Contract law has always served an important role in facilitating business and economic activity. In particular, the law has long recognized the foundational nature of commercial obligations and the largely unqualified policy basis for holding parties strictly to their bargained-for positions. A significant exception to the “absolute” nature of contractual obligations arises from the doctrine of frustration of contract. The doctrine recognizes a supervening event beyond the contemplation of parties to an agreement and results in the discharge of outstanding contractual obligations, subject to the applicability of frustrated contracts legislation. Recently, the doctrine of frustration has seen a renewed significance upon the outbreak of COVID-19 and its global impacts. This article offers an overview of the state of the doctrine of frustration, its relationship with force majeure clauses, and the legal effect of frustration under the common law as modified by frustrated contracts legislation. It also offers some observations with respect to the manner in which the doctrine may be applied to future cases arising from the circumstances of COVID-19. 

The Doctrine of Frustration: An Overview

The legal framework underlying the doctrine of frustration has been subject to considerable disagreement over the course of its development within the English and Canadian jurisprudence.  Frustration has been approached in a number of ways throughout its evolution, most principally in accordance with what are commonly known as the “total failure of consideration”, “implied term” and “radical change” approaches.

The total failure of consideration approach essentially requires a supervening event to interrupt an agreement to such an extent that one party does not receive any part of their bargain. In contrast, the implied term and radical change approaches require the happening of supervening events beyond the contemplation of the parties. The implied term approach views such supervening events as triggering an implied term for the discharge of the contract on the happening of the unexpected event. In contrast, the radical change approach permits the discharge of an agreement only where a supervening event results in the performance of obligations being ‘radically different’ from that originally bargained for by the parties.^[1]

The total failure of consideration approach has largely fallen out of view beyond its adoption in the seminal English case of Krell v Henry [Krell].^[2] Dubbed the most consequential of the ‘coronation cases,’ Krell involved the hiring of a room from which to view the procession of the coronation of Edward VII. Upon the cancellation of the procession on the grounds of the King’s illness, Krell brought a claim for the payment of monies under the contract. The English Court of Appeal found that the defendant had specifically hired “rooms to view the procession” and, in this way, construed the contract to fundamentally respect the viewing of the procession, rather than treating the procession as an ancillary aspect of the agreement. The Court concluded that the doctrine of frustration applied on the basis that the cancellation of the procession created a total failure of consideration.

The total failure of consideration approach seems to have originated in the earlier case of Taylor v Caldwell,^[3] where frustration of contract was considered to have occurred at the instance that the music hall for hire had “perished” in a fire. Nevertheless, in light of the Court’s construction of the contract in Krell, both the implied term and radical change approaches would have served as adequate bases for frustration. In contrast, the UK House of Lords relied upon the radical change approach in Tsakiroglou & Co v Noblee & Thorl GmbH.^[4] In that case, the Court held that the closure of the delivery route through the Suez Canal and the consequent extra time and expense required for delivery of goods had not rendered performance under the contract to be so radically different from that contemplated by the agreement to amount to frustration. In this way the Court seems to conceive of a very narrow scope for the doctrine, according with the ancient rule that parties to an agreement are to be held strictly to their bargains unless expressly provided for within the contract.^[5]

The high-water mark of judicial disagreement with respect to the proper approach to the doctrine of frustration appears to be found in the decision of the UK House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [Panalpina].^[6] The case involved a lease agreement for the demise of a warehouse for commercial purposes. Upon the closure of the street serving as the only access point to the property as a consequence of a nearby planned demolition, the plaintiff brought a claim for unpaid rent. Although the Court was largely in agreement that the proper approach to frustration is the radical change approach, Lord Wilberforce appeared to regard the doctrine of frustration as entirely equitable in nature and thus incapable of constraint into a rigid legal framework. The appropriate formulation, in his opinion, is that which accords with the dictates of justice. In the case at bar, he preferred the implied term approach, noting with respect to the total set of potential approaches that it was “not necessary to attempt selection of any one of these as the true basis,” that “they shade into one another” and that “a choice between them is a choice of what is most appropriate to the particular contract under consideration.”^[7]

In contrast, the Canadian jurisprudence is largely in agreement that the radical change approach is the proper approach to the doctrine of frustration. While the 1922 decision of the Supreme Court of Canada in Canadian Government Merchant Marine v Canadian Trading Co^[8] seems to adopt the implied term approach, this was supplanted almost 80 years later by the decision of the Court in Naylor Group Inc v Ellis-Don Construction Ltd,^[9] which adopted the radical change approach to frustration. The latter case involved a claim for breach of contract stemming from the award of a construction contract to a subcontractor in breach of the bidding agreement. The appellant argued that the supervening event was a decision of the Ontario Labour Relations Board (OLRB) precluding it from considering the bids of subcontractors not affiliated with a certain union. Mr. Justice Binnie, writing for the Court, held that supervening events will not result in frustration unless they were unforeseeable and beyond the control of the parties. In particular, what the doctrine requires is a supervening event that alters the nature of the party’s obligation to contract to such an extent that to compel performance despite the changed circumstances would be to order the party to do something radically different from what they had agreed to under the contract. In the case at bar, the Court considered the decision of the OLRB to be a retroactive affirmation of the pre-existing collective bargaining agreement, rather than a novel statement of the obligations of the parties. Because the decision of the OLRB was not considered to create any new obligations, there was no radical change and no basis to apply the doctrine of frustration.

Similarly, the Ontario Court of Appeal in Capital Quality Homes Ltd v Colwyn Construction Ltd considered the radical change theory as the proper approach to the doctrine of frustration. In reviving the doctrine of frustration within the realm of real property transactions, the Court rejected the implied term approach, instead characterising the supervening event as an instance of “frustration of the common venture” encroaching upon the fundamental identity of the bargain.^[10] The radical change approach was also applied by the British Columbia Court of Appeal in both KBK No. 138 Ventures Ltd v Canada Safeway Ltd^[11] and Rickards (Estate of) v Diebold Election Systems Inc, the latter being one of the most recent statements on the law of frustration by our Court of Appeal. In that case, the Court viewed the radical change theory as requiring something akin to the deprivation of “a substantial part of the consideration for which [a party] had bargained.”^[12] In this way the Court seems to have somewhat revived the “failure of consideration” perspective of frustration, albeit within the confines of the accepted radical change approach.

In general, the cases emphasize that frustration will not apply where the change in circumstances makes a party’s performance more expensive or onerous but does not prevent the party from performing the agreement.^[13] Nor will the fact that changed circumstances make the contract non-advantageous or uneconomic for a party, provided that the contract can still be performed in accordance with its terms.^[14] In such cases, it cannot be said that compelling performance despite the changed circumstances would be to order the parties to do something radically different from what had been agreed. Parties to a contract are understood to accept that the bargains they strike may become more or less economically advantageous, and performance more or less onerous, depending on the many external local, national and global events which continually impact the interests of parties. The law is understandably reluctant to excuse parties from bargains that are no longer valuable in hindsight, and it is only upon the happening of “black swan” events that the doctrine of frustration is realistically available.

In the same vein, courts have drawn a distinction between changes which are temporary or transient as opposed to permanent.^[15] Where a change is temporary, it may temporarily interrupt performance or make it less economically viable, but it will not give rise to frustration unless it renders a complete change to the nature of the obligations. For instance, the Court in Panalpina was reluctant to recognize the street closure in that case as a true supervening event in consideration of the fact that the closure had not entirely abrogated the party’s remaining rights under the lease agreement, and was comparatively brief in relation to the entire term of the lease. In that case, it was decided that an interruption of one year in a contract conferring rights over a period of ten years was not sufficient to meet the radical change standard.

In addition, the doctrine of frustration will generally not apply where the party seeking to rely on it has brought about or contributed to the supervening event in the sense that the frustration is “self-induced.”^[16] This principle arises from the requirement that the supervening event be beyond the control of the parties as well as the ancient principle that a party cannot rely on their own blameworthy conduct to escape liability.^[17] In some cases, frustration may be partially self-inflicted in that the unexpected event exacerbates some pre-existing frailty, such as undercapitalization, poor management or existing supply chain issues. In such cases, parties are much less likely to obtain the protection of the doctrine of frustration.[18]

Frustration’s Relationship With Force Majeure

As discussed above, the doctrine of frustration typically applies only where a supervening event arises such that compelling performance despite the changed circumstances would be to order the parties to do something radically different from what had been agreed. Because of this, the doctrine of frustration should not apply where the parties have put their mind to the possibility of the “black swan” and made express provision for its arrival in their contract. In such cases, it cannot be said that the event was unforeseen.

