Marvco Colour Research Ltd. v. Harris, [1982] 2 SCR 774, 1982 CanLII 63 (SCC)

Supreme Court of Canada

Contracts—Non est factum—Document, signed by respondents without being read, not as represented—Applicability of defence of non est factum.

This action was for foreclosure on a charge executed by respondents at the behest of one Johnson in connection with his acquisition of an associate’s interest in a firm. The charge was, in fact, a collateral security securing the performance of the covenantors under a Deed of Covenants and it was relied upon by the appellant in releasing one Suwald from his obligations under a chattel mortgage given by him and Johnson at the time of the purchase of the firm from appellant. Respondents executed the charge, without reading it, on Johnson’s assurances that the document being signed related to minor adjustments to an earlier mortgage executed by respondents, the funds from which had been advanced in connection with Johnson’s transaction. In reality, however, the document was a second charge in favour of the appellant. The issue is whether or not non est factum, respondents’only defence, is available.

Held: The appeal should be allowed.

The defence of non est factum was not available to respondents. Any person who fails to exercise reasonable care in signing a document is precluded from relying on non est factum as against a person who relies upon that document in good faith and for value. The application of the principle, which is based in part on the need for commercial certainty and security, depends on the circumstances of each case. Here, while both appellant and respondents are innoncent of any wrongdoing as against any persons, it was the carelessness of the respondents which resulted in the wrongdoing being able to inflict the loss. Simple justice demanded that the party able to prevent the loss through the exercise of reasonable care

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should bear that loss when the only other alternative would be for the innocent appellant to bear it.

Prudential Trust Co. Ltd. et al. v. Cugnet, [1956] S.C.R. 914, overturned; Carlisle and Cumberland Banking Co. v. Bragg, [1911] 1 K.B. 489, not followed; Saunders v. Anglia Building Society, [1971] A.C. 1004, applied; Foster v. Mackinnon (1869), L.R. 4 C.P. 704, considered; Howatson v. Webb, [1907] 1 Ch. 537, aff’d [1908] 1 Ch. 1; Muskham Finance Ltd. v. Howard, [1963] 1 Q.B. 904; Commercial Credit Corporation Ltd. v. Carroll Bros. Ltd. (1971), 20 D.L.R. (3d) 504; Custom Motors Ltd. v. Dwinell (1975), 61 D.L.R. (3d) 342, 12 N.S.R. (2d) 524 (N.S.C.A.); Bank of Nova Scotia v. Battiste (1979), 22 Nfld. & P.E.I.R. 192 (Newfoundland Trial Division); Canadian Imperial Bank of Commerce v. Kanadian Kiddee Photo Ltd. and Romano, [1979] 3 W.W.R. 256 (B.C.S.C.); Waberley v. Cockerel (1542), 1 Dy. 51. a., referred to.

APPEAL from a judgment of the Ontario Court of Appeal (1980), 115 D.L.R. (3d) 512, 30 O.R. (2d) 162, dismissing an appeal from a judgment of Grange J. Appeal allowed.

W.A. D Millar, for the appellant.

John J. Lawlor, for the respondents.

The judgment of the Court was delivered by

ESTEY J.—This is an action for foreclosure on a mortgage (or more accurately, a charge under The Land Titles Act, R.S.O. 1970, c. 234) securing the sum of $55,650.43 granted by the respondents to the appellant. The only defence raised in the action was that of non est factum.The respondents unquestionably executed the charge in favour of the appellant and it is clear that the appellant has not been guilty of fraud or improper conduct of any kind, and in concurrent findings below has been found to be, but for non est factum, fully entitled to the relief requested. The respondents executed the charge at the request of a third party, Johnston, in connection with the acquisition by Johnston of an interest of an associate in a firm owned by Johnston and the associate. In connection with this acquisition the respondents had advanced $15,000 in cash raised by them through an earlier mortgage on the same property, granted by them to the Bank of Montreal. The husband,

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Dennis Harris, one of the respondents, had also executed a contract of guarantee in favour of the appellant of the same principal sum as secured by the mortgage which is the subject of this action. In this guarantee the appellant, in consideration of the covenants by the respondent husband and Johnston, released its claims against Suwald, the person whose interest in the firm was being purchased by Johnston. Prior to the release, Suwald had been liable to the appellant on a covenant in a chattel mortgage which had been given by Johnston and Suwald at the time of the purchase of the firm from the appellant. Apparently on the same day, but after this contract of guarantee was executed, the respondents signed the mortgage or charge in question, the last paragraph of which included the following passage typed in a blank space in the form of charge used by the parties:

This mortgage is given as collateral security for the liability of Dennis Albert Harris under the terms of a Deed of Covenants bearing even date wherein the said Dennis Albert Harris and the Mortgagee are (inter alia) parties as co-covenantor and covenantee respectively. No financial liability on the part of the Mortgagors shall arise hereunder unless and until there shall be default on the part of the covenantors of the terms of the said Deed of Covenants and no rights shall accrue to the Mortgagee prior to any such default. The Mortgagee agrees with the Mortgagors that it will pursue all other remedies under the Deed of Covenants and Chattel Mortgage referred to therein before enforcing the security hereby constituted. Discharge of the liabilities arising under the Deed of Covenants and the said Chattel Mortgage shall rank pro tanto as a discharge (or partial discharge, as the case may be) of the principal secured hereby. All other terms and conditions of this Mortgage shall be read and construed accordingly.

