Contract Law in Canada

Overview

Contract law in Canada operates within a bijural framework: the nine common law provinces and three territories follow the English common law tradition, while Quebec applies the civil law tradition codified in the Civil Code of Québec, CQLR c CCQ-1991 (CCQ). This division, rooted in s. 94 of the Constitution Act, 1867 (which permits the common law provinces to unify their property and civil rights law but has never been invoked), creates two distinct streams of contract doctrine. The Supreme Court of Canada serves as the final court of appeal for both systems, occasionally rendering judgments that elucidate common law principles and civil law doctrine in the same reasons.

Formation of Contracts

Common Law Provinces and Territories

At common law, a binding contract requires offer, acceptance, and consideration. An offer is a clear indication of willingness to contract on specified terms, communicated to the offeree with the intention that it will become binding upon acceptance (Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 256). Acceptance must be communicated to the offeror and must correspond exactly to the terms of the offer — the mirror image rule. The postal acceptance rule (acceptance effective upon dispatch, not receipt) remains good law where postal communication is reasonable, but has been restricted in the context of instantaneous communication (Brinkibon Ltd v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34).

Consideration is the price paid for the promisor’s promise: something of value exchanged between the parties. The doctrine requires that consideration move from the promisee but need not be adequate (Thomas v. Thomas (1842) 2 QB 851). The Supreme Court in Petikus v. Becker [1980] 2 SCR 834 and later cases has recognized unjust enrichment as a basis for recovery in the absence of contract, supplementing the strict consideration requirement. Promissory estoppel, as recognized in Central London Property Trust Ltd v. High Trees House Ltd [1947] KB 130, permits enforcement of a promise to waive contractual rights where the promisee has relied on the promise to their detriment.

Quebec Civil Law

Under art. 1385 CCQ, a contract is formed by the exchange of consents between persons capable of contracting. The civil law does not require consideration; instead, the contract requires a cause (art. 1410 CCQ), defined as the reason that determines each party to contract, which need not be expressed. Offer and acceptance operate similarly to the common law, but the civil law permits revocation of an offer before acceptance unless the offeror has undertaken not to revoke it (art. 1392 CCQ).

Quebec contract law is governed by the overriding principle of good faith in the formation, performance, and enforcement of contracts (art. 1375 CCQ). This contrasts with the common law, where good faith has traditionally played a limited role, though the Supreme Court’s decision in Bhasin v. Hrynew [2014] 3 SCR 494 introduced a common law duty of honest contractual performance as an organizing principle of contract law.

Vitiating Factors

Contracts in both systems may be challenged on grounds that vitiate consent. Misrepresentation — a false statement of fact inducing the contract — entitles the innocent party to rescission (common law) or nullity (Quebec). Fraudulent misrepresentation sounds in damages in tort for the common law; under art. 1401 CCQ, fraud is a vice of consent rendering the contract voidable.

Duress and undue influence allow rescission. The common law distinguishes between duress to the person, duress to goods, and economic duress (Pao On v. Lau Yiu Long [1980] AC 614). Quebec law addresses these as forms of fear (art. 1402 CCQ), which includes threats of serious injury to the person or reputation. Lesion (art. 1405 CCQ) — exploitation of a party’s weakness to obtain a disproportionately advantageous bargain — is available as a remedy for minors and persons of full age in certain circumstances.

In the common law provinces, unconscionability permits a court to set aside a contract where there was an inequality of bargaining power and the resulting transaction was substantially unfair (Morrison v. Coast Finance Ltd (1965) 55 DLR (2d) 710 (BCCA)). The Supreme Court affirmed the independent doctrine of unconscionability in Uber Technologies Inc v. Heller [2020] 2 SCR 118, which also addressed the validity of arbitration clauses in standard form contracts.

Terms of the Contract

The content of a contract includes express terms (those explicitly agreed upon) and implied terms. Terms may be implied by statute (e.g., conditions and warranties under sale of goods legislation), by custom or usage, or by the courts to give business efficacy to the contract (The Moorcock (1889) 14 PD 64). The Supreme Court in Bhasin v. Hrynew affirmed that the duty of honest performance is an implied term in all common law contracts.

In Quebec, the CCQ provides a comprehensive code of contractual interpretation (arts. 1425–1432), including the rule that the common intention of the parties prevails over the literal meaning of the words (art. 1425), and that a contract is interpreted in good faith (art. 1426).

Breach and Remedies

Breach of contract occurs where a party fails to perform a contractual obligation. In the common law, breach gives rise to a right to damages measured to place the injured party in the position they would have been in had the contract been performed — the expectation interest (Hadley v. Baxendale (1854) 9 Exch 341; Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528). The Supreme Court clarified the measure of damages for breach of a contractual duty to repair in S.M. Waddams, The Law of Damages (loose-leaf) and in Bank of America Canada v. Mutual Trust Co. [2002] 2 SCR 601.

Specific performance is an equitable remedy available where damages are inadequate. Injunctions may issue to restrain breach. In Quebec, performance by equivalence (art. 1602 CCQ) entitles the creditor to damages in lieu of performance, while specific performance is the primary remedy (art. 1590 CCQ), reflecting the civil law’s preference for in natura performance.

Freedom of Contract and Legislative Intervention

The principle of freedom of contract remains foundational, but has been substantially qualified by legislation. The Sale of Goods Act (e.g., RSO 1990, c S.1) implies conditions as to title, description, quality, and fitness for purpose. Provincial consumer protection legislation (e.g., Ontario’s Consumer Protection Act, 2002, SO 2002, c 30, Sch A) provides mandatory rights to cancel certain contracts, implies statutory warranties, and renders unenforceable terms that are unconscionable.

The Civil Code of Québec itself contains mandatory rules protecting consumers and contracting parties in positions of weakness (arts. 1384, 1432–1436 CCQ). Quebec’s Consumer Protection Act, CQLR c P-40.1, operates alongside the CCQ to regulate contracts of adhesion and consumer transactions.

The Supreme Court of Canada and Unification of Principles

The Supreme Court of Canada has played a central role in developing a distinctly Canadian contract law. In Bhasin v. Hrynew, the Court recognized an organizing principle of good faith in common law contract law, declining to follow the English approach that had resisted such a duty. In Tercon Contractors Ltd v. British Columbia (Transportation and Highways) [2010] 1 SCR 69, the Court articulated a three-step framework for exclusion clauses, incorporating considerations of public policy. In Uber Technologies Inc v. Heller, the Court addressed the intersection of arbitration clauses and unconscionability in the gig economy.

These developments reflect a Canadian contract law that, while rooted in the English common law, has evolved to address distinctly Canadian social and economic conditions, including the recognition of Indigenous legal traditions and the constitutional values embedded in the Canadian Charter of Rights and Freedoms.