It is for this reason that the doctrine of frustration generally has no applicability in cases where the contract contains a force majeure or other clause which makes provision for the contractual outcome in the event of the occurrence of the supervening event. In such cases, if the force majeure clause is triggered and thereby ends the contract it is not because the contract is frustrated but, rather, because the parties agreed to that outcome.^[19]

The applicability and effect of any given force majeure clause depends on its language and the interpretation given to the language. Such clauses tend to be construed strictly and narrowly.^[20] In some cases, the interpretation of a force majeure clause may impact the issue of whether the doctrine of frustration is available. For example, where a force majeure clause expressly makes provision for certain possibilities but excludes the one that did occur, this may provide a strong basis to conclude that the doctrine of frustration applies.

The Effect of Frustration at Common Law and Statute Law

The common law doctrine of frustration provides that upon the happening of a frustrating event the contract comes to an immediate end. The result is that neither party has any future obligations under the contract, although the contract is treated as having been valid and effective until the time of frustration. With respect to the situation after the moment of frustration, the common law essentially treats any losses as laying where they fall. While this may achieve a just result in some cases, it will create unfair outcomes in others.

For example, a supply agreement which is frustrated by some unexpected event after the date of supply but prior to the due date for payment may result in the purchaser becoming relieved of its obligation to make payment, thereby conferring on them an unfair windfall. While some courts found ways to avoid such unfair outcomes, such as by finding a total failure of consideration and thereby unravelling the entire bargain,^[21] or considering some contractual obligations to have been severed from the contract prior to the time of frustration^[22], these were often uneasy fits.^[23]  For example, the total failure of consideration approach was limited in that the failure had to be “total”, meaning that the escape hatch was inaccessible where at least some consideration had passed.^[24]

In response, legislatures attempted to equip courts with scalpels where the common law of frustration provided only blunt instruments. In the words of one appellate court judge, frustrated contracts legislation “allows a court to step in and to alleviate against some of the common law harshness with respect to frustration.”^[25] In British Columbia, the applicable legislation is known as the Frustrated Contract Act (the “Act“).^[26] There is similar legislation in all other Canadian jurisdictions, except Nova Scotia.^[27]

The Act received very little attention during its debate in the British Columbia legislature in 1974. In general, it was superficially characterized as legislation that permitted “a settlement of claims to be worked out” given that the common law permitted recovery in the event of a “total failure of consideration” but not “partial failure”. It was also characterized as a “pruning Act” which “takes the unworkable parts of common law and adjusts them to the present-day practises and interpretations”.^[28]

To-date, the Act has received very limited judicial attention, as has the comparable legislation in other Canadian jurisdictions.^[29] On the face of the language of the Act, it permits the severance of those parts of the contract that were wholly performed or wholly performed except for payment at the time of the frustrating event. The Act requires that those severed aspects be treated as separate contracts that have not been frustrated. The Act also provides parties with the ability to claim restitution for any benefits they conferred on their counterparties prior to the time of frustration. The Act sets out a formula for calculating the value of such benefits, although it is limited to reasonable expenditures and excludes profit. In addition, where the frustrating event has created a loss in the value of a benefit conferred, the Act requires that the parties equally bear that loss.

The Act does not purport to modify the common law as it pertains to determining whether a contract has been frustrated. In particular, section 1 of the Act provides that it applies to contracts “from which the parties to it are discharged by reason of the application of the doctrine of frustration”. Further, section 2 of the Act expressly provides that it only applies to contracts which “contain no provision for the consequences of frustration”.

The language of section 2 is uncertain. In particular, it is not clear to what the Act refers when it speaks to a provision “for the consequences of frustration”. Viewed through a common law lens, the reference should not include a force majeure clause because in the presence of such a clause there can be no frustration. However, the alternative is that the section refers to a clause which specifies the outcome in cases where the contract has been frustrated. Such clauses are rare, and it would be an unusual contract that contains no force majeure clause but does contain a provision which dictates the consequences of frustration. Nevertheless, in a recent decision the British Columbia Supreme Court stated in obiter that the Act applies “[i]f frustration is established and the contract provides no guidance on what to do in the event of frustration”, which suggests that section 2 of the Act contemplates the existence of a clause which specifically provides for the consequences of frustration.^[30]

In addition, section 6 of the Act provides that a party that has partly performed a contractual obligation is not entitled to restitution if there is “(a) a course of dealing between the parties to the contract”, “(b) a custom or a common understanding in the trade, business or profession of the party so performing”, or “(c) an implied term of the contract” to the “effect that the party performing should bear the risk of the loss in value.” The first two of these factors might be considered in determining whether a term should be implied into a contract,^[31] which makes them an odd fit with the third factor which is arguably more in the nature of a legal conclusion to be reached based on the first two factors.

Moreover, there appears to be a fundamental inconsistency between section 6 and the other aspects of the Act. In particular, section 6(c) provides that restitution is not available where there is an “implied term” that one party is to bear the loss caused by the supervening event. However, in cases where there is such an implied term, that term could arguably be characterized either as a force majeure clause or as a “provision for the consequences of frustration”, which is the language used in section 2. However, contracts that contain force majeure clauses cannot be frustrated, and, if the implied term constitutes a “provision for the consequences of frustration” within the meaning of section 2, then the Act does not apply by virtue of section 2. Accordingly, if a contract has an implied term then the Act may well not become engaged in the first place.

It is also not clear why parties are precluded from claiming restitution under the Act where an exception in section 6 applies. Given that the Act appears intended to provide courts with the flexibility to do justice in all cases, it would arguably better support the object of the Act to permit courts the latitude to determine, unrestricted by section 6 of the Act, whether restitution is appropriate. It is also not clear whether restitution in unjust enrichment is available where restitution under the Act is not.^[32] The Act does not appear to preclude such a claim, so this avenue may remain open.

There is also uncertainty with respect to when performance of a contract will constitute a “benefit” sufficient to trigger restitution. Section 5(1) of the Act provides that “every party to a contract to which this Act applies is entitled to restitution from the other party or parties to the contract for benefits created by his performance or part performance of the contract”. The term “benefit” is broadly defined in section 5(4) of the Act to mean “something done in the fulfilment of contractual obligations, whether or not the person for whose benefit it was done received the benefit.” In one case, the British Columbia Supreme Court found that a plaintiff who had agreed to write some chapters of a proposed school textbook had provided a “benefit” to the defendant within the meaning of the Act notwithstanding that the contract had been frustrated by a change in the curriculum which rendered the plaintiff’s work superfluous to the defendant. Yet, in a subsequent case, the Court found that no “benefit” within the meaning of the Act was created by a purchaser who had expended time, effort and funds to obtain subdivision approval in respect of a property which was the subject of a frustrated contract of purchase and sale because that work had not benefited the seller.^[33] These different approaches to the concept of “benefit” under the Act indicate a tension between the plain language of the Act and the idea that no restitution should be available unless the benefit is a tangible one that survives the frustrating event and actually enriches the other party. This is a sensible approach, given that the underlying rationale of the Act appears to be to prevent the unjust enrichment of one party at the expense of the other.

COVID-19 as a Supervening Event

COVID-19 will undoubtedly generate litigation which prominently features the law of frustration. In this section, we offer some observations on the manner in which the legal framework may apply in COVID-19-related frustration cases.

Notwithstanding the magnitude and unprecedented nature of COVID-19, it is unlikely to provide parties with an automatic ‘free pass’ in respect of their failure to meet their contractual obligations. The pandemic is not an automatic frustrating event, but it may have consequences which impact certain contractual relations in a way that results in frustration.^[34] For example, a supply contract does not become frustrated merely by the happening of COVID-19; it becomes frustrated, for example, by the decision of a jurisdiction to close its borders in a way that makes it impossible for the supplying party to deliver its goods. Accordingly, the analysis should be focused on the specific impacts of the pandemic on the parties and exactly how those impacts have brought a radical change to their contractual relations. Hardship and inconvenience will be insufficient, and, given the pandemic’s wide impact, one might expect courts to be cautious in applying the doctrine, reserving it for only the most compelling cases.

In conducting this analysis, courts may face challenges distinguishing between the uncontrollable impacts of COVID-19 and the impacts of related or intermingled matters that were arguably within a party’s control. Where a government decision clearly has the effect of suspending certain non-essential business activity (and thereby making performance illegal), the result on application of the doctrine of frustration should not be hard to predict.^[35] However, where a party has voluntarily adopted policies or measures in accordance with public health directives intended to limit the spread of COVID-19, and it is those voluntary actions which impose a radical change on the contractual relationship, will the doctrine of frustration be unavailable because the true supervening event was not beyond its control? Or, where a party had pre-existing frailties that were exacerbated by the circumstances of COVID-19, but without which there would not have been any supervening event, will the doctrine be unavailable because the frustration was partially self-inflicted? In the former, more sympathetic scenario, one might argue that the doctrine of frustration ought to evolve to protect parties that have taken prudent steps to protect the wellbeing of others. The solution in such cases may be to incorporate a rule excusing a party where they acted in good faith and in a commercially reasonable manner. By evolving the common law in such a manner, courts can also make available the restitutionary features of the Act, thereby helping achieve a more just allocation of losses.

