does not encompass love and affection, but it does include almost everything else
that may be considered valuable. Even a peppercornan item will nearly negligible valuemay
constitute sufficient consideration.

It follows that the law does not insist upon adequate consideration. Consideration is adequate if it
essentially has the same value as the consideration provided by the contractual counterparty.

4. A forbearance agreement is a promise by the plaintiff not to pursue a lawsuit in exchange for
the defendants agreement to pay less money than it allegedly owed. The courts generally uphold
such agreements because they want to encourage the parties to settle their dispute out-of-court.
Moreover, the law presumes that the parties are capable of looking after their own interests, which
means that judges are reluctant to interfere where parties have come to an agreement on their own.
If the plaintiffs claim would have succeeded in court, there is obviously consideration on both sides
of the contract because the plaintiff suffered the detriment of surrendering the right to full damages
and the defendant provided a benefit in the form of an immediate payment of money. Even in a
situation where it is later discovered that the lawsuit would have been unsuccessful, a judge would
likely hold the parties to their agreement provided there was an honest belief in the validity of the
claim. In that situation, the forbearing party suffered a detriment by giving up the right to pursue
legal proceedings which might have resulted in the payment of a larger amount of money. (For
instance, even if the underlying claim was invalid, the judge might have reached an erroneous
conclusion, evidence might have been misinterpreted or lost, or witnesses might not have been
believed.) The situation is different, however, if the forbearing party did not honestly believe in the
legitimacy of its underlying claim. In that situation, the purported forbearance is not good
consideration because the only thing given up was something that the courts are unwilling to
recognize as having value ie a fraudulent legal action.

5. For an agreement to be enforceable, it is not enough that each party provides something that
could count as sufficient consideration. The requirement of mutuality means that each party must
provide consideration in return for the other partys consideration. In addition, each party must be
provided that consideration with the intention of giving something in exchange for the other partys
consideration. There must be a bargain struck between the parties and not just a coincidental
exchange of value. The idea of mutuality, then, reflects the need for a consensus ad idem or meeting
of the minds, as discussed in Chapter 7.

6. Past consideration consists of something that a party provides prior to the contemplation of a
contract. Past consideration is no consideration at all because it is not provided in return for the
consideration that the other party offers under the contract. In such circumstances, since there is no
intention to give something in exchange for the other partys consideration, no bargaining has taken
place and the arrangement is unenforceable. In that sense, the notion of past consideration is related
to the notions of mutuality and the requirement of a consensus ad idem or meeting of the minds.

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7. The statement highlights that it is sometimes difficult to determine whether or not something
is past consideration. Work that is performed prior to the contemplation of a contract amounts to
past consideration. Under such circumstances, the promise to pay a reasonable price for work
previously performed is unenforceable. On the other hand, the promise to pay for work that is
performed before the terms of the contract are entirely settled (ie before the exact price to be paid
for the work is determined) will be enforceable if, viewed objectively, there was a sufficient
meeting of the minds between the parties. Under these circumstances, the work previously
performed is good consideration, rather than past consideration, since the work was provided in
return for the implicit promise that a reasonable price would be paid. The subsequent promise of a
specific price merely provides evidence as to that reasonable price. An example of such a
situation was given in the text in connection with note 10. Lampleigh v Braithwait, which is
referenced in the text and which is explained below in the Case Brief section, provides another
dramatic illustration.

8. A pre-existing public duty cannot be good consideration under a new contract because
people who agree to be public servants make a promise to help the public in times of need. Since
they are already obligated to perform their duties, they do not have anything more to offer as part of
the mutual exchange of value under a new contract. Another reason, which does not rely on the
doctrine of consideration, is that it is against public policy to allow public servants to take
advantage of peoples misfortunes by charging for their services.

9. That rule is often criticized as failing to reflect commercial reality. Financially speaking,
parties to an agreement sometimes fail to appreciate the effort and expense that will be involved in
the performance of a contract. Where that is the case, they may agree that the terms of their original
contract should be revised so as to ensure that the agreement is fair or profitable to both parties.
Moreover, from a non-financial commercial perspective, the parties to an ongoing business
relationship will want to develop and maintain goodwill. For that reason, the agreement to make a
small sacrifice in the short term can lead to larger benefits in the long term.

For the preceding reasons, business people can avoid the rule by simply ignoring it. However, if
they want to avoid the rule in a legally binding manner, they can use one of several strategies.
Novation Business people can use a process called novation in order to discharge their
initial contract and enter into a new agreement with different terms. (The concept of
novation is discussed in greater detail in Chapter 11.)
New Consideration Business people can agree that something new is to be done in
exchange for a higher price than was originally agreed upon. The promise to provide
anything that creates a business advantage amounts to good consideration. For example,
promising a slightly greater quantity of goods, or promising to deliver a shipment somewhat
earlier would have value from a business perspective and, as such, would constitute
sufficient consideration.
Seal A new agreement based on a pre-existing contractual obligation will be enforceable
if placed under seal. A seal draws the parties attention to the importance of making an
enforceable promise outside the usual bargaining process. It therefore fulfils many of the
same functions as consideration and, as such, provides a sufficient proxy for consideration.

