Managing The Law The Legal Aspects of Doing Business 4th Edition Mcinnes Solutions Manual

Managing the Law The Legal Aspects of
Doing Business 4th Edition McInnes

Solutions Manual
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Chapter 8–Consideration and Privity
CHAPTER 8
CONSIDERATION AND PRIVITY
CONTENTS
Teaching Approach
Additional Teaching Suggestions

1. Past Consideration and Implicit Promises to Pay
2. Past Consideration and Moral Obligations
3. Promissory Estoppel—Shields and Swords
Discussion Boxes
1. You Be The Judge 8.1—Forbearance to Sue
2. Ethical Perspective 8.1—Past Consideration
3. Business Decision 8.1—Equities Arising from the Assigned Contract
4. Business Decision 8.2—Equities Arising from Other Transactions
Review Questions
Cases & Problems
Case Briefs
TEACHING APPROACH
In Chapter 7, we began to examine the formation of contracts by looking at the issues of
intention to create legal relations, offer, and acceptance. In this chapter, we complete our
examination of contractual formation by addressing the issue of consideration.
In many ways, whatever difficulties the issue may hold for a general audience, business
students should feel quite comfortable with the basic concept of consideration. The
requirement of consideration emphasizes that the paradigm of an enforceable agreement
is a commercial bargain. “Bargain” in this context refers not to “a good buy,” but rather
to a process in which each party trades one thing to get another. And while exceptions
naturally exist, business people are not in the habit of giving something for nothing. They
expect to be held to their word only if they received something in return for it. Of course,
that expectation itself is engendered by the existing rules: business people do not expect
to be held to gratuitous promises precisely because, at least in part, the law says
otherwise. Nevertheless, the basic proposition is sound. The business instinct looks for
exchanges, not gifts.
That commercial paradigm of contract clearly emerged during the nineteenth century
when the English courts, perhaps to better facilitate the industrial revolution and to
promote London as a centre of world commerce, formulated rules and principles in a way
that reflected a business orientation. The same focus was seen in the last chapter in
regards to an intention to create legal relations. Such an intention is presumed in
commercial matters, but not in social or domestic matters. As suggested in the
Instructor’s Manual, one explanation for those presumptions arises from the desire of
English judges to promote commerce, while also minimizing the extent to which business
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Copyright © 2014 Pearson Canada Inc.
men might be hampered in their pursuit of profit by the need to honour familial
undertakings. Likewise, while it would be entirely possible to have a system of contract
law that was based on the parties’ actual intentions, English courts adopted a model based
on the objective intentions of the reasonable person. A business person does not want to
be hampered by the need to ascertain a customer’s subjective beliefs. The flow of
commerce is encouraged by rules that allow people to proceed on the basis of
appearances.
Although the commercial paradigm of contract law was developed over a hundred years
ago, it generally continues to apply today. Not surprisingly, however, the fit is now
sometimes awkward. Ideas and principles appropriate to England in the nineteenth
century are not always appropriate for Canada in the twenty-first century. Consequently,
while business students will generally feel reasonably comfortable with the insistence
upon an exchange of consideration, they will also recognize that some situations may call
out for exceptions. Interestingly, that occasionally is true even in a commercial context.
As the text explains in connection with Gilbert Steel Inc v University Construction Ltd, it
sometimes makes sense to enforce gratuitous promises in the business world. And indeed,
while the process is slow and unsteady, there is a discernable trend in contract law toward
enforcing non-bargain promises, at least in some circumstances. A seal has always
provided a notable exception. And more recently, the doctrine of promissory estoppel, as
developed by Lord Denning in Central London Property Ltd v High Trees House Ltd, has
made further inroads into orthodox thinking. But significantly, as matters currently stand
in Canada, promissory estoppel can still only be used as a shield, but not a sword. It can
vary or suspend existing rights, but it cannot create contractual rights anew. As Lord
Denning himself said in Combe v Combe [1951] 2 KB 215 at 220:
“Seeing that the principle [of promissory estoppel] can never stand alone
as giving a cause of action in itself, it can never do away with the
necessity of consideration when it is an essential part of the cause of
action. The doctrine of consideration is too firmly fixed to be overthrown
by a side-wind. Its ill-effects have been largely mitigated as of late, but it
still remains a cardinal necessity of a formation of contract, though not of
its modification or change.”
As discussed in the notes below, however, there are signs that some courts are willing to
take a more robust view of promissory estoppel (or “injurious reliance,” as the Americans
call it). Students therefore should be encouraged to critically consider if and why law
should continue to generally insist upon a “bargain” as a pre-condition to the enforcement
of promises.
The first part of this chapter addresses the issue of consideration. Having completed our
survey of the elements that go into the creation of an enforceable agreement, we then turn
to the closely related questions as to who can sue or be sued under a contract. Once again,
the basic idea underlying the doctrine of privity of contract should be readily appreciated
by a business student. A bargain exists between two parties. It is, in essence, a private
ordering of affairs and hence excludes the outside world. If A contracts with B, they
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expect to resolve any resulting difficulties between themselves. They do not expect that
other parties will seek relief or be held liable (even if one such third party was intended to
obtain a benefit under the agreement). Once again, however, there are situations in which
those basic propositions sit uneasily with actual practice, even in the commercial world.
We therefore also consider the growing list of exceptions to the general privity doctrine.
ADDITIONAL TEACHING SUGGESTIONS

Past Consideration and Implicit Promises to Pay
As discussed in the text, the doctrine of past consideration can be avoided if the
defendant initially requested a benefit from the plaintiff in a way that implicitly carried a
promise of remuneration. A subsequent promise of a specific price then is enforceable as
evidence of the reasonable price that the parties initially and implicitly agreed upon. The
classic case of Lampleigh v Braithwait is cited in note 10 and is explained below in the
Case Briefs section. As an additional exercise, students might be asked to consider the
appropriate response if the subsequent promise pertained to an amount that was more or
less than reasonable. Although there are few cases on point, a promise of more than a
reasonable amount might well be enforceable because it would not impose an intolerable
burden upon the defendant who, after all, voluntarily chose the amount in question. In
contrast, if the subsequent promise was less than reasonable, it would not bind the
plaintiff. The subsequent promise is merely evidence of the reasonable price. The court
therefore would require the defendant to pay a greater amount than it actually promised.
Past Consideration and Moral Obligations