It may be that many COVID-19 frustration cases will involve extensive discovery processes in an effort to distinguish the uncontrollable impacts of COVID-19 from the impacts of related or intermingled matters that were within the party’s control. For example, while a party may plead frustration on the basis that COVID-19 made it impossible for the party to source sufficient labour to meet its contractual obligations, discovery processes may uncover that the party’s management chose to allocate the party’s remaining available labour to the performance of other contracts, with the result that frustration was arguably self-inflicted. In more complex cases, expert evidence may be required for courts to make findings as to the manner in which the consequences of COVID-19 impacted the parties and their economic relations.

For contracts entered into after COIVD-19 was declared a pandemic, parties are unlikely to obtain the benefit of the doctrine of frustration given that the circumstances were or should have been known to them such that they are not unforeseeable. On a related point, given that COVID-19 represents only one of a number of pandemics that have arisen over past decades, it may become more difficult for parties to rely on the doctrine of frustration in the event of future pandemics. Rather, courts may for some time into the future treat pandemics as events that should have been foreseeable by parties. As a result, parties should consider including well-drafted force majeure clauses in their contracts which specify the outcome in the event that a future pandemic impacts the contractual relationship. By doing so, parties may achieve greater contractual certainty and avoid a potentially frustrating experience.

This article was also published here: “How Frustrating: The Doctrine of Frustration in the Age of COVID-19” (2020) 78:5 Advocate (Vancouver Bar Association) 685.

A substantially expanded and updated version of this article, which is more broadly focused on the law across Canada and informed by recent decisions concerning the doctrine of frustration in the context of COVID-19, was also published here: “Frustration of Contract in the Era of COVID-19” (2021) 51:1 The Advocates’ Quarterly 418.

^[1] GHL Fridman, The Law of Contract in Canada, 5th ed (Toronto: Carswell).

^[2] Krell v Henry (1903), 2 KB 740 (EWCA).

^[3] Taylor v Caldwell (1863), 122 ER 309 (EWHC).

^[4] Tsakiroglou & Co v Noblee & Thorl GmbH (1961), 2 All ER 179 (UKHL).

^[5] See Paradine v Jane, where the Court expressed the view that contracts are “absolute” in the sense that impossibility is never an excuse unless expressly provided for in the contract.

^[6] National Carriers Ltd v Panalpina (Northern) Ltd (1981), 1 All ER 161 (UKHL) [Panalpina].

^[7] Ibid at 8.

^[8] Canadian Government Merchant Marine v Canadian Trading Co (1922), 64 SCR 106 (SCC).

^[9] Naylor Group Inc v Ellis-Don Construction Ltd (2001), [2001] 2 SCR 943 (SCC).

^[10] Capital Quality Homes Ltd v Colwyn Construction Ltd (1975), 61 DLR (3d) 385 (ONCA) at 17.

^[11] KBK No. 138 Ventures Ltd v Canada Safeway Ltd (2000), 185 DLR (4th) 650 (BCCA).

^[12] Rickards (Estate of) v Diebold Election Systems Inc (2007), 69 BCLR (4th) 75 (BCCA) at para 39.

^[13] See e.g. Delta Food Processors Ltd. v. East Pac. Enterprises Ltd. (1979), 16 BCLR 13 (BCSC).

^[14] Supra note 1.

^[15] See e.g. Polia v. Trelinski (1997), 32 RFL (4th) 209 (BCSC).

^[16] See e.g. Maritime National Fish Co. v. Ocean Trawlers Ltd., [1935] AC 524 (PC).

^[17] See e.g. Commr. of Agricultural Loans of Cont. v. Irwin, [1942] SCR 196 (SCC).

[18] See e.g. Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., [1975] SCJ No. 46 (SCC) [Atlantic Paper], which involved a 10 year supply contract for the supply of waste paper utilized in the production of corrugation. Approximately one year into performance of the contract, the customer advised the supplier that it would no longer accept delivery of the waste paper. The Court held that the primary cause of the customer’s failure to perform its obligations was its lack of an effective marketing plan for its product. Although the case is a force majeure case rather than a frustration case, the same reasoning would presumably apply if there were no force majeure clause and the party had pled frustration instead.

^[19] Ottawa Electric Co. v. Ottawa (City), [1903] OJ No. 520 (ONCA); Dover Corp. (Canada Ltd. v. Maison Holdings Ltd., [1976] AJ No. 607 (ABCA).

^[20] Supra note 18.

^[21] Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32 (HL).

^[22] Appleby v. Myers (1867), LR 2 CP 651 (Ex. Ch) [Appleby].

^[23] Ibid; St. Catharines (City) v. Ontario Hydro-Electric Power Commission [1927] OJ No. 139, 61 OLR 465 (Ont HC), aff’d [1928] OJ No. 39, 62 OLR 301 (Ont. CA).

^[24] Supra, note 21.

^[25] Witwicki v. Midgley, 1979 CarswellMan 100 (MBCA) at para. 10., rev’ing 1976 CarswellMan 63 (MBQB).

^[26] RSBC 1996 c. 166.

^[27] Frustrated Contracts Act, RSA 2000, c. F-27; CCSM c. F190; RSNB 2011, c. 164; RSNL 1990 c. F-26; RSNWT 1988, c. F-12; RSNWT (Nu.) 1988, c. F-12; RSO 1990, c. F.34; RSPEI 1988, c. F-16; SS 1994, c. F-22.2; RSY 2002, c. 96.

^[28] Hansard, March 18, 1974, pages 1299-1300.

^[29] For the more notable of the reported decisions, see e.g. Pure v. BC-Alta, 2019 BCSC 390 at paras. 81-84, Fort St. John Aircraft Maintenance Ltd. v. Canadian Indemnity Co., 1983 CarswellBC 1366 at paras. 10-12 and British Columbia v. Cressey Development Corp., 1992 CarswellBC 1133 at paras. 9-13.

^[30] Pure v. BC-Alta, 2019 BCSC 390 at paras. 81-84.

^[31] Moulton Contracting Ltd. v. British Columbia, 2015 BCCA 89 at para. 53.

^[32] Prior to the enactment of the Act, the common law permitted recovery on the basis of a total failure of consideration, which is a quasi-contractual concept more grounded in restitutionary principles. See e.g. the decision of the House of Lords in Firbosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd., [1943] A.C. 32 (HL) which held that in situations involving a total failure of consideration there could be recovery essentially on the basis of restitutionary principles.

^[33] British Columbia v. Cressey Development Corp., 1992 CarswellBC 1133 at paras. 9-13.

^[34] There is some support for this concept in the comments of Kerans J.A. of the Alberta Court of Appeal in Atco Ltd. v. Continental Energy Marketing Ltd., [1996] 6 WWR 274 (ABCA) where a distinction was drawn between the alleged supervening event and the “proximate cause” of the interruption of the supply arrangement, which was the supplier’s decision to cut off supply to the buyer. Kearns J.A. emphasized that a force majeure clause is not just about the occurrence of an event, but about the effect of that event on the party seeking its protection. Arguably the same analysis ought to apply in frustration cases.

^[35] One interesting question is whether governments may obtain the benefit of the doctrine of frustration where it was in fact their decisions which resulted in the supervening event. Previous case law suggests that the doctrine will not be available in such circumstances: see e.g. Wells v. Newfoundland, [1999] 3 SCR 199.

The post Frustration of Contract and COVID-19 appeared first on Nied Law |‎ Litigation Counsel.

Background

The plaintiff/respondent purchased a steel storage building from the defendant/appellant, a manufacturer. The respondent allegedly became injured during his use of the building and commenced an action in the British Columbia Supreme Court against the appellant in negligence and breach of contract.

The contract between the appellant and respondent contained a forum selection clause which provided that any claim in connection with the supply of the building had to be commenced in the Ontario courts. Accordingly, the appellant brought an application seeking an order staying the proceedings in British Columbia on the basis that the forum selection clause applied to the claim and there was no reason not to enforce it.

The chambers judge hearing the application was required to apply the “strong cause” analysis, which is a two-part analysis applied to determine the enforceability of forum selection clauses. This analysis was settled by the Supreme Court of Canada in Z.I. Pompey Industrie v. ECU‑Line N.V., and recently modified in the consumer context by the Supreme Court of Canada in Douez v. Facebook, Inc., a three-way split decision.