10. Quantum meruit is a Latin phrase that means as much as it is worth. That phrase is
used, within the law of contract, when the parties have agreed to buy and sell services, but they
have not stated a specific price. (If the parties have agreed to buy and sell goods, the appropriate
phrase is quantum valebat.) In such circumstances, a court will hold that the buyer must pay
quantum meruit a reasonable price.
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The concept of quantum meruit is closely related to the doctrine of consideration. An agreement is
not enforceable unless each side has provided consideration. Very often, however, the parties do not
expressly address that issue. For example, the plaintiff may have asked the defendant to provide
certain services, but neither may have specified the price. Without a price obligation on the part of
the buyer, there would be no consideration and hence no contract. A court consequently will infer
that the buyer promised to pay a reasonable price. Consideration then exists on both sides of the
transaction the sellers promise of services and the buyers promise of payment and the
agreement is enforceable.

11. There are three non-statutory exceptions to the general rule that payment of a lesser sum
does not discharge a debt of a larger amount.
Seal A promise to accept a lesser sum in discharge of a debt is enforceable if it is
supported by consideration. As usual, a seal can serve as a proxy for consideration.
New consideration The debtor may provide new consideration. That new consideration
may consists of something valuable (eg a car), something of nominal value (ie a
peppercorn), early payment of the lesser sum, or payment in a different mode (eg payment
by cheque, rather than by cash).
Promissory estoppel If the creditor promises to accept less than full payment from the
debtor and the debtor can show: (i) that the creditor unambiguously stated that it would not
enforce its legal rights, (ii) that the debtor relied on the creditors statement, (iii) that the
debtor was not guilty of inequitable behaviour, and (iv) that the creditors statement was
made in the context of an existing legal relationship, then the creditor will not be permitted
to go back and assert its original rights (or at least not without providing sufficient notice of
its intention to do so).

12. Generally speaking, a promise by a creditor to accept less than full payment in satisfaction
of a debt is not enforceable unless supported by fresh consideration. A number of Canadian
jurisdictions have enacted legislation that circumvents this general rule and allows a debt to be
extinguished upon payment of a lesser amount. It is important to note that the legislation typically
requires that at least part of the debt must have been paid for the promise to accept less to be
enforceable.

Provinces with Part Performance Legislation

Alberta
British Columbia
Manitoba
Northwest Territories
Nunavut
Ontario
Saskatchewan
Yukon

Provinces without Part Performance Legislation

New Brunswick
Newfoundland
Nova Scotia
Prince Edward Island

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13. The statement is not quite true. A seal is not a form of considerationit does not consist of
something of value. Instead, it serves as a proxy or substitute for consideration for some purposes.
(Although not discussed in the text, a seal is recognized in law, but not in equity. Equity insists upon
substance, rather than form and therefore requires actual valuable consideration. As a result, for
example, a contract under seal cannot be subject to the equitable remedy of specific performance.)
By completing the solemn (and somewhat bizarre) ritual of sealing a document containing a
promise, a promisor indicates a willingness to be held to a promise despite the absence of any
consideration from the promisee.

14. Promissory estoppel is a doctrine that prevents a party from retracting a promise, even a
gratuitous promise, that the other party has relied upon. The doctrine creates an important exception
to the general rule that the law only enforces promises that have been acquired in exchange for
something else of value. Significantly, the doctrine of promissory estoppel will only apply if four
requirements have been met.
The representor must unambiguously state that it will not enforce its legal rights against the
representee.
The representee must rely upon the statement in a way that would make it unfair for the
representor to retract its undertaking.
The representee must not be guilty of inequitable behaviour.
The representors statement must be made in the context of an existing legal relationship.

The final requirement encompasses the notion that promissory estoppel cannot be used to create
rights that did not previously exist. The doctrine can only be used to protect a representee who
satisfies the other three requirements and who was party to a pre-existing contractual relationship.
For example, a landlord, who obviously has a pre-existing legal relationship with its tenant, and
who has reduced the amount of rent a tenant is required to pay, may not be allowed to go back on its
promise and recover the original amount of rent. (The landlord may, however, enforce the original
rights in the future if it gives reasonable notice of its intention to do so.)

In contrast, if, outside the scope of any pre-existing relationship, a person gratuitously promised a
neighbour that a house would not be built on a particular location (perhaps because it would
interfere with the neighbours view), that promise would not be enforceable.

The issue of promissory estoppel was discussed in further detail in this chapter of the Instructors
Manual under the heading of Additional Teaching Suggestions.