The relationship between the doctrine of past consideration and the morality of enforcing
promises can be illustrated in class by a pair or remarkable American decisions. Webb v
McGowin is cited in note 12 of the text and is described below under the Case Briefs
section. The court in that decision ignored principle in support of their conception of
morality and enforced a promise to pay that the defendant made after being heroically
rescued by the plaintiff. In Harrington v Taylor 36 SE 2d 227 (NC SC, 1945), Lee Taylor
was about to be decapitated by his axe-wielding wife when Lena Harrington intervened to
prevent the blow. In doing so, she suffered a badly mutilated hand. Mr Taylor later
promised to compensate Ms Harrington for her trouble. However, he subsequently
refused to honour that promise. The court believed that Mr Taylor owed a moral
obligation to Ms Harrington, but, because of the doctrine of past consideration, it refused
to recognize the existence of a contract between the parties.
Promissory Estoppel – Shields and Swords

Students could be invited to consider why Canadian courts generally continue to adhere
to the traditional view that promissory estoppel can be used as a shield but not a sword. In
other words, it can be used to prevent a party from retracting a gratuitous promise to
suspend or modify existing rights, but it cannot be used to create new rights extra-
contractually. In that regard, students could be asked to reflect on the both the morality of
promising and the traditional view that agreements are normally enforceable only if they
are the products of bargains that involve an exchange of value.
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Does Canadian society still sufficiently adhere to the 19th century belief in the sanctity of
commercial arrangements, to the exclusion of other sources of rights? Should it be
possible for one party to get something for nothing, so long as there is clear evidence that:
(i) the representor promised to act in a certain way, (ii) the representee relied on that
promise in such a way that it would be unfair or harsh if the representor was allowed to
act contrary to its promise, and (iii) the representee was not guilty of inequitable
behaviour? In those circumstances, why should the law not recognize the creation of new
rights, even outside the context of an existing contractual relationship between the
parties?
There are several arguments in favour of allowing promissory estoppel to act as a sword,
as well as a shield.
 First, even on settled principle, contractual consideration need not be adequate.
Unless there is some impropriety in the transaction, something of great value can
be sold, under the clichéd example, for a peppercorn.
 Second, the law in the United States has developed the doctrine of injurious
reliance. While the position is not invariably endorsed, many American courts
and commentators favour a rule under which a representee can get some relief
(though not necessarily full enforcement of the gratuitous promise – perhaps
merely compensation for the injurious reliance) if it has detrimentally relied upon
the representor’s representation and if it was reasonably foreseeable that the
representation would induce such a reaction.
 Third, the High Court of Australia has allowed promissory estoppel to create new
rights even in the absence of an existing contract: Waltons Stores (Interstate) Ltd
v Maher (1988) 164 CLR 387. Maher hoped that Waltons would lease its
premises for the purpose of operating a store. Under such an arrangement, the
existing buildings would have to be demolished and the property would have to be
redeveloped to Waltons’ specifications. Although no formal contract was ever
created, Waltons gave Maher assurances that the lease would be signed. Maher
therefore proceeded with the demolition and redevelopment work. Some time
later, Waltons abruptly announced that it no longer was interested in the property.
The evidence indicated that Waltons had acted in bad faith and that it had secretly
kept Maher dangling for many months. The High Court held that Waltons was
estopped from denying its earlier representations that the lease would be signed. It
stressed that the doctrine of consideration was not being abolished in a “back-
handed way” because whereas a contract supported by consideration will lead to
expectation relief, the appropriate remedy for estoppel is the minimum that must
be done in order to equitably protect the representee’s reliance.
 Fourth, other forms of estoppel, such as proprietary estoppel (which is discussed
below in the case brief of Willmott v Barber) can create new rights outside of the
context of an existing legal relationship.
Students could also be asked to reflect, from a business perspective, on the practical
implications of creating new rights on the basis of promissory estoppel. Are business
people prepared to potentially give something for nothing? How often would such a
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doctrine apply? Would it be consistent with the reasonable expectations that business
people generally share?
DISCUSSION BOXES
You Be The Judge 8.1
Forbearance to Sue
1. An exchange of consideration is required for the creation of a legally enforceable
agreement. In this case, Igor promised to pay $50 000 in exchange for the company’s
promise not to sue him for the full $60 000. The forbearance to sue constitutes sufficient
consideration because it has value from a legal perspective. Consequently, the company
can force Igor to pay the $50 000. (As suggested by Case Brief 8.1, however, the
situation would be different if the company did not honestly believe that Igor could be
held liable for the loss.)
2. Provided the company had a bona fide – that is, honest – belief in the validity of
the claim at the time it agreed not to pursue its lawsuit, then it gave up something of
value. The company was entitled to press a claim against Igor. Moreover, as in this case,
even unsuccessful claims are often settled for some portion of the total damages that are
claimed. Likewise, unmeritorious claims sometimes even succeed if a matter proceeds to
full trial. Judges sometimes make mistakes and evidence is sometimes lost or
misinterpreted. Consequently, by forbearing to sue, the company did give up something
of value – ie the opportunity to commence a formal process that might allow it to recover
something more than the $50 000 that Igor promised to pay.
3. When discussing this question, students should be encouraged to observe several

points.
 The courts are eager to find the existence of a contract because it encourages
settlement and finality.
 This in turn helps to eliminate the amount of expensive litigation that makes its
way through the courts.
 If courts refused to recognize the existence of a contract, it would undermine the
bargaining process upon which contract law is based.
 Judges want to protect the parties’ freedom to contract and their ability to arrange
their own affairs. In this case, it meant a great deal to Igor that his reputation
would remain untarnished. From Igor’s perspective, it was a good bargain for him
to agree to pay the $50 000, even with the knowledge that the company may not
have been successful in court. This point re-emphasizes the notion that there is an
element of risk-taking involved in the bargaining process and that the courts will
not protect the parties from a bad bargain.
Ethical Perspective 8.1