In Douez, the plaintiff brought a proposed class action against Facebook, the large social network, for infringing the privacy rights of almost two million Canadian customers. This gave rise to complex legal issues regarding statutory privacy rights. The plaintiff’s standard form electronic contract with Facebook contained a forum selection clause providing that disputes would be litigated in California. Relying on the forum selection clause, Facebook moved to have the British Columbia action stayed. The Court applied the strong cause analysis and ultimately declined to enforce the forum selection clause on the application of the second stage of the analysis, which engages public policy. Three judges of the Court with Abella J. concurring in the result (and McLachlin C.J. and two others in strong dissent) found that “strong cause” existed due to the gross inequality of bargaining power and other “reasons of public policy that are compelling”, including the interest in Canadian courts adjudicating cases “impinging on constitutional and quasi-constitutional rights because these rights play an essential role in a free and democratic society and embody key Canadian values.”

Post-Douez, the two-part legal analysis requires that courts first determine whether the forum selection clause is enforceable and applies to the claim. The party seeking to enforce the forum selection clause bears the burden of proof at this stage. If this part of the test is met, courts then turn to assessing whether there are strong reasons not to give effect to an otherwise enforceable forum selection clause. The party seeking to displace the forum selection clause bears the burden of proof at this stage of the analysis. In addition, when the forum selection clause in question is contained in a consumer contract, courts should take account of all the circumstances of the particular case, “including public policy considerations relating to the gross inequality of bargaining power between the parties and the nature of the rights at stake.”

The chambers judge began by correctly determining that the forum selection clause, which was broadly worded, applied to the claim. Turning to the second stage of the analysis, the chambers judge properly considered a variety of circumstances, including the convenience to the parties, fairness between the parties, and the interests of justice. In addition, the chambers judge correctly identified that the consumer context required that he consider a “broader range of circumstances”, namely public policy factors.

In particular, the chambers judge found it “highly relevant” that the forum selection clause was contained in a standard form contract, meaning that the respondent had no ability to negotiate the applicability or terms of the clause. This determination was made notwithstanding the fact that the chambers judge had concluded, earlier in his reasons, that there was “no significant inequality of bargaining power” between the parties.

In addition, the chambers judge relied on the fact that the action sought damages in negligence for personal injury and was not a mere commercial dispute over a breached contract. The chambers judge appeared to be of the view that public policy interests were furthered by having the personal injury claim in negligence and product liability heard in British Columbia as opposed to Ontario. This determination was made notwithstanding that the chambers judge determined, earlier in his reasons, that there was no reason to believe that the governing law in Ontario would differ significantly from the law of British Columbia.

Lastly, the chambers judge relied on the fact that the respondent had alleged that the appellant sold the building to the respondent with knowledge that the product was unsuitable for the climatic conditions in British Columbia. The chambers judge reasoned that the public had an interest in seeing such a claim litigated in British Columbia where the issue arose and the damages were suffered.

Decision

The British Columbia Court of Appeal allowed the appeal and transferred the claim to the Ontario courts. The Court acknowledged that the chambers judge’s decision was discretionary and that the standard of review is deferential, but concluded that the chambers judge “erred in principle by characterizing ordinary considerations as matters of public policy compelling enough to justify overriding the forum selection clause.”

In the course of its analysis, the Court held that it is “important in conducting the strong cause analysis to bear in mind the principle that courts do not have discretion to refuse to enforce valid contracts unless there is some paramount consideration of public policy sufficient to override the public interest in freedom of contract.”

The Court held that the chambers judge erred in elevating the three factors described above to public policy factors sufficient to override the forum selection clause. With respect to the first factor, the Court held that the law “does not support the proposition that inclusion of a forum selection clause in a non-negotiable standard form consumer contract always raises a public policy concern sufficient to offset the public policy interest in holding parties to the terms of their bargain.” In addition, the Court held that “[n]either standard form contracts nor forum selection clauses raise public policy interests per se” and that courts will “generally give effect to the terms of standard form consumer contracts absent legislative intervention.”

As the Court recognized, it is not the fact that a forum selection clause is in standard form that gives rise to public policy concerns, but rather the existence of gross inequality of bargaining power between the parties. Because the chambers judge had found that there was no significant inequality of bargaining power, “the standardized form of the contract itself does not raise a public policy concern.”  

In addition, the Court noted that “[i]n many respect, the contract in issue falls closer to the sophisticated commercial contract end of the spectrum”, unlike the contract at issue in Douez, which was a “minor consumer transaction” entered into electronically. As the Court noted, in the present case the transaction had significant value, and was “more akin to the purchase of a vehicle”. The Court further held that transactions of this kind “occur infrequently in the lifetime of the average consumer and command heightened attention and scrutiny.”

Turning to the second factor relied upon by the chambers judge, the Court held that the claim at issue was categorically different than that in Douez. In particular, in Douez “the matter engaged a unique British Columbia statute which had no equivalent in the other jurisdiction.” In addition, in Douez “the nature of the claim was a strong reason to override the forum selection clause because it involved the choice between a Canadian and a foreign court and involved a quasi-constitutional right.” In contrast, the “present case concerns two competing Canadian forums with roughly equivalent laws of contract, personal injury and product liability.”

With respect to the third factor, the Court held that there was nothing unique to British Columbia about the cause of the building’s collapse as allegedly related to the climatic conditions in British Columbia. The Court observed that the difficulty in relying on that factor is that “there will always be a public interest in seeing cases with facts and damages arising in a particular province litigated in that province.” The Court accepted that this is a factor which relates to the balance of convenience and should be considered as part of the second stage of the strong cause analysis, but held that “it will rarely rise to the level of a public policy concern.”

Although the Court did not articulate the threshold to be met in order for a factor to raise to the level of a public policy concern, it confirmed that the power of courts to refuse enforcement on the grounds of public policy is a power which should be “rarely exercised” and only in compelling cases where “the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds.” In addition, the Court noted that it is “helpful to consider the categories of public policy interests traditionally held to be sufficient to override a contractual bargain”, which include those that are found to be injurious to the state, injurious to the justice system, in restraint of trade, involving immortality or affecting marriage. While the Court held that “the categories of public policy are not closed”, it cautioned that “significant judicial restraint is called for”.

Analysis

Following the decision of the Supreme Court of Canada in Douez, there was considerable uncertainty regarding the manner in which the strong cause test would be applied in future cases involving consumer contracts. In particular, there was uncertainty as to the manner in which courts would apply the two public policy factors noted in Douez – namely those related to “gross inequality of bargaining power” and the “nature of the rights at stake”. The decision in Schuppener provides some guidance on both factors.

Inequality of Bargaining Power

In Douez, the majority held that there was gross inequality of bargaining power because the forum selection clause in that case was contained in a “consumer contract of adhesion” which was not subject to negotiation. Following that decision, there was concern that all consumer contracts of adhesion would have this public policy factor weighing against them.

The decision in Schuppener clarifies that the public policy factor related to gross inequality of bargaining power will not invariably arise whenever the contract at issue is in standardized form and non-negotiable. To the contrary, the decision confirms that there is nothing wrong with standard form, non-negotiable agreements in and of themselves. They only become concerning when they arise in an environment of gross inequality of bargaining power. Accordingly, what must be examined is the power dynamic between the parties. While the fact that a contract is in standard form may be a contextual factor to consider in that analysis, it is not determinative.

As the appellant submitted before the Court, there is a distinction to be drawn between bargaining power and bargaining position. Whether or not there is gross inequality of bargaining power in any given case is a function of market factors, not the parties’ bargaining positions. This can be illustrated with the following hypothetical.

Imagine a consumer in need of legal services. Those services are required very urgently, and the consumer resides in a small town with only one lawyer. Suppose that this consumer wishes to hire the lawyer, and that the lawyer presents the consumer with a non-negotiable, standard form engagement agreement. In these circumstances, one might argue that the consumer’s free will has been vitiated by an overwhelming imbalance of bargaining power. They are in need of legal services urgently, and, given the market factors, they essentially have no choice but to accept the lawyer’s standard form, non-negotiable terms. This is a classic monopoly scenario, and it’s a situation where a standard form, non-negotiable agreement is troubling from a public policy perspective. But what makes it troubling is not the standard form nature of the agreement, but the environment of unequal bargaining power caused by market factors.