15. The concept of consideration applies to the formation of a contract, whereas the concept of
privity of contract applies to the identification of people who can be involved in the enforcement of
a contract. Despite this difference, the two concepts are closely linked because of the bargain theory
of contract. The privity of contract doctrine refers to the relationship that arises between the
individuals who create a contract. Generally speaking, only parties can sue or be sued on a contract.
Similarly, the consideration doctrine states that, generally speaking, a promise can be enforced only
if it is part of an exchange of value. Consequently, it is usually true that the only parties to a contract
are those people who provided consideration.

It is, however, possible for a person to be party to an agreement without actually providing
consideration. That may occur, for instance, in a three party situation. Both B and C are named in
the contractual document as promisees of As promise even though only B provided consideration
for As promise. Both B and C can enforce the promise against A: Coulls v Bagots Executor &

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Trustee Co Ltd (1967) 40 AJLR 471 (Aust HC); S Waddams The Law of Contracts 4th ed (1998) at
193-194.

16. Contractual obligations cannot be assigned because, generally speaking, the contractual
party must perform personally. Quite often, a contract is intended to secure the services of someone
in particular. For example, if a famous actress is cast to star in a play, she cannot send her
understudy in her place. Likewise, if a world-renowned chef agrees to appear on a cooking show, he
is not entitled to send his apprentice in his place. In both of these examples, it is the contractual
partys personal skills that the other party bargained for.

Vicarious performance is not a form of assignment. It does, however, provide an exception to the
general rule precluding assignment of contractual obligations where the contractual partys personal
skills are not essential to performance. Vicarious performance can occur if a contractual party
arranges for a stranger to fulfill the obligations imposed by a contract. So if a person enters a
contract with a representative from a construction company to have a skyscraper built, the person
cannot reasonably expect the sales representative to undertake the work alone. The actual work will
be performed by someone else, perhaps under a sub-contract. The construction company,
nevertheless, remains liable to the person who pays for the skyscrapers construction.

17. The doctrine of privity states that only those individuals who are parties to a contract can sue
or be sued. In some situations, however, basic fairness requires that a right of enforcement be
available to a third party beneficiary as well.

A life insurance contract may be created between the insured and the insurance company. The
insured, however, wants an assurance that, when he dies, the company will pay a benefit to his
named beneficiary. Since that beneficiary is not a party to the contract, enforcement presumptively
is not available.

Likewise, a set of parents may purchase car insurance from an insurance company with the
intention of protecting both themselves and their children. The company will charge a price (or
premium) that reflects all of the protected parties. Nevertheless, a child who has an accident and
seeks protection presumptively would be met by the companys argument that the child is not privy
to the agreement and therefore cannot enforce it.

Legislation now exists in every Canadian province and territory that allows the insurance company
to be sued by the intended beneficiary. As a result, despite not being technically a party to the
insurance contract, a right of enforcement is available to the beneficiary of a life insurance policy
and to a child who was included in his or her parents drivers insurance.

18. A Himalaya clause is named after the case in which it was first formulated. 1 It is a special
term of contract that protects a third party beneficiary from liability in the context of maritime
shipping. Special rules protect a carrier from liability for damage done to goods that were damaged
during transport. The owner of the goods therefore cannot successfully sue the carrier for the full
value of lost or damaged goods.

As a way around that special rule, the owner might sue the actual individuals stevedores who
damaged the goods while loading or unloading them from the ship. In order to protect those
individuals, a carrier began insisting that the carriage contract (between the carrier and the owner)
1 Adler v Dickson (The Himalaya) [1955] 1 QB 158 (CA).
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included a Himalaya clause that said that (1) the stevedores liability was limited, and (2) the
carrier acted as the stevedores agent in arranging that protection.

Courts soon accepted that a separate contract limiting liability arose between the property
owner and the stevedore once the stevedore began the task of handling the goods. A Himalaya
clause therefore is not really an exception to the privity rule. Instead, it involves a process that leads
to a new contract being created for the benefit of the stevedores.

19. To say that an assignment is taken subject to the equities is to say that the debtor
generally can use the same defences against the assignee that could have been used against he
assignor. The precise extent to which that is true however, depends upon the circumstances.

Same Transaction The assignee is always subject to any defences or counterclaims that the
debtor could have exercised against the assignor and that arose in connection with the same
transaction that I subject to the assignment. It would be inequitable or unfair to expect the debtor to
honour an obligation under the transaction, while not also allowing the debtor to take advantage of
any offsetting rights that exist in connection with the same transaction.

Different Transaction The situation may be different, however, if a debtor wants to rely
upon a right or counterclaim that arose against the assignor in connection with a different
transaction.
Transaction Before Notice It is fair and equitable to allow the debtor to rely upon that
right or counterclaim if the debtor was unaware of the assignment. In that instance, the
debtor might argue that it entered into the second transaction with the assignor only because
it believed that it could thereby reduce it liability under the first (assigned) transaction.
Transaction After Notice In contrast, the debtor cannot rely upon a right or
counterclaim arising under a second transaction with the assignor if that transaction arose
after the debtor was notified of the assignment. in that instance, the debtor entered into the
second transaction with the assignor despite knowing that liability under the first transaction
lie against the assignee, rather than the assignor. Since the debtor was aware that the two
transaction were separate, it is fair to allow the assignee to enforce the first transaction, clear
of any countervailing rights arising under the second transaction.

