NCA Contract Law 2 — Questions and Answers
Question 1: What is the difference between a 'condition' and a 'warranty' in Canadian contract law?
- They are the same thing
- A condition is a fundamental term whose breach entitles the innocent party to terminate the contract and claim damages, while a warranty is a less important term whose breach gives rise to damages only, not termination (Correct answer)
- A warranty is more important than a condition
- Conditions apply to goods and warranties apply to services
Correct answer: A condition is a fundamental term whose breach entitles the innocent party to terminate the contract and claim damages, while a warranty is a less important term whose breach gives rise to damages only, not termination
The distinction is critical for determining remedies. A condition is an essential term going to the root of the contract — its breach entitles the innocent party to treat the contract as repudiated (terminate) and claim damages. A warranty is a term of lesser importance — its breach entitles the innocent party to damages only; they must continue performing the contract. Some jurisdictions also recognize 'innominate' or 'intermediate' terms, where the remedy depends on the severity of the breach.
Question 2: What is the duty to 'mitigate damages' in Canadian contract law?
- A duty to prevent the contract from being breached
- The innocent party has a duty to take reasonable steps to minimize their losses following a breach — damages will not be awarded for losses that could have been reasonably avoided (Correct answer)
- A duty to accept the breaching party's apology
- There is no duty to mitigate in Canadian law
Correct answer: The innocent party has a duty to take reasonable steps to minimize their losses following a breach — damages will not be awarded for losses that could have been reasonably avoided
The duty to mitigate requires the innocent party to take reasonable steps to reduce their losses after a breach. They cannot recover damages for losses they could have reasonably avoided. However, the standard is reasonableness — the innocent party is not required to take extraordinary measures or accept unreasonable alternatives. The burden of proving failure to mitigate is on the party in breach.
Question 3: What is the test for remoteness of damages in contract law as established in Hadley v Baxendale?
- All losses caused by the breach are recoverable
- Damages are recoverable only if they arise naturally from the breach (first limb) or were reasonably within the contemplation of both parties at the time of contracting as a probable result of the breach (second limb) (Correct answer)
- Only direct damages are ever recoverable
- There is no limit on recoverable damages in Canada
Correct answer: Damages are recoverable only if they arise naturally from the breach (first limb) or were reasonably within the contemplation of both parties at the time of contracting as a probable result of the breach (second limb)
Hadley v Baxendale (1854) established two limbs for remoteness: (1) damages arising 'naturally' (i.e., in the usual course of things) from the breach; (2) damages that were reasonably within the contemplation of both parties at the time of contracting as the probable result of the breach. Special circumstances must be communicated to bring unusual losses within the second limb. This rule limits recovery to foreseeable losses.
Question 4: What are 'implied terms' in a Canadian contract and how do they arise?
- Terms that are always implied into every contract regardless of context
- Terms not expressly stated but implied by statute (e.g., Sale of Goods Acts), by custom or trade usage, by the courts to give business efficacy to the contract, or on the basis of the 'officious bystander' test (Correct answer)
- Terms that are written in invisible ink
- Terms that only apply after the contract is terminated
Correct answer: Terms not expressly stated but implied by statute (e.g., Sale of Goods Acts), by custom or trade usage, by the courts to give business efficacy to the contract, or on the basis of the 'officious bystander' test
Implied terms arise from four sources: (1) statute — e.g., Sale of Goods Acts imply conditions of merchantability and fitness for purpose; (2) custom or trade usage — established practices in a particular trade; (3) business efficacy — terms necessary to make the contract work as the parties intended (The Moorcock test); (4) the officious bystander test — terms so obvious that both parties would have agreed ('Oh, of course!'). Courts imply terms cautiously to respect freedom of contract.
Question 5: What is the legal effect of an 'exclusion clause' or 'limitation of liability clause' in Canadian contract law?
- Such clauses are always void and unenforceable
- They are enforceable if properly incorporated into the contract, brought to the other party's reasonable attention, and construed strictly against the party relying on them (contra proferentem), subject to unconscionability and statutory limitations (Correct answer)
- They can limit liability for any type of harm without restriction
- They only apply to commercial contracts between businesses
Correct answer: They are enforceable if properly incorporated into the contract, brought to the other party's reasonable attention, and construed strictly against the party relying on them (contra proferentem), subject to unconscionability and statutory limitations
Exclusion and limitation clauses are subject to several judicial controls: (1) they must be properly incorporated (signed or reasonable notice given before or at the time of contracting); (2) they are construed strictly against the party relying on them (contra proferentem); (3) they may be struck down if unconscionable; (4) they may be subject to statutory restrictions (e.g., consumer protection legislation). The Tercon framework (SCC, 2010) provides a three-step analysis for enforceability.
Question 6: How does the doctrine of 'privity of contract' apply in Canada, and what are the main exceptions?
- Anyone affected by a contract can enforce it
- Only parties to the contract can sue on it or be bound by it, but exceptions include agency, trust, assignment, statutory third-party beneficiary rights, and the principled exception from London Drugs (Correct answer)
- Privity has been abolished in Canada
- Privity only applies to real estate contracts
Correct answer: Only parties to the contract can sue on it or be bound by it, but exceptions include agency, trust, assignment, statutory third-party beneficiary rights, and the principled exception from London Drugs
The privity doctrine limits contractual rights and obligations to the contracting parties. Exceptions in Canadian law include: (1) agency (undisclosed principal); (2) trust (beneficiary of a contractual trust); (3) assignment; (4) statutory exceptions (e.g., insurance legislation); (5) the London Drugs Ltd v Kuehne & Nagel International Ltd (SCC, 1992) exception — employees of a contracting party may rely on limitation clauses if they were performing the contracted services. Some provinces have also enacted third-party beneficiary legislation.
NCA Contract Law 2
What is the difference between a 'condition' and a 'warranty' in Canadian contract law?