Now, let’s modify that hypothetical. Presume the facts are the same, except that there is no urgency to the legal services and the consumer resides in a large city with a multitude of different lawyers offering the same services. In those circumstances, it is much harder to argue that the consumer’s agreement to the lawyer’s terms occurred in a context where their free will had been vitiated by an overwhelming imbalance of bargaining power. The consumer had other options and ample time to consider those options. This is a situation where a standard form, non-negotiable agreement should not be troubling from a public policy perspective because the environment is not one of unequal bargaining power. In fact, in a highly competitive marketplace, it may well be the consumer that has the greater bargaining power. If in such a situation a supplier or service provider takes a non-negotiable position which the consumer dislikes, the consumer can turn to a different supplier or service provider.

In sum, bargaining power is not the same thing as bargaining position, and just because a party takes a non-negotiable position does not mean they have any bargaining power. It is for this reason that the Supreme Court of Canada in Douez was clear that the relevant question is whether there is gross inequality of bargaining power. The Court, in answering that question, implicitly canvassed the market factors that effectively put Facebook in a near monopoly position and, by the same stroke, put consumers in a position of gross inequality of bargaining power. That is not an outcome that will arise in every case involving a standard form contract. In the author’s view, it should be limited to cases where the service provider or supplier is essentially in a monopoly position and the service or product is essential to the consumer. In Douez, the Court reasoned that the service provided by Facebook met the latter requirement because it had “become increasingly important for the exercise of free speech, freedom of association and for the full participation in democracy” with the result that “[h]aving the choice to stay ‘offline’ may not be a real choice in the Internet era.” This should be distinguishable from cases where the product or service is either available from another supplier or service provider or is not essential to consumers, as in Schuppener.

The reasons of the Court in Schuppener also suggest that the weight to be given to forum selection clauses falls onto a spectrum, with sophisticated commercial contracts deserving of more weight and unsophisticated consumer contracts deserving of less weight. The analysis does not call for a binary determination, and not all contracts must be treated the same merely because one of the parties is a “consumer”.

Nature of the Rights at Stake

With respect to the other public policy factor – namely the “nature of the rights at stake” – Schuppener clarifies that the threshold is a high one.

The Court essentially distinguished Douez as an outlying case on the basis that it concerned a statute unique to British Columbia, constitutional and quasi-constitutional rights of great importance to Canadian society, and the prospect that a foreign court would adjudicate such uniquely Canadian issues.

Read together, Douez and Schuppener arguably suggest that the nature of the rights at stake will not give rise to a public policy factor unless (1) the court specified in the forum selection clause would be unable to properly adjudicate the claim; or (2) litigation in the specified forum would deprive Canadian society of a compelling public good.

Those requirements were not met in Schuppener, where there was neither a basis to conclude that the Ontario courts could not properly adjudicate the somewhat standard claim, nor a basis to conclude that litigating the claim in Ontario rather than British Columbia would deprive Canadian society of a compelling public good.

Matthew Nied acted for the successful appellant in this case. This article was also published here: “Recent Developments in the Law of Forum Selection Clauses and Public Policy” (2020) 9:2 Commercial Litigation and Arbitration Review 13.

The post Schuppener v. Pioneer Steel Manufacturers Limited: Forum Selection Clauses and Public Policy appeared first on Nied Law |‎ Litigation Counsel.

Background

In October 2017, Madam Justice Fitzpatrick of the Supreme Court of British Columbia (the Court) granted a receivership order in respect of a 92-unit strata condominium development known as “Murrayville House,” located in Langley, British Columbia. The development was owned by a single-purpose development company (the Debtor) with no other significant assets.

The receivership order was granted on the application of one of the mortgagees with the support of the other mortgagees. The receivership was precipitated by ballooning debt caused by cost overruns, lengthy delays, the filing of various legal claims and certificates of pending litigation, and allegations of financial misconduct on the part of the Debtor. At or around the time of the receivership order, the creditors faced a shortfall of more than $30 million.

The development was substantially complete at the time of the receivership order, subject only to certain exterior work, common area deficiency work and in suite deficiency work. In addition, all of the units in the development had been made the subject of presale agreements with individual purchasers years prior to the receivership. At the outset of the receivership, it was anticipated that the receiver’s task would essentially be to complete the construction, file a new disclosure statement, obtain new home warranty coverage and then monetize the development.

The receiver’s task was complicated by changes in the real estate market in British Columbia. Subsequent to the execution of the presale agreements, the value of the units increased by 46%, based on an appraisal obtained by the receiver. That translated into a total increase in value of nearly $5.5 million. In light of this value lift, the receiver was faced with the decision of whether to complete the presale agreements and permit the purchasers to benefit from the lift, or, alternatively, remarket the units at current market prices in order to maximize the realization for the benefit of the creditors.

The receiver decided that it should complete the presale agreements and brought an application seeking directions from the Court confirming that decision. The application, which was heard over five days in March 2018, was supported by the purchasers as well as the B.C. Superintendent of Real Estate. It was opposed by the mortgagees and the Debtor.

The application involved two central issues. The first issue was whether the presale agreements had terminated prior to the receivership as a result of the effluxion of time (by way of the passing of an outside date), in which case the agreements were not binding and the receiver’s decision to resurrect them was an improvident one. The second issue was whether, if the agreements were enforceable, they should be disclaimed in favour of remarketing the units and maximizing the realization.

Decision

The Court directed the receiver to disclaim the agreements and remarket the units. In addition, the Court directed that the receiver grant the purchasers a right of first refusal in respect of their units. The purchasers who did not wish to exercise their right of first refusal were entitled to the return of their deposit monies with interest.

The Court was satisfied that the application could be resolved by consideration of the disclaimer issue alone, premised on the assumption that the contracts remained valid and enforceable. As a result of its conclusion that the contracts should be disclaimed, the Court did not need to consider the first issue.

The Court began by recognizing the well-settled principle that a receiver has discretion to disclaim contracts entered into prior to the commencement of a receivership in order to maximize the recovery of the assets under its charge. However, the Court also recognized that a receiver must assess all equitable considerations or “equities” in the course of considering whether to disclaim a contract.

The Court went on to review prior disclaimer decisions in British Columbia and Ontario and ultimately adopted the following analytical framework which was substantially advanced by one of the mortgagees (represented by Matthew Nied):

1. First, what are the respective legal priority positions as between the competing interests?
2. Second, would a disclaimer enhance the value of the assets? If so, would a failure to disclaim the contract amount to a preference in favour of one party?; and
3. Third, if a preference would arise, has the party seeking to avoid a disclaimer and complete the contract established that the equities support that result rather than a disclaimer?

Applying the first stage of the analysis, the Court determined that the mortgagees had legal priority over the purchasers whose agreements expressly provided that they created “contractual rights only and not any interest in land” and that the purchasers would only acquire an interest in land “upon completion of the purchase and sale.” In addition, the Court determined that the purchasers could not have an equitable interest in the units because the remedy of specific performance was not available to them in the circumstances.

Having concluded that the purchasers’ contractual rights did not have legal priority over those held by the mortgagees, the Court proceed to the second stage of the analysis. The Court concluded that there was no doubt that remarketing the units would enhance the value of the assets to be distributed to the stakeholders, and that, on this basis, disclaimer was appropriate. The Court also noted that permitting the presale contacts to complete would require the Court to discharge the mortgages in circumstances where the mortgagees would not receive payment of the amounts they bargained to accept in exchange for discharge, which would be an “exceptional result.”

Having made that determination, the Court proceeded to the third stage of the analysis, which was to consider whether the purchasers had established that the equities supported overriding the mortgagees’ legal priority in their favour, as opposed to allowing a disclaimer.

The Court considered various equitable considerations advanced by the purchasers, including that the contracts did not complete due to the Debtor’s actions; that many of the purchasers would be priced out of the real estate market if they could not complete their contracts; and that the public policy objectives of consumer protection justified completing the contracts. The Court addressed each of those arguments in detail and noted its sympathy for the position of the purchasers, but ultimately concluded that the purchasers had not demonstrated that the equities justified overriding the mortgagees’ legal priority “and giving the purchasers a preference that they would not otherwise enjoy.”

The Court determined that the receiver had not applied the correct analysis to the question of disclaimer and that the receiver’s recommendations should not be accorded any deference. In particular, the Court held that the issues before the Court did not involve a consideration of business choices made by a receiver, which is where deference to the knowledge and experience of a receiver would ordinarily be accorded. The Court also noted that, given the significant dispute between the parties, it “would have been best for the Receiver to have provided facts as known to it and thought to be relevant to a determination, but otherwise to have remained neutral as to the result.”

Implications

This decision illustrates that disclaimer remains a useful tool for maximizing realizations in insolvencies for the benefit of all stakeholders. The decision also confirms that disclaimer will generally be appropriate where continuing a contract would create a preference unless there are compelling equitable considerations which favour creating that preference.