20. Judges allow employees to take advantage of exclusion clauses for several reasons.
Judges are influenced by the practical reality of the situation. Where there is an exclusion
clause, the employees expect to be protected by it in the event that something goes wrong. It
would be unjust to allow the customer to later undermine that expectation by invoking the
privity doctrine. Likewise, a customer usually realizes at the outset that a company will not
perform a contract itself (indeed, as an artificial person, a corporate entity cannot do so). The
customer knows that the companys employees will perform the actual work. Consequently,
the reasonable expectation of the parties is that the exclusion clause will protect the people
ie the employees who are actually at risk of liability.
From a financial perspective, employees may not have the resources to pay for what often
amounts to considerable damages. In London Drugs Ltd v Kuehne & Nagel International
Ltd, for example, the employees negligent handling of London Drugs transformer caused
damages in the amount of $33 955.41.
An exclusion clause is normally used in a commercial context to signify which contractual
party should arrange insurance against a particular type of loss. Consequently, having been
alerted to the need for insurance, a contractual party is not treated unfairly if it is precluded
from suing with respect to a loss that was designated as its own responsibility.
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CASES AND PROBLEMS

1. In our legal system, promises generally are enforceable only if they are supported by
consideration. There are certain exceptions, however, that allow for the enforcement of gratuitous
(ie non-purchased promises). Unfortunately for Millie, her claim against Douglas does not come
within either the general rule or any of the exceptions.

Consideration
Douglas promise to pay $100 000 was not supported by any consideration from Millie. There is no
suggestion in the facts that the money was to be a loan, which Millie would be required to repay.
Douglas instead promised a simple gift. Furthermore, it is irrelevant that Millie intended to use the
money for a bakery and that she already has contractually obliged herself to buy certain supplies
and equipment. The facts do not indicate that she became obliged to do so in exchange for the
receipt of Douglas payment. Consideration may be positive or negative. Millies actions and
reliance could constitute consideration for a promise of payment, but in this situation, there was no
mutuality between Douglas promise and Millies reliance acts.

Seal
A gratuitous promise is enforceable if it is made under seal. Millie sealed a document in which she
acknowledged receipt of Douglas promise of payment. In order to sue Douglas, however, Millie
would have to prove that he placed his promise under his seal. The requirement pertains to the
promisor, rather than the promisee.

Promissory Estoppel
A gratuitous promise may be enforceable if it gives rise to a promissory estoppel. That doctrine may
apply if a promisee detrimentally relies upon a promise. It is unnecessary, however, to even consider
in detail the four elements of promissory estoppel. In Anglo-Canadian law, the doctrine merely
applies within an existing contract (or other legal relationship) to enforce a promise to refrain from
strictly adhering to a legal right. The doctrine cannot be used to create a new contract. In this
instance, Douglas promise did not occur within the context of an existing contract. He and Millie
had no prior legal relationship.

2. As a general rule, a contract is not created unless both parties have provided consideration.
Consideration may consist of either a benefit or a detriment a party may either provide
something of value or suffer a valuable loss. In this situation, John Sebastien clearly provided
consideration when he promised to pay $100 000. The Goldberg Conservatory, however, did not
provide any consideration. It did not promise to give anything to Sebastien. Nor did it promise to
suffer any sort of loss. Significantly, it had already decided to acquire the organ when it placed the
newspaper. It did not incur any expenses in connection with Sebastiens promise.

It therefore appears that Sebastiens promise is not enforceable. There are, however, exceptional
circumstances in which gratuitous promises (ie promises that are not supported by consideration)
may be enforced. There is nothing to suggest that Sebastien applied his seal to his promise. The
Conservatory therefore would argue for the doctrine of promissory estoppel. In essence, it would
say that Sebastien had given a promise, and that in the circumstances, it would be inequitable (or
unfair) for him to go back on that promise. That argument would not, however, succeed on these
facts.

Promissory estoppel requires proof of four elements: (i) a promise by the representor, (ii) reliance
upon that promise by the representee, (iii) the lack of inequitable behaviour by the representee, and
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(iv) an existing legal relationship between the parties. The Conservatory could satisfy elements (i)
and (iii). Sebastien had given a promise and there is nothing to suggest that the Conservatory acted
improperly. With respect to element (ii), however, the Conservatory did not rely upon Sebastiens
promise. It intended from the outset to acquire the organ. Furthermore, with respect to element (iv),
there is no evidence that the parties shared a pre-existing relationship. While there occasionally is
disagreement, the general view is that promissory estoppel can be used to vary existing rights, but it
cannot be used to create entirely new rights. For instance, a landlord may be held to its promise to
accept a reduced rent from a tenant (Central London Property Ltd v High Trees House Ltd [1947]
KB 130 (KB) discussed in Case Brief 8.4). In the current case, however, the Conservatory could
not use promissory estoppel to impose a legal obligation upon Sebastien.