Past Consideration
1. Each student can be expected to answer the question as to whether or not Heena
has a moral obligation to pay. There is, of course, no correct answer. Most students
presumably will suggest that Heena has some moral obligation, but perhaps not one that
necessarily requires an annual payment of $500. (They may, however, suggest that
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Heena’s own proposal fairly fixed the proper amount of the reward. A similar process
was discussed in connection with note 10.) It is also possible, however, that some
students will deny the existence of a moral obligation. They may adopt a rigidly
individualistic approach such that Heena has no moral obligations that she did not
voluntarily assume. Conversely, they may adopt a communalistic approach that suggests
that the rescuer was subject to a moral obligation to help Heena in her time of need and
that the discharge of that duty is rewarding in itself.
Whether or not one believes that Heena had a moral obligation to pay the money she
promised depends on one’s individual beliefs. As we saw in Chapter 7 in respect of firm
offers, moral and legal obligations do not always coincide. Under the circumstances,
Heena has no legal obligation to pay the annual $500 because the assistance she received
was given prior to the contemplation of the contract. Since there was no mutuality of
consideration, there is no enforceable contract.
2. Leaving aside the rules regarding past consideration, students should notice that
the general rules regarding the formation of a contract (as discussed in Chapter 7) are not
satisfied. For example, there was neither a meeting of the minds between the parties, nor
an intention to create legal relations. For further discussion, students can be asked to
consider the following proposition: even though the rescuer may be morally deserving of
the annual payment, for the sake of consistency and predictability, it is more important to
protect the notion of contractual relations as a bargaining process.
Students can also be asked to comment on whether they find anything discomforting
about enforcing a promise that was made by the rescued party who was quite likely in a
fragile and shaken state of mind. The issue of capacity to contract is considered in
Chapter 10.
Finally, although the issue is addressed only briefly in Chapter 12, some students might
instinctively recognize the possibility of a claim for unjust enrichment. While there are
few cases on point, there is some support for the view that a rescuer should be entitled to
restitution for services rendered. In Matheson v Smiley [1932] 2 DLR 787 (Man CA), a
physician attended to a man who had attempted to commit suicide with a shotgun blast to
his chest. The man did not request the services. To the contrary, the evidence indicated
that he resisted help (although, in the circumstances, he may have lacked legal capacity to
issue any binding commands). Nevertheless, although the man eventually died, the doctor
was awarded remuneration for his efforts. (Of course, with respect to the measure of
relief, there is likely to be a difference between restitution – which does no more than
return the value of the services to the rescuer – and reward – as proposed by Heena).
Business Decision 8.1

Equities Arising from the Assigned Contract
1. An assignment is subject to the equities. That means that the debtor can generally
use against the assignee the same defences and counterclaims that it could use against the
assignor. Where, as in this case, a defence or counterclaim arise out of the same
transaction that was the subject of the assignment, the rule applies very broadly. The
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debtor can use the defence or counterclaim regardless of whether or not it arose before
the assignee notified the debtor of the assignment. Consequently, Ahmad will only be
liable to pay $20 000. Although he is indebted under the contract for $60 000, he enjoys a
$40 000 counterclaim that arose under the same contract as a result of Stetson’s shoddy
performance. (The assignee presumably has the right to sue Stetson under the contract of
assignment on the basis that he or she did not actually receive what he or she paid for – ie
the right to collect $60 000 from Ahmad. The agreement between the assignor and the
assignee may, however, vary the usual rules in that regard.)
Business Decision 8.2

Equities Arising from Other Transactions
1. Once again, the assignee takes subject to the equities. In this case, however, there
is an important difference. The defence or counterclaim in question did not arise in
connection with the same transaction that is the subject of the assignment, but rather in
connection with a separate transaction. In that situation, the debtor can use the defence
or counterclaim against the assignee only if the defence or counterclaim arose before the
assignee provided the debtor with notice of the assignment.
Consequently, if the student (the assignee) gave notice to White (the debtor) before
Citron (the assignor) became indebted to White for the receipt of the paper products, the
student would be entitled to demand the full $7000 from White. White would not be
entitled to off-set the $5000 rights that is subsequently acquired against Citron as a result
of the paper product transaction.
2. In contrast, if the student (the assignee) gave notice to White (the debtor) after
Citron (the assignor) became indebted to White for the receipt of the paper products, the
student would only be entitled to demand $2000 from White. White would be entitled to
off-set the $5000 rights that is subsequently acquired against Citron as a result of the
paper product transaction.
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
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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 promisee’s 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 party’s 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 party’s
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.
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 peppercorn—an item will
nearly negligible value—may 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.
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4. A forbearance agreement is a promise by the plaintiff not to pursue a lawsuit in

exchange for the defendant’s 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 plaintiff’s 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 party’s
consideration. In addition, each party must be provided that consideration with the
intention of giving something in exchange for the other party’s 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 party’s 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.
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
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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 people’s 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
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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.
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 seller’s
promise of services and the buyer’s 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
creditor’s statement, (iii) that the debtor was not guilty of inequitable behaviour,
and (iv) that the creditor’s 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
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Yukon
Provinces without Part Performance Legislation

New Brunswick
Newfoundland
Nova Scotia
Prince Edward Island
13. The statement is not quite true. A seal is not a form of consideration—it 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 representor’s 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 neighbour’s view), that promise would not be
enforceable.
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The issue of promissory estoppel was discussed in further detail in this chapter of the
Instructor’s 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 A’s promise even though
only B provided consideration for A’s promise. Both B and C can enforce the promise
against A: Coulls v Bagot’s Executor & 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 party’s 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 party’s 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 skyscraper’s 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
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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 company’s 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’ driver’s
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) 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.
1
Adler v Dickson (The Himalaya) [1955] 1 QB 158 (CA).
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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 company’s 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.
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
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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. Millie’s actions and reliance could constitute consideration
for a promise of payment, but in this situation, there was no mutuality between Douglas’
promise and Millie’s 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 Sebastien’s promise.
It therefore appears that Sebastien’s 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 (iv) an existing legal relationship between the parties. The
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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 Sebastien’s 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
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different, however, if the sub-contractor had improperly exploited the contractor’s