In cases such as these, the purchasers’ only recourse will generally be to bring a damages claim against the debtor. While such an option may be fruitful in rare cases, in most insolvencies a damages claim, even if successful, will likely not be recoverable against an insolvent debtor. In addition, in some cases (such as this case) presale agreements may contain exclusion clauses preventing purchasers from bringing claims against the developer beyond seeking return of their deposit monies.

Significantly, the decision in this case was largely driven by the conclusion that the mortgagees had legal priority because the presale agreements expressly provided that they created “contractual rights only and not any interest in land.” In the absence of such language, purchasers may have a basis to claim that they have a proprietary or in rem interest that takes priority over the interests of secured creditors.

In addition, there was no evidence of any agreement on the part of the mortgagees to partially discharge their security against the development in order to permit the presale agreements to complete. To the contrary, the mortgage terms did not require the mortgagees to discharge their security unless they were repaid in full. This may be distinguishable from cases in which mortgagees agree to partially discharge their security in order to permit presale contracts to complete or have conducted themselves in a manner suggestive of that.

Matthew Nied acted for one of the mortgagees in this matter.

The post Forjay Management Ltd. v. 0981478 B.C. Ltd.: Disclaimer of Contract in Insolvency Cases appeared first on Nied Law |‎ Litigation Counsel.

This new approach was, in the graphic words of Binnie J., intended to “shut the coffin” on the “jargon” associated with the doctrine of “fundamental breach” in the context of limitation clauses. That doctrine, which was first posited by Lord Denning and applied by Canadian courts in various forms for more than 50 years, effectively provided that a party could not rely on a clause that purported to limit its liability if the party was in breach of the fundamental “core” of the contract and thereby deprived its counterparty of the very thing bargained for.

The application of the doctrine of fundamental breach tended to focus on whether a limitation clause was “unfair” or “unreasonable” at the time of breach. This conferred on courts a seemingly broad, after-the-fact discretion to depart from the terms of a valid contract “upon vague notions of ‘equity or reasonableness'”.  This led to unpredictable outcomes that cast significant doubt on the enforceability of limitation clauses.

The new approach reinforces the right to limit liability in the interests of preserving individual liberty and commercial flexibility by attempting to circumscribe a court’s ex post facto discretion. It provides that a party will only be able to avoid the effects of a limitation clause if at least one of three things is true: 1) if the clause, interpreted in context, does not apply to the liability at issue; 2) if the clause was unconscionable at the time the contract was made; or 3) if enforcement of the clause would be contrary to public policy.  According to Tercon, a court has no residual discretion beyond these cases to decline to enforce a limitation clause.

In the four years since Tercon, courts have generally applied the new approach in a consistent manner.  However, uncertainty has crept into the analysis in three key areas. First, while Tercon dealt with the doctrine of fundamental breach in the context of limitation clauses, there is some question as to the continued applicability of the doctrine in other contexts.  Second, it is unclear whether the unconscionability stage of the analysis incorporates the traditional requirement that special notice be provided of extraordinary or unusual limitation clauses. Third, the breadth of the public policy stage of the analysis remains unclear.

This article provides an overview of the legal framework established in Tercon and analyzes the three areas of continuing uncertainty.

Read the full article here: Matthew Nied (co-author), “The Ghosts of Fundamental Breach: New Developments in the Enforceability of Contractual Limitations of Liability Since Tercon” (2014) 72:5 The Advocate (Magazine of the Vancouver Bar Association) 665 [cited by the Quebec Court of Appeal in 6362222 Canada inc. c. Prelco inc., 2019 QCCA 1457 at para. 23].

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In October 2012, Wayne Plimmer filed a class-action lawsuit against Google in British Columbia. Mr. Plimmer, a non-Gmail user, claims that Google has been “reading” emails that he has sent to Gmail users, that he has never consented to Google’s use of his private emails for advertising purposes, and that Google is liable for damages for invading his privacy. The claim alleges invasion of privacy under both the common law and the British Columbia Privacy Act. Gmail had more than 425 million active users in or around the time of the filing of the claim.

More than 120 years before, on a day in 1890, Samuel D. Warren, a Boston attorney, felt a similar frustration with his own privacy interests. He and his wife had hosted a series of elite social events, including a wedding for their daughter, which the Boston newspapers had covered in highly personal and embarrassing detail. Exasperated, Warren approached his former law partner, Louis D. Brandeis, with the desire of finding some legal remedy for this constant invasion of privacy, one that would protect his right to be “left alone.”

Later that year, Warren and Brandeis published “The Right to Privacy” in the Harvard Law Review. It called for common-law protection for, among other items falling within the penumbra of privacy, the use of private letters by an unintended third-party recipient.

In 1939, this proposed right to privacy was incorporated into the Restatement of Torts, and by 1960 it was adopted in 26 states and the District of Columbia. In 1977, the Restatement (Second) of Torts provided as an example of such a tort an “investigation or examination into [one’s] private concerns, as by opening his private and personal mail.” Throughout the 20th Century, it was taken as established that reading someone else’s mail would satisfy the elements of this tort.

By 2001, all but two US states had recognized some form of a right to privacy, and today the concept has begun to make its way into Canadian law. Yet, as the tort gains wider acceptance, its scope is called into question when considered in the new context of Internet communications. Although Warren and Brandeis bristled at the thought of third parties intercepting private mail, the facts of Plimmer v. Google have been described by one academic as an “are-you-kidding-me” lawsuit.

This article explores why the act of intercepting and reading another’s mail—an act that was initially viewed as an obvious example of an invasion of privacy—could today be viewed by some as an obvious non-starter. This article first compares the common-law invasion-of-privacy regime in Ontario with the statutory regime in British Columbia. The regimes in these provinces are among the most developed of the Canadian invasion-of-privacy regimes and generally are representative of the common law and statutory regimes in other Canadian jurisdictions. It is suggested that, in practice, the analysis applicable to the tort of intrusion upon seclusion, as a subset of invasion of privacy, is similar under both the common law and statutory regimes.

Next, the article surveys US jurisprudence, which has informed the development of Canadian law, and shows why voluntarily disclosure of information to a third party may have different implications under the Canadian common law regime than it does in the United States. Finally, the article explores the impact of consent under the common law and statutory regimes, and briefly considers the potential implications for a case such as Plimmer.

Read the full article here: Matthew Nied (co-author), “Clicking Away Privacy: Email and the Tort of Intrusion Upon Seclusion” (2014) 17:9 Journal of Internet Law 3.

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The Court held that the defamatory material did not sufficiently reference the factual foundation required to establish the defence. As a result, the Court overturned the trial judge’s dismissal of the claim, granted a permanent injunction, and awarded general damages of $25,000 and punitive damages of $50,000.

The decision clarifies the circumstances in which the “factual foundation” requirement of the defence of fair comment will be met. It also provides guidance with respect to the application of the defence of fair comment to internet publications involving hyperlinked documents.

Background

The appellant, Mainstream Canada (“Mainstream”), was a producer of farmed salmon in British Columbia. The respondent, Don Staniford (“Mr. Staniford”), was an activist dedicated to the eradication of salmon farming. Mr. Staniford was also the author of a website under the name of The Global Alliance Against Industrial Aquaculture (“GAAIA”).

Starting in January 2011, Mr. Staniford posted various publications and images regarding salmon farming on the GAAIA website, and also sent a press release to the media containing similar content.

In general, the publications alleged that salmon farming was hazardous to human health and the environment. The publications also drew comparisons between salmon fish farmers and cigarette manufacturers.

Mainstream commenced an action seeking general and punitive damages on the basis that the publications were defamatory, as well as a permanent injunction restraining Mr. Staniford from publishing similar words and images in the future.

The trial judge dismissed the action. Although the trial judge held that the publications were defamatory, she held that the defence of fair comment applied.

Mainstream appealed the trial judge’s decision on the basis that the defence of fair comment did not apply.

Law

In a defamation action, the plaintiff has the burden of proving that a publication is defamatory. If the plaintiff succeeds, the onus shifts to the defendant to advance a defence, including the defence of fair comment, in order to escape liability.

The defendant must prove five elements to establish the defence of fair comment:

• The comment must be on a matter of public interest;

• The comment must be based on fact;

• The comment, though it can include inferences of fact, must be recognisable as comment;

• The comment must satisfy the following objective test: could any person honestly express that opinion on the proved facts?; and

• Even though the comment satisfies the objective test the defence can be defeated if the plaintiff proves that the defendant was actuated by express malice.

The second element of the defence of fair comment requires that a comment have a sufficient factual foundation. In particular, the comment must be an expression of opinion on a known set of facts, and the audience must be in a position to assess or evaluate the comment.