The mortgage was in fact, therefore, a collateral security granted by the respondents in favour of the appellant securing the performance by the covenantors, including the respondent husband, and it was relied upon by the appellant in releasing Suwald from his obligations under the chattel mortgage.

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Johnston was at all material times living with the daughter of the respondents. The daughter also executed the aforementioned contract of guarantee as trustee because she had been the trustee under a bill of sale executed by the appellant in favour of a company owned or controlled by Suwald and Johnston at the time the appellant sold its business to those individuals or their corporate nominee. The daughter did not personally guarantee the indebtedness to the appellant. Other than the association of their daughter with Johnston, the purchaser of the Suwald interest in the firm in question, there appears to be no reason for the participation by the respondents in the financing of Johnston’s purchase of Suwald’s interest in the firm.

The mortgage in question was executed by the respondents individually at different times and places on the same date, apparently January 27, 1976. When the respondent wife signed the document her daughter was present, but the finding is that in executing the mortgage the respondent wife relied upon the representations made by Johnston, who was also present, as to the nature and content of the document, and did not do so in reliance upon anything said by the daughter. The respondent husband executed the mortgage later on the same day in the presence of Johnston upon whose representations he likewise apparently relied. The learned trial judge stated this about the execution of the mortgage by the respondents:

When she [the respondent wife] arrived Johnston said they were to wait for Clay [an employee in the lawyer’s office] who was bringing a paper for her to sign. Clay arrived, said there was an error in the document, left and returned and presented the document to the wife. At some point Johnston, perhaps in the presence of Clay, said it was “just to correct the date” in the Bank of Montreal mortgage. In any event the defendant wife signed it without reading it. Later that day Johnston and Clay attended upon her husband at home and got him to sign as well. The husband testified they told him it related to discrepancies in the date of the Bank of Montreal mortgage. He signed without question and without reading.

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There is also no doubt that the defendants were careless in not reading the document before signing. The wife is well educated, the husband less so, but both are literate and English-speaking and both have a basic understanding of mortgages, having executed at least three others since the purchase of their home. It is the undisputed evidence however that they were told it was an unimportant amendment to the Bank of Montreal mortgage when in reality it was a second substantial mortgage to the plaintiff.

The mortgage in favour of the Bank of Montreal has been paid off and the only issue arising on this appeal concerns the mortgage which is the subject of the action, and in that connection this issue was put by the appellant:

Is the defence of non est factum available to a party who, knowing that a document has legal effect, carelessly fails to read the document thereby permitting a third party to perpetrate a fraud on another innocent party?

This issue turns on the decision of this Court in Prudential Trust Co. Ltd et al.v. Cugnet, [1956] S.C.R. 914, a four-to-one decision. The majority, applying the decision of the English Court of Appeal in Carlisle and Cumberland Banking Co. v. Bragg, [1911] 1 K.B. 489, found that where a document was executed as a result of a misrepresentation as to its nature and character and not merely its contents the defendant was entitled to raise the plea of non est factum on the basis that his mind at the time of the execution of the document did not follow his hand. In such a circumstance the document was void ab initio. So when the judgment of Nolan J. with whom Justices Taschereau and Fauteux, as they then were, concurred. Locke J. reached the same result, but added the following comment, at p. 929, on the effect of careless conduct on the ability of the defendant to raise the plea of non est factum:

It is my opinion that the result of the authorities was correctly stated in Bragg’s Case. To say that a person may be estopped by careless conduct such as that in the present case, when the instrument is not negotiable, is to assert the existence of some duty on the part of the person owing to the public at large, or to other persons unknown to him who might suffer damage by acting upon the instrument on the footing that it is valid in the

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hands of the holder. I do not consider that the authorities support the view that there is any such general duty, the breach of which imposes a liability in negligence.

Cartwright J., as he then was, dissented. His Lordship commenced with a recitation, at p. 932, of the general priorities:

…generally speaking, a person who executes a document without taking the trouble to read it is liable on it and cannot plead that he mistook its contents, at all events, as against a person who acting in good faith in the ordinary course of business has changed his position in reliance on such document.

and then moved to the exception arising under the principle of non est factum. After making reference to Carlisle v. Bragg, supra, his Lordship said at p. 934:

An anxious consideration of all the authorities referred to by counsel and in the Courts below has brought me to the conclusion that, in so far as Carlislev. Bragg decides that the rule that negligence excludes a plea of non est factum is limited to the case of negotiable instruments and does not extend to a deed such as the one before us, we should refuse to follow it.

