D. Canadian Reception of the Doctrine

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 765-776

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Canadian courts accorded the doctrine of fundamental breach set out by Lord Denning in the Karsales⁵²case a warm reception. The doctrine was applied on numerous occasions, many of them involving disputes concerning commercial agreements.⁵³In these cases, the courts typically reasoned that the contract performance provided by the person relying on the clause was so defective that the other party had essentially not received the bargained-for consideration. With the advent of the decision of the House of Lords in Suisse Atlantique,⁵⁴ however, Canadian courts accepted the soundness of the decision in that case and began to employ, at least in appearance, the construction approach. In B.G. Linton Construction Ltd. v. C.N.R. Co.,⁵⁵ a majority of the Supreme Court of Canada, following the reasoning in Suisse Atlantique, held that the defendant, which had badly botched the sending of the plaintiff’s bid on a construction project by telegraph, was able to rely on a comprehensive exculpatory clause. In dissent, however, Laskin C.J.C. would have applied the principle that an exculpatory clause cannot be given the effect of completely negating any obligation that the agreement might have appeared to contemplate. In his view, "[t]here must be a residue of obligation that is not cancelled out by concurrent exemp-

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tion; otherwise, it is illusory to speak of a contract."⁵⁶The majority did not disagree with this proposition but held that the case was one of negligent performance rather than fundamental breach.

Although the Suisse Atlantique approach was accepted and purportedly applied in a number of subsequent Canadian cases, it was not apparent, at the level of the actual results of these cases, that much had changed as a result of the shift to the construction technique. In cases involving consumer purchases of vehicles, for example, a series of defects in the vehicle in question was held to constitute a fundamental breach that the exculpatory clause, on its proper construction, did not reach.⁵⁷Similar results were achieved in the context of commercial transactions on the basis of the construction approach. Thus, for example, in R.G. MCLEAN Ltd. v. Canadian Vickers Ltd.,⁵⁸the supplier of a defective printing press was unable to rely on a broadly worded exclusion clause. The defects had resulted in a performance that was "totally different from what the parties had in contemplation."⁵⁹Accordingly, on its proper construction, the clause did not preclude the action for damages for breach of warranty.

Canadian cases in the post-Suisse Atlantique era, however, also contained, on occasion, more aggressive assertions of a "rule of law" approach reminiscent of Lord Denning’s views. In a consumer transaction case, Davidson v. Three Spruces Realty Ltd.,⁶⁰a British Columbia trial judge, drawing on prior statements of Lord Denning to the same effect,⁶¹asserted a jurisdiction to withhold enforcement of an exculpa-tory clause where, in all the circumstances, "it is unreasonable and unconscionable"⁶²to enforce the clause. The plaintiffs had placed valuables in "safety deposit" vaults operated by the defendant. The circum-

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stances considered relevant by the trial judge included the fact that the agreement was set out on a standard form, that the customers’ attention had not been drawn to the exemption clause nor, indeed, were they provided with copies of the agreement. These factors, it may be noted, are rather similar to those that English courts are required to consider under the Unfair Contract Terms Act 1977.⁶³Further, in Davidson, the agreements were executed by the plaintiffs after receiving representations that proper precautions would be taken by the defendant to ensure the security of their valuables. A suggestion had also been made by the defendant that there was no need for the plaintiffs to acquire insurance against loss by theft or otherwise. The trial judge’s view that exemption clauses can be ignored where it would be unreasonable and unconscionable to apply them is, of course, quite inconsistent with the reasoning in the Suisse Atlantique case.