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.]
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, Lampleigh’s 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 amount—because she believed a higher price was warranted—
a 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
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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.
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 president’s
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 Roark’s
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
8-19
undoubtedly suffered a deprivation insofar as he expended time and effort, the Blacksox
did not thereby receive any benefit because, given the local government’s 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,
BCMI’s 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.
 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 territories—as 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
AJ’s 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 AJ’s, there was no direct contractual connection between Everlast
and AJ’s.
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Perhaps the easiest way in which Everlast would have acquired a right of enforcement
against AJ’s 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 AJ’s, 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 AJ’s promise for its own benefit and
for the benefit of Everlast. In that situation, Everlast, as beneficial or equitable owner of
AJ’s 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 AJ’s) 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 Wholesaler’s rights against AJ’s. There is, however, no way in which
Everlast could compel Automotive Wholesaler to do so. Significantly, although AJ’s 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 AJ’s 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 Bruno’s
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 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
Bruno’s breach and therefore might be limited to nominal damages.
There may be a solution to that problem. Provided that Ann and Bruno’s 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
8-21
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 Ann’s 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 customer’s 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 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-Dive’s 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.
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[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 OCI’s employees. Those
employees therefore would have been protected if their carelessness had caused Rose’s
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.
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
8-23
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 defendant’s 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 Rose’s 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 J’s 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 J’s 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.
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[Based on Edgeworth Construction v ND Lea & Associates (1993) 107 DLR (4th) 169
(SCC).}
CASE BRIEFS
Dalhousie College v Boutilier Estate [1934] 3 DLR 593 (SCC)—note 1
The claimant college launched a campaign to raise funds for general operating purposes.
The defendant was persuaded to sign a document that stated: “For the purpose of
enabling Dalhousie College to maintain and improve the efficiency of its teaching, to
construct new buildings and otherwise to keep pace with the growing need of its
constituency and in consideration of the subscription of others, I promise to pay [$5000 to
the treasurer of the college].” Despite that promise, the defendant died without making
payment and the claimant sued to enforce the promise.
The Supreme Court of Canada held that the promise was non-binding and unenforceable.
(1) Because there was no evidence that other prospective donors in fact promised gifts in
exchange for the defendant’s promise, those other promises did not constitute
consideration for the defendant’s undertaking. (2) Likewise, even if the claimant could
prove that it incurred expenditures in reliance upon the defendant’s promise, there was no
evidence that the claimant had provided consideration, in the form of a binding promise
of expenditures of projects, in exchange for the defendant’s promise. (3) The court could
not imply a promise, on behalf of the claimant, to act as consideration for the defendant’s
promised gift.
Currie v Misa (1875) LR 10 Ex 153 (HL)—note 2

This case contains one of the most frequently quoted definitions of consideration: “A
valuable consideration, in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance, detriment, loss or
responsibility, given, suffered or undertaken by the other.”
Hamer v Sidway 27 NE 256 (1891 NY CA)—note 4

This case illustrates the proposition that consideration needs to be sufficient, but not
adequate. In other words, the party must give a benefit or suffer a detriment, but the
courts generally are not concerned with the actual value of that consideration. This case
also illustrates that consideration can be negative, in the sense that it is enough if the
party suffers some detriment, even if the other party is not thereby provided with some
benefit. An uncle promised payment of $5000 in exchange for his nephew’s promise to
refrain from drinking, smoking, swearing, and playing cards before he turned 21 years of
age. The nephew lived a clean life during the relevant period and claimed payment of the
money. The uncle agreed to pay the $5000, but said that he would hold it until the young
man was old enough to act responsibly with such a large amount. The uncle then died and
the nephew claimed payment from his estate. The court allowed the claim on the basis
that the nephew had provided consideration for the uncle’s promise.
Moss v Chin (1994) 120 DLR (4th) 406 (BC SC)—note 8

Mr Chin ran down Mrs Moss at a pedestrian crosswalk. Because she suffered severe brain
damage, her interests were represented by the Public Trustee. The Public Trustee sued Mr
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Chin in the tort of negligence and claimed, among other things, the cost of Mrs Moss’s
future medical expenses. Over time, as negotiations between the parties progressed, Mrs
Moss’s physical condition deteriorated, and she eventually died. The Public Trustee,
however, hid that fact from Mr Chin and convinced him to settle the lawsuit for a certain
amount of money.
Mr Chin later learned that he had paid for future medical expenses for a woman who was
already dead. He convinced a judge to set aside the settlement contract and refund the
money that had been paid. Although the courts generally uphold settlement agreements,
the judge said that the Public Trustee could not enforce an agreement that it created
dishonestly.
Stott v Merit Investments Inc (1988) 48 DLR (4th) 288 (Ont CA)—note 9
The basic facts are provided in You Be The Judge 8.1.
Eastwood v Kenyon (1840) 113 ER 482 (CA)—note 10

Sarah Sutcliffe was an orphan and an heiress to a substantial amount of money. The
plaintiff agreed to act as her guardian during her infancy. In that capacity, he borrowed
money to pay for her education. She promised to repay that amount when she reached the
age of majority. Sarah later married the defendant, who also promised to repay the
plaintiff for the money that he had spent on Sarah’s education. In fact, however, neither
Sarah nor her defendant husband made repayment. The plaintiff then sued the defendant
on his promise. The claim failed because the defendant’s promise was only supported by
past consideration insofar as the plaintiff paid for Sarah’s education before the defendant
promised to repay that amount. And since past consideration is no consideration at all,
there was no contract between the parties. The case also illustrates the proposition that the
mere presence of a moral obligation is insufficient to create an enforceable right out of a
promise to pay.
Lampleigh v Braithwait (1615) 80 ER 255 (KB)—note 12

The defendant committed a murder. He asked the plaintiff to secure a pardon from the
king. The plaintiff went to a great deal of effort on the defendant’s behalf and
successfully obtained a pardon for him. The defendant then promised to pay £100.
However, he later refused to honour that promise. The plaintiff sued for £100. The
defendant argued that his promise was unenforceable because it was given in exchange
for past consideration insofar as the plaintiff rendered the services before receiving the
specific promise of payment. The court found in favour of the plaintiff. It held that the
defendant’s initial request for help contained an implied promise to pay a reasonable
amount for the plaintiff’s services and that the subsequent promise of £100 merely
specified that amount.
Webb v McGowin 168 So 2d 196 (Ala CA 1935)—note 13