Looking beyond the immediate facts, it is interesting to note that the problem of gratuitous promises
often affects charitable undertakings. A simple promise to donate money is unenforceable. To get
around that problem, a charity may give some sort of consideration. It may promise to provide a
benefit to the promisor (eg by agreeing to name the wing of a building after him). Or it may
promise to suffer a detriment (eg by spending money on a project that it otherwise would not have
carried out).

[Based on Dalhousie College v Boutilier [1934] 3 DLR 593 (SCC).]

3. Following Gilbert Steel Ltd, Hardy Construction is not required to pay the extra $20 000
because it has not received anything new in exchange for its promise to do so. Canadian courts have
held that a pre-existing obligation owed to the same party cannot serve as consideration for a new
contract.

However, Hardy Construction might consider some or all of the following factors when deciding
whether or not to honour its promise:
making the additional payment creates an advantage that arises out of the continuing
relationship between the parties, which is another way of saying that small sacrifices often
lead to larger benefits in the long run,
making the additional payment will help to develop and maintain goodwill, and
successful business people are those who remain flexible and appreciate that initial
predictions as to cost, labour and the length of time necessary to complete the project are
sometimes under-estimated.

The English Court of Appeal has recently recognized the importance of maintaining ongoing
business relationships and has moved away from the rigid application of the doctrine of
consideration in that context. In Williams v Roffey Bros, Lord Russell said that, while consideration
is still a fundamental requirement for an enforceable agreement, the courts should be more willing
to find its existence where such a finding reflects the true intentions of the parties. On facts that are
very similar to those in the present case, the House of Lords found that the contractor had received a
new practical benefit insofar as it was relieved of the need to find a replacement sub-contractor and
insofar as it was saved from incurring the penalty under the main contract. The decision would have
been different, however, if the sub-contractor had improperly exploited the contractors
vulnerability to extract the promise of additional payment.

[Based on Williams v Roffey Bros & Nicholls Ltd [1990] 1 All ER 512 (CA) which is discussed
below in a Case Brief.]

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4. A court most likely will find that Lampleigh is contractually obliged to pay $25 000 to
Braithwait. Although the case may appear to involve past consideration (ie Braithwait rendered
services before Lampleigh promised to pay $25 000), that actually is not true.

Past consideration consists of something that a party did prior to the contemplation of a contract. In
this case, however, the parties exchanged promises, and created a full contract, at the outset. When
Lampleigh asked Braithwait for assistance, he expressly requested her services and he impliedly
promised to pay. Braithwait accepted that contractual offer by promising to use her best efforts on
his behalf.

Although there was no mention of a price at that point, Lampleighs request carried an implicit
promise to pay quantum meruit (ie reasonable value). If the parties had not said anything more, a
court would quantify that promise by looking to market values. On the facts, however, there is no
need to do so because Lampleigh, in subsequently promising to pay $25 000, effectively filled in
the gap. Braithwait, in implicitly agreeing to that sum, accepted that $25 000 was appropriate for
quantum meruit. (If Braithwait had not accepted a promise of that amountbecause she believed a
higher price was warranteda court would again look to evidence of market value.)

Although the point was not mentioned in the text (though the concept is explained in Chapter 12),
unjust enrichment would entitled Braithwait to restitution even if a contractual claim against
Lampleigh failed. And once again, in determining quantum meruit (as a restitutionary, rather than a
contractual, measure of relief) a court would accept the parties estimate of $25 000, instead of
calculating relief on the basis of evidence regarding market value.

[Based on Lampleigh v Braithwait (1615) 80 ER 255 (KB).]

5. This question is concerned with concepts of consideration and forbearance. As a general

rule, a contract is not valid unless it is supported by consideration on both sides. Consideration may
be either a benefit or a detriment a party may either provide something of value or suffer some
valuable loss.

Forbearance may fall into the latter category of consideration. That may be true if a party, in
exchange for the receipt of money, gives up the ability to secure judicial enforcement of a legal
right. That is clearly true if the right in question was in fact valuable ie if a court would have
enforced it. A difficult issue may arise, however, if a party forbears on a purported right which, if
brought to court, would have been rejected. In that situation, it may seem as though the party has
not really given up anything at all ie that he or she has not really provided any consideration.
Nevertheless, forbearance of a purported right does often constitute consideration. The party has
given up the right to legitimately bring the issue to a judge for determination. There is also a strong
policy incentive to characterize forbearance of a purported right as consideration. Such a rule
encourages settlements and allows disputes to be resolved with a high degree of finality.