Similarly, in the decision of the Ontario Court of Appeal in Beaufort Realties (1964) Inc. v. Belcourt Construction (Ottawa) Ltd.⁶⁴- a decision ultimately appealed to the Supreme Court of Canada⁶⁵- the Court refused to apply a waiver of lien clause executed by a subcontractor in the context of a construction project where the general contractor had wrongfully refused to pay the subcontractor for what it considered to be unsatisfactory work. Wilson J.A., speaking for the Court of Appeal, acknowledged that the Supreme Court of Canada had approved Suisse Atlantique in the Linton Construction⁶⁶ case and further acknowledged that Lord Reid, in Suisse Atlantique, had stated that "there is no indication in the recent cases that the courts are to consider whether the exemption is fair in all circumstances or is harsh and unconscionable."⁶⁷

Nonetheless, Wilson J.A. went on to suggest that it was open to the court to determine "whether it is fair and reasonable that [the exemption clause] survive the disintegration of its contractual setting."⁶⁸For the Court of Appeal, the waiver of lien stipulation, even though it simply deprived the subcontractor of the additional remedy of a lien, was

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considered to be an exculpatory clause. Further, non-payment by the general contractor on the mistaken assumption that the subcontractor was in breach was held to constitute a fundamental breach of the agreement. Accordingly, the general contractor could not rely on the waiver and the statutory lien was held to revive. Otherwise, the result would be unfair and unreasonable. Again, it is not possible to find in Suisse Atlantique support for the proposition that a court can withhold enforcement of an exculpatory clause in circumstances where it considers application of the clause to be "unfair and unreasonable." Further, the result in this case might be considered to constitute a rather aggressive application of the doctrine of fundamental breach.

Against this background, the decision of the Supreme Court of Canada in the Beaufort Realties case occasions some surprise. Subsequent to the decision of the Ontario Court of Appeal, and prior to the argument of the appeal to the Supreme Court of Canada in this case, the decision of the House of Lords in Photo Production was released.⁶⁹

In a rather short judgment on behalf of the Supreme Court, Ritchie J. quoted at length from Lord Wilberforce’s reasons in Photo Production in which Lord Wilberforce strongly criticized the views of Lord Denning and reaffirmed the construction approach favoured in Suisse Atlantique. Consistently with the position taken in the Linton Construction case, then, the Supreme Court reaffirmed its support for the construction approach. At the same time, however, the Court, somewhat surprisingly, affirmed the holding of the Ontario Court of Appeal that the waiver of lien clause ceased to bind the subcontractor as a result of the general contractor’s fundamental breach of contract. If, at the level of formal doctrine, the construction approach had been reaffirmed by the court in this case, the result belied some continuing influence of Lord Denning’s views.

A more open embrace of an independent Canadian doctrine of fundamental breach was to await the decision of the Supreme Court of Canada in 1989 in Hunter Engineering Co. Inc. v. Syncrude Canada Ltd.⁷⁰ This case involved a commercial transaction under which gearboxes were designed and supplied by Hunter for the plaintiff Syncrude’s tar sands operations in Western Canada. Under a second agreement, Allis-Chalmers supplied a conveyer system that included a further set of Hunter-designed gearboxes. Under both contracts, warranties were given with respect to the gearboxes but, under a separate provision, the warranties in each case expired either twenty-four months from delivery of the

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equipment or twelve months from its commencement in service, whichever should first occur. When, after expiry of the warranty period, the gearboxes failed as a result of design defects, Syncrude launched actions against Hunter and Allis-Chalmers, both of whom relied on the limitation of liability clauses. Syncrude sought to disarm the clauses on the basis of the doctrine of fundamental breach. Although the Court was unanimous in the view that the plaintiff’s claims were to be dismissed, a majority view as to the nature of the doctrine of fundamental breach did not emerge. Extensive discussions of the doctrine were offered both by Dickson C.J.C. and Wilson J., but neither view attracted majority support. Each attracted a concurring vote. The fifth member of the panel declined to choose between the competing views.⁷¹Both Dickson C.J.C. and Wilson J. noted that the Photo Production case had reaffirmed the construction approach advocated in Suisse Atlantique and adopted by the Supreme Court of Canada in the Beau-fort Realties case. They acknowledged as well, however, that although Canadian courts appeared to have paid lip service to the construction approach, they had persisted in...