The parties worked together in a lumber mill. The plaintiff saw that a 75 pound block of
wood was about to fall on the defendant. The plaintiff therefore grabbed onto the block
and diverted its path as he fell to the ground with it. The defendant later gratefully
promised to pay the plaintiff $15 every two weeks for the rest of the plaintiff’s life. The
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defendant fulfilled his promise, but after his death, his estate refused to make the
payments to the plaintiff. The plaintiff sued the estate for breach of contract. Somewhat
surprisingly, the court allowed the claim. That decision seems irreconcilable with the
doctrine of past consideration. It is clear that the court was motivated to ignore principle
for moral reasons. It believed that the defendant (and his estate) were morally obliged to
compensate the plaintiff for his heroic efforts.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 All ER 512 (CA)—note
15
The defendant’s agreed to repair a block of flats for a third party. The terms of that
contract exposed the defendant to substantial penalties if the work was not completed on
schedule. The defendant then sub-contracted the project to the plaintiff for a set price.
The plaintiff soon fell behind schedule because it had agreed to complete the project for a
price that was too low and because it had poor work habits. The defendant then promised
the plaintiff extra money if it brought the project back on schedule. Although the plaintiff
did so, the defendant refused to pay the additional amounts. The plaintiff then sued for
breach of contract. The defendant replied by arguing that its promise of more money was
not supported by any fresh consideration.
The court rejected that plea and found in favour of the plaintiff. It held that the past
consideration doctrine was largely a product of an outdated 19th century philosophy of
rugged individualism. It also held that a modern approach should reflect the fact that
parties occasionally legitimately recognize the need to revise the terms of their bargain
after it has been started. It therefore held that while a promise is not enforceable if it is
entirely unsupported by new consideration, there was, perhaps contrary to first
appearances, new consideration on the facts. The court held that the defendant received a
new practical benefit insofar as it avoided a penalty under the primary contract with the
third party and insofar as it was not required to retain another sub-contractor to complete
the project. However, the court also held that the promise of extra payment would not be
enforceable in such circumstances if it was extracted from the defendant as a result of the
plaintiff’s duress. (The concept of duress is discussed in Chapter 10.)
Greater Fredericton Airport v Nav Canada (2008) 290 DLR (4th) 405 (NBCA)—note
15
The defendant entered into an Aviation and Services Facilities Agreement (ASF) with the
government of Canada. Canada assigned its interests to the claimant. The ASF imposed
upon the defendant certain obligations and certain expenses regarding the operation of an
airport.
The claimant decided to extend a runway and asked the defendant to re-locate certain
equipment as part of that project. The defendant objected to the proposal and insisted that
it would make more sense to purchase new piece of equipment called a DME. Although
the ASF required the defendant to bear the expense of the DME, the defendant refused to
proceed unless the claimant agreed to bear the cost instead. As the defendant knew, the
claimant was in a very difficult situation: (1) the overall project had to occur promptly,
(2) the defendant enjoyed a virtual monopoly position, and (3) the defendant was
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threatening a breach of contract. The claimant accordingly promised payment under

protest. Once the project was complete, however, the claimant refused to pay for the
DME.
The claimant would have prevailed under the traditional rules. The claimant’s promise to
pay for the DME constituted a revision of the ASF, but the defendant had not provided
any fresh consideration in support of that change.
The New Brunswick Court of Appeal, however, held that the traditional rule is outdated,
capable of injustice, and frequently avoided on specious grounds. It therefore attempted
to strike a new balance between the competing interests of preventing economic duress
and respecting bona fide variations of ongoing contracts. Whereas the traditional rule
simply prohibited such variations in the absence of fresh consideration, the new rule
allows enforcement of a genuine variation in the absence of fresh consideration as long
as the variation is not the product of illegitimate pressure.
On the facts, that meant that the parties’ variation prima facie was enforceable,
notwithstanding the fact that the defendant gave nothing in exchange for the claimant’s
increased contractual burden. Going further, however, the court also held that the
defendant had improperly extracted the claimant’s promised payment.
Significantly, if this decision is adopted elsewhere in the country, it will take Canadian
law well beyond English law. While the English decision of Williams v Roffey Bros holds
that a contractual variation may be supported by the practical consideration of actual
performance, Nav Canada says that a contractual variation may be enforced despite the
absence of any new consideration.
DeLuxe French Fries Ltd v McCardle (1976) 10 Nfld & PEIR 414 (PEI CA)—note 16
The defendant agreed to sell 20 000 bags of potatoes to the plaintiff. The parties agreed
on a price, as well as on a delivery schedule. After delivering less than 2000 bags, the
defendant announced that he would not be able to deliver any more unless the plaintiff
paid a higher price. The plaintiff agreed to that arrangement. The defendant, however,
delivered only about 3400 more bags. The plaintiff then sued for damages for breach of
contract. In calculating damages, the court had to determine the correct purchase price:
the initially agreed amount or the subsequently adjusted amount. The court found that
following the defendant’s demand for a higher price, the parties had terminated their
original contract and created a new one, on exactly the same terms, with the exception of
the inflated price.
Foakes v Beer (1884) 9 App Cas 605 (HL)—note 17

The defendant owed approximately £2090 to the plaintiff under a judgment. That
judgment bore the right to interest. The parties then entered into an agreement under
which the plaintiff agreed to give the defendant time to pay the judgment and the
defendant promised to pay £500 immediately and £150 according to a schedule until the
full amount of the judgment (without interest) was paid. The defendant fulfilled its
promises, but the plaintiff insisted that it was entitled to receive interest on the judgment.
8-28
The defendant argued that that right was eliminated by the parties contract. The plaintiff,
in response, argued that a contract was never created because the defendant did not
promise to give anything by way of consideration under the agreement that it was not
already obliged to give under the judgment. The court found in favour of the plaintiff and
ordered the defendant to pay the accrued interest on the judgment. It held that the mere
renewal of a promise to pay an existing debt is not fresh consideration. It also held that,
generally speaking, a promise to receive part payment only on a larger debt is not
enforceable.
Foot v Rawlings (1963) 37 DLR (2d) 695 (SCC)—note 18

The defendant owed a large amount of money to the plaintiff under a set of promissory
notes. (Promissory notes are discussed in detail in Chapter 14.) Under the terms of those
notes, the defendant was required to pay $400 per month at 8 percent interest. The parties
then entered into a new agreement under which the defendant was only required to pay
$300 per month at 5 percent interest. Under the terms of that agreement, the defendant
promised to (and in fact did) give a series of post-dated cheques to the plaintiff. In
exchange, the plaintiff promised that it would not sue on the notes so long as the
defendant complied with the new agreement. The plaintiff cashed one of the cheques that
it received from the defendant, but then claimed payment under the original terms of the
promissory notes.
The issue for the court was whether the parties’ agreement was enforceable. The answer
depended upon whether or not the defendant had given fresh consideration for the
plaintiff’s promise to refrain from suing on the promissory notes. The court found in
favour of the defendant. It recognized that consideration is not provided by a mere
promise to pay a lesser sum in the same manner as originally contemplated. However, it
also said that consideration is provided if there is a promise to pay a lesser sum in a new
manner In effect, the plaintiff agreed to accept a lesser sum in discharge of the original
debt in exchange for the fact that the defendant provided payment by way of cheques,
rather than in the mode initially contemplated. That decision should be compared with the
decision in D & C Builders v Rees.
D & C Builders v Rees [1965] 3 All ER 837 (CA)—note 18