Decision

On appeal, Mr. Justice Tysoe, writing for a unanimous three-member panel, held that the trial judge erred in finding that the defence of fair comment applied to the defamatory material. In particular, the Court concluded that the defence did not apply because the second element of the defence was not met.

The Court began by observing that the “factual foundation” requirement could be met in any of three ways:

• The factual material can be expressly stated in the same publication as that in which the comment appears (i.e. by “setting it out”);

• The factual material commented on, while not set out in the material, can be referred to (i.e. by being identified “by a clear reference”); or

• The factual material can be “notorious”, as to be already understood by the audience.

The Court concluded that the factual foundation for certain comments in the publications “were neither notorious nor contained in the defamatory publications”.

As for whether there was a “clear reference” to the factual foundation, the Court observed that although the publications made general reference to certain scientific evidence that might have provided a factual foundation for the comments, the publications neither provided details of the evidence nor contained hyperlinks to the scientific papers in which the evidence was contained. At best, the references were indirect: the publications hyperlinked to articles that contained references to the scientific papers that might have provided a factual foundation for the comments.

Accordingly, the Court held that there was no clear reference in the defamatory publications as to where the factual foundation might be found. In addition, the Court observed that the trial judge, by concluding that it would take a “determined reader” to locate the factual foundation upon which the comments were based, had “implicitly acknowledged that there was not a clear reference to the facts that were neither notorious nor contained in the defamatory publications.”

The Court also considered whether the factual foundation could be sufficiently stated if it were contained somewhere on the website, contained in scientific papers hyperlinked on the website, or if the website set out the website addresses for the scientific papers.

On that point, the Court held that “[i]t is not sufficient for the defence of fair comment for facts upon which the comments were made to be contained on website pages that were not alleged to contain defamatory comments or in hyperlinked documents unless those other pages or hyperlinked documents were identified by a clear reference to contain such facts.”

The Court added that “[w]hether hyperlinks in a defamatory publication on a website to other documents containing facts upon which the defamatory comment was made is sufficient will depend on the circumstances of each case. If the defamatory publication advises the reader that a hyperlinked document contains facts upon which the defamatory comment is based and sets out where in the document they are contained, then there may well be a sufficient reference to those facts.”

In the case at bar, “the readers of the defamatory publications were not advised which of the multitudinous hyperlinked documents in the publications or elsewhere on the GAAIA website contained facts upon which Mr. Staniford’s comments were based.”

As a result, the Court concluded that “the facts upon which Mr. Staniford’s defamatory comments were based were not all notorious, contained in the defamatory publications or sufficiently referenced to be contained in other specified documents.” Accordingly, the defence did not apply.

The post Mainstream Canada v. Staniford: Defamation, the Defence of Fair Comment, and the “Factual Foundation” Requirement appeared first on Nied Law |‎ Litigation Counsel.

The “duty to consult” is a duty on the part of Canada’s governments (the “Crown”) to engage in a process of consultation with First Nations where proposed Crown conduct may adversely affect Aboriginal claims or rights.

The decision may have implications for similar mining claim regimes in British Columbia and other Canadian jurisdictions.

On February 25, 2013, the Government of Yukon filed an application seeking leave to appeal the decision to the Supreme Court of Canada.

Background

The plaintiff, the Ross River Dena Council (the “Council”), claimed Aboriginal title and rights to a portion of traditional territory known as the “Ross River Area”. The claim covered approximately 13% of the Yukon.

The dispute focused on the mining claim system established by the Quartz Mining Act, S.Y. 2003, c. 14 (the “Act”), which provides that an individual may acquire mineral rights simply by physically staking a claim and then recording it with a designated regulatory authority.

Once a mining claim is recorded, the Act provides that a claimant is entitled to the minerals within the claim and may conduct certain exploration activities on the land without further authorization and without notice to the Government of Yukon. Such a system is typically referred to as an “open entry” or “free entry” mineral claim system.

The regulatory authority’s role in registering a mineral claim is purely ministerial in nature. That is, the authority does not possess any discretion to refuse to record a claim that complies with the requirements of the Act.

The Council argued that this system permits exploration activities potentially adverse to its asserted Aboriginal title and rights, and that the Government  has a duty to consult before recording mining claims within the claimed territory.

The chambers judge held that the Government’s practices in respect of new mineral claims under the Act did not measure up to the consultation requirements required by the law, but held that those requirements would be satisfied by a scheme under which the Government provided notice to the Council of newly-recorded quartz mining claims within its traditional territory.

The Council appealed, arguing that consultation must take place before the recording of mineral claims, and that consultation requires more than mere notice of new claims.

Law

The law provides that the Crown has a duty to consult with First Nations with respect to contemplated Crown activities when:

• The Crown has knowledge, actual or constructive, of the potential existence of a First Nations claim or right;

• The Crown contemplates conduct or a decision; and

• The conduct or decision may adversely affect the First Nations claim or right.

The duty to consult is grounded in the honour of the Crown. While the treaty claims process is ongoing, there is an implied duty to consult with First Nations claimants on matters that may adversely affect their treaty and Aboriginal rights, and, where appropriate, to accommodate those interests in the spirit of reconciliation.

It is not necessary for a First Nation to definitely establish a claim or right for the duty to consult to arise. The depth of the required consultation in connection with an unproven claim increases with:

• The strength of the prima facie First Nations claim; and

• The seriousness of the impact on the underlying claim or treaty right.

As a result, a dubious or peripheral claim may attract a mere duty of notice, while a stronger claim may attract more stringent duties.

The remedy for a breach of the duty to consult varies with the situation. The Crown’s failure to consult can lead to a number of remedies ranging from injunctive relief against the conduct, to damages, to an order to carry out the consultation prior to proceeding further with the proposed Crown conduct.

Decision

The question on appeal was whether the three elements of the duty to consult were present where the Government sought to record a mineral claim within territory subject to Aboriginal rights and title claims.

There was no dispute that the first element of the duty to consult was satisfied, since the Government had knowledge of the Council’s asserted Aboriginal rights.

There was also no doubt that the third element of the duty to consult was met. The regulatory regime could allow mineral claims to be granted without regard to asserted Aboriginal title, and could also allow exploratory work that might adversely affect claimed Aboriginal rights to be carried out without consultation.

Accordingly, the key issue in dispute was whether the second element of the duty to consult was met. That is, the question was whether the recording of a mineral claim under the Act qualified as “contemplated Crown conduct” despite the fact that the regulatory authority had no discretion in respect of the granting of the mineral claim provided that the requirements of the Act were met.

Mr. Justice Groberman, writing for the Yukon Court of Appeal, rejected the notion that “the absence of statutory discretion in relation to the recording of claims under the … Act absolve[d] the Crown of its duty to consult.” In the Court’s view, the duty to consult “exists to ensure that the Crown does not manage its resources in a manner that ignores Aboriginal claims”, and that “[s]tatutory regimes that do not allow for consultation and fail to provide any other equally effective means to acknowledge and accommodate Aboriginal claims are defective and cannot be allowed to subsist.”

The Court also held that the duty to consult required more than the mere provision of notice of mining claims. Although the Court acknowledged that “the open entry system … under the … Act has considerable value in maintaining a viable mining industry and encouraging prospecting” and “that the system is important both historically and economically”, the Court held that the system had to be modified “in order for the Crown to act in accordance with its constitutional duties.”

However, the Court did not specify precisely how the regime could be brought into conformity with the requirements of the duty to consult. In the Court’s view, “[w]hat is required is that consultations be meaningful, and that the system allow for accommodation to take place, where required, before claimed Aboriginal title or rights are adversely affected.”

In particular, where “exploration activities are expected to have serious or long-lasting adverse effects on claimed Aboriginal rights, … [t]he affected First Nation must be provided with notice of the proposed activities and, where appropriate, an opportunity to consult prior to the activity taking place.” In doing so, “the Crown must ensure that it maintains the ability to prevent or regulate activities where it is appropriate to do so.”

In the result, the Court declared that the Government had a duty to consult “in determining whether mineral rights … within [the claimed lands] are to be made available to third parties under the provisions of the … Act.” The Court also declared that the Government “has a duty to notify and, where appropriate, consult with and accommodate the plaintiff before allowing any mining exploration activities to take place within the [claimed territory], to the extent that those activities may prejudicially affect Aboriginal rights claimed”.

The Court suspended these declarations for one year in order to permit the Government time, if it wished, to make statutory and regulatory changes in order to provide for appropriate consultation.

The decision may have implications for similar “open entry” mining claim regimes in British Columbia and other Canadian jurisdictions. Although the decision is binding precedent only in the Yukon, the judges of the Yukon Court of Appeal are comprised of the judges of the British Columbia Court of Appeal. Accordingly, the decision is likely to be highly influential in British Columbia.