An exception to that rule is, however, recognized if the party actually knew that the purported right
was in fact unenforceable. In that situation, the party does not really give up anything at all. It knew
that it had no right to bring the matter before a judge. Furthermore, it would be highly undesirable
for the law to enforce agreements that are not only based don a mistaken assumption, but that are
also induced through fraud.

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In the present case, a court would set aside the settlement agreement and allow Mr Chin to recover
$300 000. Because the Public Trustee knew of Mrs Moss death, it knew that it did not have any
right to the money. It therefore did not actually suffer any detriment that was capable of constituting
consideration. And in the absence of consideration, the purported contract was not really a contract
at all.

6. Roark will not be permitted to use the doctrine of promissory estoppel as a cause of action.
Despite the original intentions of the parties, the Blacksox are not bound to abide by the promise of
their president. The reason for that is simple: the presidents statement was not made in the context
of an existing legal relationship. Canadian courts still generally adhere to the view that promissory
estoppel can act as a shield, but not a sword. It can be used to vary or suspend existing legal rights,
but it cannot be used to create new rights.

It sometimes is suggested that estoppel should have a broader role and that it should act as both a
shield and a sword. The Australian High Court endorsed that proposition in Waltons Stores
(Interstate) Ltd v Maher (as previously explained under Additional Teaching Suggestions).
Waltons is distinguishable from the present case, however, because the deal fell through without
fault by either party and because the Blacksox did not act in bad faith.

Some students might suggest that the result in this case is unfair. Both parties believed that a
contract would be created and the Blacksox encouraged Roark to act on that basis. Consequently,
they may suggest that while it may not be possible to fulfil Roarks expectations and to order the
Blacksox to pay $100 000, as would occur under a contract, it would seem desirable to at least
compensate Roark for his expenses (or possibly apportion those expenses between the parties). As
the law presently stands, however, there is no clear means for doing so. The law effectively takes
the position that Roark assumed the risk of disappointment by starting work without first
concluding a contract.

In some situations, however, the courts have used the action in unjust enrichment to award
restitution to the party that performed the services: eg William Lacey (Hounslow) Ltd v Davis
[1936] 2 KB 403. That approach should not work in a case like this, however, where the defendant
did not receive any enrichment from the plaintiff. While Roark undoubtedly suffered a deprivation
insofar as he expended time and effort, the Blacksox did not thereby receive any benefit because,
given the local governments decision, the architectural plans could not be used.

In the final analysis, this type of case appears to fall through the cracks. While a court may
occasionally manipulate the rules to effect a fair result, general principles perhaps surprisingly
indicate that Roark will receive nothing.

7. Christine probably remains liable to pay the remainder of the debt to Black Crow Music
Inc. The root of the problem lies in the general rule, under Foakes v Beer, that a promise to accept
payment of a smaller sum in discharge of a larger debt is unenforceable for want of consideration.
Although Christine, as the debtor, would receive an obvious benefit, she appears not to provide any
consideration. And without any consideration, BCMIs promise to accept the lesser sum in
fulfillment of the larger obligation is not enforceable. That presumptively is true even after the
company has taken receipt of the lesser sum.

Christine has (depending upon the jurisdiction in which the case arises) one or two arguments in her
favour, but they probably will not succeed.

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Seal A seal is not consideration, but it is a substitute or proxy for consideration. It
therefore may render a party liable despite the absence of any consideration from the other
side. The pro cess involved in a seal in effect warns a party that it is about to give something
for nothing. In this case, however, the seal is provided by Christine, rather than the
company. It therefore is useless. The question is not whether she will be held to the
agreement, but rather whether BCMI will be barred from demanding payment of the
outstanding $10 000. The company would be barred only if it gave its promise under seal.
Statute Several provinces (British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, and the territoriesas cited in the text) have legislation that allows for the
discharge of a larger, by payment of a lesser sum, in certain circumstances. Significantly,
however, that legislation applies only if the creditor actually accepts part payment in
discharge of the whole. The provision is not triggered if a creditor merely promises to do so.
Such a promise can be retracted anytime before payment actually is received with the
requisite intention. The facts of this case fall into the latter category. Although BCMI
promised to accept $15 000 in discharge of the debt of $25 000, it changed its mind before
Christine paid. Accordingly, when the company received the lesser sum, it did so without the
intention to forgive the remainder. It therefore is entitled to the outstanding amount.

8. This question concerns the principle that only a party (ie someone with privity) can sue on a
contract. In this case, Everlast will not be entitled to recover $1000 from AJs because it was a
stranger to the resale agreement. Although Everlast was privy to its contract with Automotive
Wholesaler, and although Automotive Wholesaler was privy to its own contract with AJs, there was
no direct contractual connection between Everlast and AJs.