The plaintiff renovated the defendant’s shop for a price of £746. The defendant paid
£250, but did not want to pay the rest of the bill. The defendant then offered to pay £300
in full satisfaction of the debt. It did so with full knowledge that the plaintiff’s financial
situation was very weak. The plaintiff agreed to that arrangement because it feared that,
without the money, it would become bankrupt. However, after it received the £300, it
sued for the rest of the original debt. The court found in favour of the plaintiff. It held that
the parties agreement was unenforceable because it was not supported by fresh
consideration on the defendant’s behalf. The court also rejected the proposition that the
Supreme Court of Canada had approved in Foot v Rawlings. Although the defendant had
paid with a cheque, rather than with cash as originally contemplated, the court held that
the different mode of payment did not constitute new consideration.
8-29
The court also considered the possibility of enforcing the promise on the basis of the
doctrine of promissory estoppel. As discussed in another part of this chapter, a gratuitous
promise that is unsupported by consideration may occasionally be enforceable on that
basis. However, the court said that promissory estoppel was not available to the
defendant, which had acted in bad faith. The defendant had tried to exploit the plaintiff’s
financial vulnerability by threatening to pay nothing unless the plaintiff agreed to accept a
lesser sum in full discharge of the original debt.
Graham v Voth Bros Construction (1974) Ltd [1982] 6 WWR 365 (BC Co Ct)—note 21
The defendant owed money to the plaintiff. The defendant knew, however, that the
plaintiff was on the verge of bankruptcy, and that without an immediate infusion of cash,
would not be able to pay its employees. The defendant therefore refused to pay anything
until the plaintiff agreed to accept a reduced amount. The plaintiff succumbed to the
threat. Nevertheless, after receiving part payment, it sued for the remainder of the original
amount. The judge reviewed the cases and the statute, and concluded that the legislation
did not constitute a complete code. More specifically, it was subject to the court’s ability
to set aside unconscionable agreements. The plaintiff’s claim was therefore successful.
Royal Bank of Canada v Kiska (1967) 63 DLR (2d) 582 (Ont CA)—note 22
The defendant allegedly guaranteed a loan that the plaintiff bank gave to a third party.
The defendant signed a document. Although the defendant did not separately attach a seal
to it, the word “seal” was already printed on the document next to the space where the
defendant signed. The majority of the Ontario Court of Appeal found that the guarantee
was enforceable because it was supported by consideration. Laskin JA, however, did not
agree that consideration existed. He therefore considered the possibility that the promise
was enforceable without consideration by virtue of a seal. He stressed that a seal can
serve as a substitute for consideration because it involves a formal process through which
a person acknowledges that he or she is giving a promise without returning anything in
exchange. He therefore insisted that, while there no longer is a need to use hot sealing
wax and ornate insignias, there must be some semblance of a formality. And in that
regard, the mere fact that a document contains the word “seal” properly serves as an
invitation to observe a proper formality and it is not a substitute for a formality.
Consequently, the promise in this case was not placed under seal and, according to
Laskin JA, was not enforceable.
Willmott v Barber (1880) 15 Ch D 96 – note 24

John Barber leased land from William Bowyer. The terms of that lease prohibited Barber
from assigning his interest to a third party without Bowyer’s consent. Barber nevertheless
gave an option to Joseph Willmott for the purchase of the leasehold interest. In reliance
upon that option, Willmott entered upon the premises and made substantial improvements
to the land. He then attempted to exercise the option. Barber refused to cooperate,
however, because Bowyer would not consent to the proposed arrangement. Willmott
consequently claimed, on the basis of the doctrine of proprietary estoppel, that Bowyer
was required to consent to the assignment of the leasehold interest.
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Fry J held that such estoppel requires proof that: (i) the plaintiff acted under mistake as to
his legal rights regarding the land, (ii) the plaintiff expended money or energy on the faith
of that mistake, (iii) the defendant, the possessor of the land, knew of the existence of his
own rights that were inconsistent with those contained in the plaintiff’s mistaken belief,
(iv) the defendant knew of the plaintiff’s mistaken belief, and (v) the defendant
encouraged the plaintiff’s actions either actively or by failing to assert his rights. If those
requirements are met, then the defendant may be estopped from denying the truth of his
earlier representation. On the facts, however, Willmott could not establish the doctrine
against Bowyer. In particular, there was no evidence that Bowyer knew that he was
entitled to veto any attempt by Barber to assign his leasehold interest to Willmott, nor
was Bowyer aware that Willmott mistakenly believed that he could exercise his option to
acquire the lease without first obtaining consent from Bowyer as the lessor.
Jorden v Money (1854) 5 HL Cas 185 (HL)—note 25

Mr Money was indebted to Mrs Jorden. On several occasions, she promised that she
would never demand payment. Subsequently, however, she changed her mind and
demanded payment. Mr Money argued that she was estopped from doing so. The House
of Lords rejected that argument on the basis that an estoppel must pertain to an existing
fact. Mrs Jordan’s comments, in contract, pertained to her future intentions.
John Burrows Ltd v Subsurface Surveys Ltd (1968) 68 DLR (2d) 354 (SCC)—note 26
The plaintiff sold a business to the defendant. As payment, the defendant provided a
promissory note that called for payment to be made in monthly instalments. (Promissory
notes are discussed in Chapter 14.) The note also said that the entire payment was
accelerated and due immediately if the defendant failed to make an instalment on
schedule. The defendant was habitually late in making payments under the note, but the
plaintiff did not initially invoke the acceleration clause and demand full payment. The
principals of the parties then experienced a personal dispute. When the defendant next
failed to pay on schedule, the plaintiff purported to exercise the acceleration clause. The
defendant argued that the plaintiff was estopped from doing so. The court disagreed. It
held that mere habitual non-enforcement of strict contractual rights does not constitute a
representation that those rights will not be enforced. The representation underlying
promissory estoppel must unequivocally indicate an intention to suspend existing
contractual rights.
D & C Builders Ltd v Rees [1965] 3 All ER 837 (CA)—note 27

A brief of this case appears above.
Maracle v Travelers Indemnity Co of Canada (1991) 80 DLR (4th) 652 (SCC)—note 28