On February 25, 2013, the Government of Yukon filed an application seeking leave to appeal the decision to the Supreme Court of Canada.

The post Ross River Dena Council v. Government of Yukon: “Open Entry” Mining Claims and the Duty to Consult appeared first on Nied Law |‎ Litigation Counsel.

The key issue on appeal was how to determine whether an interference with the private use and enjoyment of land is unreasonable when it results from construction which serves an important public purpose.

The Court held that the reasonableness of an interference must be determined by balancing the competing interests, as in all other cases of private nuisance. That balance will be appropriately struck by answering the question of whether, in all of the circumstances, the individual claimant has shouldered a greater share of the burden of construction than it would be reasonable to expect individuals to bear without compensation.

Background

Antrim Truck Centre Ltd. (“Antrim”) owned and operated a truck stop on Highway 17 near Ottawa. For more than 25 years, the business benefited from the patronage of motorists travelling along the highway.

In 2004, the Province of Ontario constructed a new highway that significantly and permanently altered Highway 17 in a manner that restricted motorists’ access to the truck stop, decreasing the market value of the land and effectively putting the truck stop out of business.

Antrim sought compensation for injurious affection before the Ontario Municipal Board, which awarded damages of approximately $400,000 for business loss and for loss in the market value of the property.

The award was upheld by the Divisional Court of the Ontario Superior Court of Justice, but set aside by the Ontario Court of Appeal on the basis that the interference was not unreasonable given the important public purposes served by the highway’s construction.

Decision

The key issue on appeal was how to determine whether an interference with the private use and enjoyment of land is unreasonable when it results from construction which serves an important public purpose.

In order to establish a claim for injurious affection, Antrim had to establish three elements under the Ontario Expropriations Act:

• The damage must result from action taken under statutory authority;

• The action would give rise to liability but for that statutory authority; and

• The damages must result from the construction and not the use of the works.

If Antrim could establish those three elements, it would be compensated for the amount by which the affected land’s market value was reduced because of the interference, and for personal and business damages.

On appeal, there was no dispute that the first and third requirements of injurious affection were met. The unresolved question was whether the second requirement was met. That is, if the highway construction had not been done under statutory authority, could Antrim have successfully sued for damages caused by the construction under the law of private nuisance?

Mr. Justice Cromwell, writing for the Court, began by observing that in order to establish a claim in private nuisance a claimant must establish that the interference with their use or enjoyment of land is both substantial and unreasonable.

To conclude that an interference is substantial, it must be shown to be “non-trivial” and “amount[ing] to more than a slight annoyance or trifling interference.” This requirement “underlines the important point that not every interference, no matter how minor or transitory, is an actionable nuisance; some interferences must be accepted as part of the normal give and take of life.”

Once the substantial interference threshold is met, the inquiry proceeds to the unreasonable interference analysis, which is concerned with whether the substantial interference was also unreasonable in all of the circumstances.

The question of whether an interference is unreasonable where that interference arises from an activity that furthers the public good “must be determined by balancing the competing interests”. In the Court’s view, that balance is “appropriately struck by answering the question whether, in all of the circumstances, the individual claimant has shouldered a greater share of the burden of construction than it would be reasonable to expect individuals to bear without compensation.”

In the traditional law of private nuisance, courts assess whether an interference is unreasonable by balancing the gravity of the harm against the utility of the defendant’s conduct. However, because the acts of a public authority will generally be of significant utility, public interests will generally outweigh the private interests affected by even very significant interferences. Accordingly, a simple balancing of private interests against  public utility may well undermine the purpose of legislation that provides compensation for injurious affection.

In order to avoid that result, the Court held that “the question is not simply whether the broader public good outweighs the individual interference when the two are assigned equal weight”. Rather, “the question is whether the interference is greater than the individual should be expected to bear in the public interest without compensation”. The rationale is that “everyone must put up with a certain amount of temporary disruption caused by essential construction.”

The Court thus drew a distinction between interferences that constitute the “give and take” expected of all members of the public and “interferences that impose a disproportionate burden on individuals.” The Court observed that “the reasonableness analysis should favour the public authority where the harm to property interests, considered in light of its severity, the nature of the neighbourhood, its duration, the sensitivity of the plaintiff and other relevant factors, is such that the harm cannot reasonably be viewed as more than the claimant’s fair share of the costs associated with providing a public benefit.” Another relevant factor is whether the public authority “has made all reasonable efforts to reduce the impact of its works on neighbouring properties.”

The Court ultimately allowed the appeal on the basis that it was reasonable for the Board to conclude that, in all of the circumstances, Antrim should not be expected to endure “permanent interference with the use of its land that caused a significant diminution of its market value in order to serve the greater public good.”

It is important to recognize that Antrim was decided on the basis of Ontario’s statutory regime. Although s. 41 of the British Columbia Expropriation Act also permits claims for compensation on the basis of injurious affection, it remains unclear how Antrim will impact compensation claims in British Columbia.

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The Court held that a deposit will generally be forfeited without proof of damages, subject to a clear expression of contrary intention in the contract. This decision clarifies the law in British Columbia and resolves a conflict between prior inconsistent decisions.

Background

The sellers entered into a standard form contract to sell a residential property for approximately $2,000,000. The buyer paid a deposit of $100,000. The contract provided that if the buyer did not complete the sale, “the Seller [could], at the Seller’s option, terminate [the] Contract, and, in such event, the amount paid by the Buyer [would] be absolutely forfeited to the Seller … on account of damages, without prejudice to the Seller’s other remedies.”

The buyer paid the deposit, but failed to complete the transaction. The sellers subsequently went to court seeking a declaration that the deposit was absolutely forfeited to them. In the meantime, the sellers managed to sell the property to another buyer at a higher price. As a result, the seller did not suffer any damages as a result of the buyer’s failure to complete the sale.

The trial judge observed that the contract provided that the sellers “were only entitled to the deposit ‘on account of damages’” in the event that the buyer did not complete the sale. The trial judge interpreted this to mean that the sellers did not have an unconditional right to the full deposit; instead, they only had a right to claim proven damages out of the deposit funds. Because the sellers had suffered no damages, the buyer was entitled to the return of the deposit.

Decision

The sole issue on appeal was whether the deposit was absolutely forfeited without proof of damages.

The Court began by reviewing the legal principles that govern deposits. The Court observed that the common law supports the notion that, in general, a deposit is lost by the party who fails to perform a contract, even in the absence of damages, on the basis that a deposit is “not merely a part payment”, but also a practical mechanism to “creat[e] by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”

The Court held that although the question of whether a deposit is forfeited is a matter of contractual interpretation, a deposit is generally forfeited without proof of damages. This is consistent with the purpose of deposits, which is to motivate contracting parties to carry through with their bargains.

However, the Court noted that the mere act of labeling a payment as a “deposit” in a contract will not permit the parties to “immunize [the payment] from judicial scrutiny.” A court is not precluded from considering whether a “deposit” is in fact a penalty (in which case relief from forfeiture is available at common law), or unconscionable (in which case relief is available in equity). The Court observed that a deposit of up to 10% of the purchase price has generally been regarded as reasonable, and noted that there was an instance in which a deposit of 20% was regarded as reasonable.

The Court expressly rejected the argument that the phrase “on account of damages” should be interpreted to limit the forfeiture of a deposit to proven damages. In the Court’s view, the phrase was intended to mean that “in any action by a vendor to recover damages against a defaulting purchaser for breach of contract, the amount of the deposit would be counted toward (or “on account of”) such damages.” Seen in this manner, “[t]he phrase forecloses double recovery if damages are proven”, which is “not inconsistent with the nature of the deposit as a ‘guarantee’ of performance which encourages contracting parties to complete their contracts in accordance with their terms.”

Tang does not preclude parties to a contract from providing that a deposit will not be forfeited unless damages are proven. However, in light of the Court’s reasoning, doing so would appear to require the use of language that clearly and unambiguously expresses the parties’ intentions to negate the general rule and the policy rationale underlying it.

The post Tang v. Zhang: Forfeited Deposits and Proof of Damages appeared first on Nied Law |‎ Litigation Counsel.

Read the full article here: Matthew Nied (co-author), “Mason Capital Succeeds: Appeal Court Confirms CDS’s Ability to Requisition Meeting By ‘Empty Voter’” (2012) 7:4 Corporate Governance Report 41.

The post TELUS Corporation v. Mason Capital Management: Shareholder Meeting Requisitions and “Empty Voting” appeared first on Nied Law |‎ Litigation Counsel.