Perhaps the easiest way in which Everlast would have acquired a right of enforcement against AJs
was through the use of a trust. In contracting with Automotive Wholesaler, Everlast could have
included a clause that required Automotive Wholesaler to sub-contract on trust. In that situation,
when contracting with AJs, Automotive Wholesaler would have acted on its own behalf and, by
way of trust, on behalf of Everlast. In other words, Automotive Wholesaler would have received
AJs promise for its own benefit and for the benefit of Everlast. In that situation, Everlast, as
beneficial or equitable owner of AJs promise, would have been entitled to enforce that promise.
The trust analysis is possible, however, only if the parties to the relevant contract (ie Automotive
Wholesaler and AJs) intended to create a trust relationship for the benefit of Everlast.

Everlast might also be able to enforce payment of $1000 if it received an assignment of Automotive
Wholesalers rights against AJs. There is, however, no way in which Everlast could compel
Automotive Wholesaler to do so. Significantly, although AJs has refused to pay the $1000 penalty,
Automotive Wholesaler was not in breach of its agreement with Everlast. Automotive Wholesaler
merely promised Everlast that the sub-contracts would include the sub-buyers undertakings to pay
the penalty. Automotive Wholesaler fulfilled that promise since AJs gave such a undertaking (even
though it subsequently broke that undertaking).

[Based on Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 (HL) which is
discussed below in a Case Brief.]

9. Claire did not bargain for the $8000 and she gave nothing in return for Brunos agreement to
pay. She therefore cannot compel Bruno to fulfill his promise.

In theory Ann can recover the $8000 because she is the one who provided the consideration to
Bruno. However, in practise, the courts might decide that Ann should not receive the money
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because she is not the one who suffered the loss. The usual remedy for breach of contract is
compensation (as discussed in Chapter 12). In this case, however, Ann did not suffer a loss. Even if
Bruno performed as promised, he would have paid money to Claire, and not to Ann. Consequently,
Ann did not suffer a loss as a result of Brunos breach and therefore might be limited to nominal
damages.

There may be a solution to that problem. Provided that Ann and Brunos contract did not stipulate
that their rights are non-assignable, Ann can transfer her rights under the agreement to her sister so
that Claire can pursue an action against Bruno. Even on that analysis, however, there may be a
problem. As the assignee, Claire would acquire the rights of Ann, as the assignor. Ann, however, did
not have the right to substantial relief against Bruno. Consequently, if Claire receives exactly what
Ann had, Claire also would be left without substantial relief.

A court would presumably struggle to avoid that conclusion. Before the assignment, Claire could
not successfully sue because while she suffered a loss, she did not have privity. Likewise, Ann could
not successfully sue because while she had privity, she did not suffer a loss. Following the
assignment, a court therefore might be motivated to allow Claire to argue that she both suffered a
loss (as the third party beneficiary under the contract) and had privity (as assignee of Anns rights as
a contractual party).

10. This is a relatively difficult question because it requires students to extrapolate from the
materials that are contained in the text, and to come up with a new principle. Although top students
may be expected to come up with the correct answer, the focus should generally be on the ability
to identify the underlying problem and to recognize the possibility of using an analogy to extend the
scope of the established rules.

The basic problem is that Can-Dive is attempting, as a third party beneficiary, to enforce a
contractual benefit that was created between Fraser River and London Insurance. As a general rule,
a party without privity (ie a party that did not participate in the formation of the contract) cannot sue
or be sued on an agreement. That rule has been criticized, however, as being occasionally unfair and
contrary to business expectations. The legislatures and the courts have therefore created a number of
exceptions.

In London Drugs Ltd v Kuehne & Nagel International Ltd (discussed below in a Case Brief), the
Supreme Court of Canada created an exception in the employment context. According to that
exception: (i) if an company enters into a contract with a customer for the purpose of limiting the
customers ability to sue either the company or its employees, and, (ii) if an employee creates a loss
while performing an act that is contemplated by that contract, then the customer cannot sue either
the company or the employee. In other words, despite a lack of privity, employees are allowed to
take the benefit of a contract that was created for their protection.

In Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd, the Supreme Court of Canada extended
that analysis to the current situation. It expressly created a new exception to the privity rule under
which a third party beneficiary can rely on the terms of an insurance policy if the contractual parties
so intended. That intention is determined on the basis of two factors: (i) the contractual parties must
have intended to extend the benefit of their agreement to the third party seeking to rely on the
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contractual provision, and (ii) the activities performed by the third party seeking to rely on the
contractual provision must be the very activities contemplated as coming within the scope of the
contract.

Those conditions were met on the facts. (i) Can-Dive was included with the class of third party
beneficiaries (charterers) to which the insurance contract referred. (ii) The ship was lost while Can-
Dive was acting as expected. The court also held that Can-Dives rights could not be varied by a
subsequent agreement between Fraser River and its insurer. Finally, the court held that the new
exception was merely an incremental development, and, moreover, one that comported with
commercial reality. Given the terms of the insurance policy, it was reasonable for the parties to
expect that Can-Dive would be protected from a subrogated claim by the insurer.