The plaintiff purchased an insurance policy from the defendant. That policy required
action to be taken under the policy within one year from the date of an insurable event.
The plaintiff’s building was destroyed by a fire. The defendant offered to settle the claim
for a certain amount of money. The plaintiff did not respond to the offer. Shortly after the
one year, contractual limitation period expired, the plaintiff started an action against the
defendant for payment. The defendant pleaded the limitation period. The plaintiff argued,
under promissory estoppel, that the defendant’s offer to settle was an admission of
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liability and, furthermore, implicitly carried a promise that it would not enforce the one
year limitation period. The Supreme Court of Canada rejected the plaintiff’s argument
and found in favour of the defendant. It held that an offer to settle or an admission of
liability does not implicitly contain a representation that a contractual limitation period
will not be enforced. In discussing the doctrine of promissory estoppel, the court
consistently referred to the suspension of existing contractual rights. In other words, it
supported the traditional view that promissory estoppel is a shield, but not a sword – it
can lead to the variation of existing rights, but not to the creation of new rights.
Re Tudale Exploration Ltd v Bruce (1978) 20 OR (2d) 593 (HCJ)—note 28

The defendant granted the plaintiff a three year option to acquire certain mining claims.
The agreement said that the option could only be modified in writing. That period was
twice extended in writing. The defendant then orally agreed to extend it for a further
period. Before the expiration of that period, however, the defendant stated that the option
had expired. The plaintiff then wanted to exercise the option. It argued that the defendant
was prevented by the doctrine of promissory estoppel from insisting upon its contractual
rights. On that view, the defendant had made an oral representation to the effect that the
strict contractual rights would not be enforced. The plaintiff also argued that it had relied
upon that representation. The court agreed. The ratio of the case is reconcilable with
established law insofar as the plaintiff used promissory estoppel as a shield to prevent the
defendant from retracting a representation to the effect that it would not strictly insist
upon its existing contractual rights. However, the court also suggested in dicta that
promissory estoppel can also create new rights. In other words, the court controversially
suggested that promissory estoppel can be used as either a shield or a sword.
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 (HL)—note 29
The plaintiff sold tires to a party named Dew. That contract prohibited Dew from re-
selling the tires at a discount unless the sub-buyer agreed to abide by the plaintiff’s list
price for the tires. Dew re-sold the tires to the defendant. Dew and the defendant also
created a subsidiary contract (to the main sales contract) under which the defendant: (i)
agreed to abide by the plaintiff’s list price, and (ii) promised to pay £5 to the plaintiff for
each tire that it sold in violation of that list price. The defendant re-sold some tires to a
fourth party for less than the plaintiff’s list price. The plaintiff sued the defendant. The
court rejected that claim. The plaintiff’s contract was with Dew. The defendant had a
separate contract with Dew. However, there was no contractual relationship between the
plaintiff and the defendant. Consequently, although the defendant had breached its
subsidiary agreement with Dew, and although that agreement called upon the defendant
to pay compensation to the plaintiff in such circumstances, the plaintiff could not enforce
that provision against the defendant.
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR

277 (HL)—note 30
The defendant agreed to buy land from the plaintiff for £850 000. Under the terms of that
agreement, the defendant was to pay £150 000 to a third party. The plaintiff claimed that
the defendant had breached the contract and sued for compensatory damages. The House
of Lords found that the defendant had not committed a breach of contract. However, in
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dicta, it said that if the defendant had broken the agreement, the plaintiff could not claim
relief with respect to the £150 000 that the defendant was to have paid to the third party.
Contractual damages are intended to compensate the plaintiff for its loss. But since the
amount in question was to have been paid to the third party, and not to the plaintiff, the
plaintiff would not have suffered a compensable loss.
Vandepitte v Preferred Accident Insurance Co [1933] AC 70 (PC)—note 37

Mr Berry purchased liability insurance coverage for his vehicle from the defendant
insurance company. That insurance policy was contained in a standard form document
and was said to cover not only Mr Berry but also anyone driving his car with his consent.
While driving her father’s car with his consent, Jean Berry caused an accident that injured
the plaintiff, Alice Vandepitte. Mrs Vandepitte sued the defendant insurance company
and argued that the insurer was liable for Jean’s actions under the terms of her father’s
policy. In response, the defendant company argued that while Jean fell within the
wording of that policy, she was not a party to the insurance contract and therefore had no
rights under the policy. And if that was true, then the defendant could not be compelled to
compensate Mrs Vandepitte for the injuries that she sustained as a result of Jean’s
careless driving.
In response to that argument, Mrs Vandepitte claimed that Jean was made a party to the
contract by way of a trust. On that view, Mr Berry purchased the insurance policy from
the defendant not only for himself but also on trust for his daughter. He therefore held the
defendant’s promise to provide insurance coverage on behalf of himself and his daughter.
The Privy Council recognized the possibility of such an arrangement. The argument was,
however, defeated on the evidence. The court did not believe that Mr Berry had actually
intended to purchase the insurance policy on trust for both himself and his daughter. The
court consequently said that since Jean Berry was not a party to the insurance contract,
she was not entitled to the benefit of the policy. Mrs Vandepitte was certainly entitled to
receive damages from Jean Berry, but Jean Berry could not shift that loss onto the
insurer.
Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd (1999) 176 DLR (4th) 257
(SCC)—note 38 and note 41
This case involves an extension of idea formulated in London Drugs. Fraser River owned
a barge that it chartered to Can-Dive. The ship sank as a result of Can-Dive’s negligence.
Fraser River claimed compensation for its loss under its own insurance policy. That
insurance policy contained a clause that purportedly protected third party charterers, such
as Can-Dive, from being sued by the insurer by means of the doctrine of subrogation.
Fraser River nevertheless entered into an agreement under which the insurer, having paid
a benefit under its policy, would effectively exercise its right of subrogation and bring an
action against Can-Dive. The issue before the court was whether Can-Dive could rely on
the benefit that it expected to take under the insurance policy contract that existed
between Fraser River and its insurer.
8-33
The Supreme Court of Canada answered in the affirmative. 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 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-
Dive’s rights could not be varied by the 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.
Adler v Dickson (The Himalaya) [1955] 1 QB 158 (CA)—note 42

A passenger on the SS Himalaya was injured after a gangway collapsed. Since her ticket
contained a clause that limited the carrier’s liability, the passenger sued the master of the
ship and a boatswain. An issue therefore arose as to whether the limitation clause might
extend to protect not only the carrier, but also the individuals who performed on board
the ship.
The Court of Appeal significantly held that a contractual limitation clause may extend,
either expressly or impliedly, to protect someone other than the immediate contractual
party. The court further held that, notwithstanding the general privity rule, such third
party beneficiaries ought to enjoy the protection of the limitation clause.
Somewhat ironically, however, the court ultimately held, on the facts, that the clause in
question did not actually purport to extend, expressly or impliedly, to the defendants.
They consequently were personally liable to the plaintiff passenger.
ITO—International Terminal Operators Ltd v Miida Electronics Inc (1986) 28 DLR

(4th) 641 (SCC)—note 43
Mitsui OSK Lines Ltd (the carrier) carried electronic calculators from Japan to Montreal
on behalf of Miida Electronic Ltd (the property owner). When the goods arrived in
Canada, Mitsui arranged for ITO (the stevedores) to temporarily store them. A number of
cartons of calculators were stolen from ITO’s warehouse. Miida therefore sued ITO.
The contract of carriage included a Himalaya clause that purported to protect stevedores
in ITO’s position. The subsequent contract between Miida and ITO expressly stated that
the latter was to enjoy all limitation rights contained in the Himalaya clause found in the
carriage agreement.
The Supreme Court of Canada accepted that a Himalaya clause can extend to a party in
ITO’s position. It adopted the agency and separate contract analysis that Lord
8-34
Wilberforce formulated in New Zealand Shipping Co v AM Satterthwaite & Co (The

Eurymedon).
New Zealand Shipping Co v AM Satterthwaite & Co (The Eurymedon) [1975] AC 154

(PC NZ)—note 47
An English company named Ajax sold a drill to the plaintiff company in New Zealand.
Ajax created a contract with a carrier to deliver the property from Liverpool to
Wellington. That contract contained a limitation clause that (1) purported to protect both
the carrier and any stevedores who might deal with the property, and (2) required any
action to be brought by the property owner within one year of damage occurring. Ajax
passed the bill of lading to the plaintiff company. In effect, the plaintiff acquired exactly
the same rights and liabilities as Ajax.
The goods were damaged by the defendant stevedores in New Zealand. The plaintiff sued
the defendant more than one year after the damage had occurred. The defendant
accordingly argued that it was protected by the limitation clause. The plaintiff, in
contrast, argued that the defendant was a mere third party beneficiary to the contract
created with the carrier, and therefore could not rely upon the limitation clause.
Lord Wilberforce, writing for the Privy Council, held in favour of the defendant. he
began by observing a strong policy desire to extend the limitation clause beyond the
carrier, to include the defendant. He then held that such protection could be extended if
the carrier acted as the defendant’s agent in creating a contractual clause for the latter’s
benefit. That agency was said to require proof of four elements:
 the contract expressly or impliedly extended to the stevedores
 the carrier intended to act for itself and for the stevedores
 the stevedores either authorized the carrier’s actions at the outset or retroactively
ratified its actions
 the stevedores provided consideration to the property owner
The first, second, and third elements easily were satisfied. The outcome turned on the
fourth requirement. on that issue, Lord Wilberforce held that the property owner had
made an offer, through the agency of the carrier, of a unilateral contract. Under the terms
of that offer, a contract containing an exemption clause would come into existence
between the property owner and the stevedores if and when the stevedores accepted the
offer by performing the task of handling the goods. That requirement was met and as a
result, the defendant stevedores received the protection of a limitation clause under the
new unilateral contract.
Lord Wilberforce’s reasoning often is criticized, quite rightly, as strained, artificial, and
confusing. As a matter of precedent and practice, however, the decision has stood the test
of time and today provides a fairly simple mechanism through which a limitation clause
may be extended beyond the immediate parties, in order to benefit the actual workers.
8-35

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Additional Teaching Suggestions

ADDITIONAL TEACHING SUGGESTIONS

Past Consideration and Moral Obligations

Promissory Estoppel – Shields and Swords

3. When discussing this question, students should be encouraged to observe several

Ethical Perspective 8.1

Business Decision 8.1

Business Decision 8.2

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

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

4. A forbearance agreement is a promise by the plaintiff not to pursue a lawsuit in

5. For an agreement to be enforceable, it is not enough that each party provides

6. Past consideration consists of something that a party provides prior to the

7. The statement highlights that it is sometimes difficult to determine whether or not

8. A pre-existing public duty cannot be good consideration under a new contract

9. That rule is often criticized as failing to reflect commercial reality. Financially

The concept of quantum meruit is closely related to the doctrine of consideration. An

Provinces with Part Performance Legislation

Provinces without Part Performance Legislation

It is, however, possible for a person to be party to an agreement without actually

16. Contractual obligations cannot be assigned because, generally speaking, the

Vicarious performance is not a form of assignment. It does, however, provide an

Same Transaction The assignee is always subject to any defences or counterclaims

Different Transaction The situation may be different, however, if a debtor wants

CASES AND PROBLEMS

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

different, however, if the sub-contractor had improperly exploited the contractor’s

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

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

Everlast might also be able to enforce payment of $1000 if it received an assignment of

10. This is a relatively difficult question because it requires students to extrapolate

The London Drugs Exception

The Himalaya Exception

A Himalaya clause is a contractual term in a contract of carriage that purports to limit

Currie v Misa (1875) LR 10 Ex 153 (HL)—note 2

Hamer v Sidway 27 NE 256 (1891 NY CA)—note 4

Moss v Chin (1994) 120 DLR (4th) 406 (BC SC)—note 8

Eastwood v Kenyon (1840) 113 ER 482 (CA)—note 10

Lampleigh v Braithwait (1615) 80 ER 255 (KB)—note 12

Webb v McGowin 168 So 2d 196 (Ala CA 1935)—note 13

threatening a breach of contract. The claimant accordingly promised payment under

Foakes v Beer (1884) 9 App Cas 605 (HL)—note 17

Foot v Rawlings (1963) 37 DLR (2d) 695 (SCC)—note 18

D & C Builders v Rees [1965] 3 All ER 837 (CA)—note 18

Willmott v Barber (1880) 15 Ch D 96 – note 24

Jorden v Money (1854) 5 HL Cas 185 (HL)—note 25

D & C Builders Ltd v Rees [1965] 3 All ER 837 (CA)—note 27

Maracle v Travelers Indemnity Co of Canada (1991) 80 DLR (4th) 652 (SCC)—note 28

Re Tudale Exploration Ltd v Bruce (1978) 20 OR (2d) 593 (HCJ)—note 28

Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR

Vandepitte v Preferred Accident Insurance Co [1933] AC 70 (PC)—note 37

Adler v Dickson (The Himalaya) [1955] 1 QB 158 (CA)—note 42

ITO—International Terminal Operators Ltd v Miida Electronics Inc (1986) 28 DLR

Wilberforce formulated in New Zealand Shipping Co v AM Satterthwaite & Co (The

New Zealand Shipping Co v AM Satterthwaite & Co (The Eurymedon) [1975] AC 154

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