[Based on Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd (1999) 176 DLR (4th) 257
(SCC) which is discussed below in a Case Brief.]

11. The company is protected by the Waiver of Liability document because it was a party to it.
The document is part of the contract of carriage that was created between Ontario Cruises Inc and
Rose Adler. In exchange for the right to enjoy the cruise, the plaintiff both paid the $50 price and
agreed that neither the company nor its employees could be held liable if their negligence caused
her to suffer a loss or injury.

Wallis Boatswain claims the protection of the same exclusion clause. He cannot do so. The doctrine
of privity states that only a party to a contract can sue or be sued upon it. By the same token, only a
party to a contract can claim the benefit of an exclusion clause contained in the agreement. There
are exceptions to that general rule, but none apply in Wallis favour.

The London Drugs Exception

The rule in London Drugs creates an exception to the privity doctrine that operates in favour of
employees. An exclusion clause often is contained in a contract created between a customer and a
company. In practice, however, the negligence that may lead the customer to sue for damages is apt
to be committed not so much by the company itself, but rather by its employees. Furthermore, those
employees are not normally in a position to negotiate with the customer with a view to creating a
contract that contains an exclusion clause for the employees.

Practical justice accordingly led the Supreme Court of Canada to create an exception to the privity
doctrine that allows an employee to take the benefit of a contractual exclusion clause that operates
in favour of the employer. That exception requires proof that (1) the employee was expressly or
impliedly contained within the terms of the exclusion clause, and (2) the accident occurred while
the employee was performing work that was required by the contract.

In this instance, the Waiver of Liability expressly refers to OCIs employees. Those employees
therefore would have been protected if their carelessness had caused Roses injuries. Significantly,
however, Wallis was not employed by OCI. The facts instead state that he was employed by the
province, which owned the pier.

The Himalaya Exception

Similar reasoning explains the privity exception that arises in connection with a Himalaya clause.
Special rules limit the liability of a carrier in maritime matters. In practice, however, loss or injury
is apt to be caused not by the company that owns the ship, but rather by employees and agents, such
as stevedores. Those individuals may be protected under a Himalaya clause.
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A Himalaya clause is a contractual term in a contract of carriage that purports to limit liability not
only for a carrier and its employees, but also for other individuals who provide related services. The
carrier effectively acts as agent for the purposes of creating a contract between those workers and a
passenger. And that contract limits the liability of the workers.

Ironically, in the lead case itself, the court recognized the possibility of an effective Himalaya
clause, but nonetheless imposed liability upon the defendant stevedore. The clause that was
contained in the contract of carriage did not purport to protect individuals in the defendants
position. That is true in this instance as well. Although OCI could have drafted its Waiver of
Liability to cover someone like Wallis, it did not do so. Wallis therefore is fully liable for Roses
damages.

[Based on Adler v Dickson (The Himalaya) [1955] 1 QB 158 (CA), which is discussed below in a
Case Brief.]

12. The architectural firm is not entitled to the benefit of the exemption clause and it therefore
will be liable to the builders.

The doctrine of privity states that only a party may sue or be sued on a contract. That is true even if
a contract contains a promise by one party to provide a benefit to a third party. Although such a
promise constitutes sufficient consideration, and therefore can be used to create a valid contract, it
does not result in the third party being privy to the agreement.

A third party accordingly can claim the protection of an exemption clause in a contract only if a
court is willing to recognize an exception to the general privity doctrine. One such exception was
created by the Supreme Court of Canada in London Drugs Ltd v Kuehne & Nagel
International Ltd (as discussed in Case Brief 8.6). Iacobucci Js two-part test requires the third
party to prove that (1) the contractual exemption clause extended to the third party, either expressly
or impliedly, and (2) the loss against which the third party seek protection arose in the manner
contemplated by the exemption clause. Significantly, though not a formal part of the London Drugs
test, Iacobucci J also stressed the practical reality of the situation in that case. Low level employees
in a warehouse were being sued for an enormous loss. Those employees lacked the means to protect
themselves through personal exemptions clauses or third-party (liability) insurance policies.
Moreover, the plaintiff, in signing the exemption clause with the employer, expressly chose to
protect itself through first-party (property) insurance.

As a matter of both precedent and principle, London Drugs would not extend to protect the
architectural firm against the builder. The first branch of Iacobucci Js test could not be satisfied
because the exemption clause purported to protect only the province. It was not intended to protect
the architects. Moreover, unlike the vulnerable employees in London Drugs, the architectural firm
could easily protect itself, either by purchasing liability insurance or by appending a disclaimer
clause to the plans that it drafted. (The possibility of disclaiming responsibility for negligent words
was discussed in Chapter 6 in connection with the case of Hedley Byrne.) That was the conclusion
reached by the Supreme Court of Canada in the case upon which this exercise is based.

[Based on Edgeworth Construction v ND Lea & Associates (1993) 107 DLR (4th) 169 (SCC).}

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