He concluded, therefore, that any person who fails to exercise reasonable care in signing a document is precluded from relying on the plea of non est factum as against a person who relies upon that document in good faith and for value.

As the basis for the judgments of Justice Nolan, concurred in by two other members of the Court, and of Justice Locke was the judgment of the Court of Appeal of England in Carlisle v. Bragg, supra, it should be pointed out at once that that case has been overruled by the House of Lords in Saunders v. Anglia Building Society, (reported in the Court of Appeal as Gallie v. Lee), [1971] A.C. 1004, per Lord Pearson at p. 1038; per Lord Wilberforce at p. 1027; per Viscount Dilhorne at p. 1023; and per Lord Hodson at p. 1019. Lord Reid stated at p. 1015:“I m in general agreement with the speech of my noble and learned friend, Lord Pearson.”

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The doctrine of non est factum sprang into prominence with the judgment in Foster v. Mackinnon (1869), L.R. 4 C.P. 704. At trial in that case the jury was directed that if the defendant’s signature on the document in question “was obtained upon a fraudulent representation that it was a guarantee, and the defendant signed it without knowing that it was a bill, and under the belief that it was a guarantee, and if the defendant was not guilty of any negligence in so signing the paper, the defendant was entitled to the verdict”. On appeal, the Court of Common Pleas endorsed the direction of the trial judge, and held, at p. 712, that:

…in the case now under consideration, the defendant, according to the evidence, if believed, and the finding of the jury, never intended to indorse a bill of exchange at all, but intended to sign a contract of an entirely different nature. It was not his design, and, if he were guilty of no negligence, it was not even his fault that the instrument he signed turned out to be a bill of exchange.

In Foster v. Mackinnon, supra, a distinction is drawn between negotiable instruments and other documents. A qualification of the general rule was felt to be necessary when applied to negotiable instruments in order to protect innocent transferees for value. As a result, the Court concluded that where “the party signing knows what he is doing: the indorser intended to indorse, and the acceptor intended to accept, a bill of exchange,” the party signing the document cannot deny its validity against a holder in due course whether or not he was negligent in affixing his signature. This rule was said to be a limitation on the general principle of non est factum established in earlier cases under which the signor, in order to deny successfully his signature, had to show that he had not been careless in executing the document. This general rule was applicable to deeds, and “equally applicable to other written contracts” (at p. 712).

Following the decision in Foster v. Mackinnon, supra, and prior to the decision of the Court of Appeal in Carlisle v. Bragg, supra, it is clear that the presence or absence of negligence on the part of the defendant was a critical factor in determining his ability to raise successfully the plea of non

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est factum. The rule as stated in two of the leading texbooks of the day was as follows:

So a man may avoid a deed or other instrument, which he was induced to execute by a fraudulent misrepresentation of its contents, as was held in Foster v. Mackinnon…

And if the party who executes an instrument in such circumstances has not been guilty of negligence in so doing, he may avoid it, not only against him who made the fraudulent misrepresentation, but as against a third party who has acted innocently, on the faith of the instrument being genuine.

(Chitty on Contracts (15th ed. 1909) 673-674)

…Mistake as to the nature of the transaction entered into… must arise from some deceit which ordinary diligence could not penetrate, or some mischance which ordinary diligence could not avert…

(Anson, Law of Contracts (12th ed. 1910) 151-52)

Only one exception to this rule was recognized: if the document signed was a bill of exchange and the signor intended to sign a bill of exchange, he could not successfully plead non est factum, even though he had not been negligent.

Almost a half a century after the decision in Foster v. Mackinnon, supra, the Court of Appeal in Carlisle v. Bragg, supra, substantially modified the law in the United Kingdomwith reference to the plea of non est factum. In that case the Court allowed the plea to be entered by a defendant who had executed a guarantee believing it to be a document of a different character, and went on to hold that the defendant was not estopped from raising the plea even though it was the negligence of the defendant which lead to the loss in question. The jury indeed had found the defendant to be negligent in signing the document. The Court of Appeal concluded that any doctrine which limited the application of the plea where the defendant was negligent was confined to negotiable instruments.

The decision of the Court of Appeal in Carlisle v. Bragg may be summarized as follows:

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(1) Foster v. Mackinnon applies only to bills of exchange.

(2) Negligence on the part of the signor is therefore relevant only to bills of exchange.

(3) Negligence is used in the tortious sense, and therefore, only when a duty of care exists in the signor and his act is the proximate cause of the loss by the third party, can it be a bar to a successful plea of non est factum.

(4) In all other cases negligence is irrelevant, and non est factum may be pleaded where the document signed is of a different nature from that which the signor intended to execute. Vide Chitty on Contracts (18th ed. 1930) at p. 803, and Anson, Law of Contracts (14th ed. 1917) at p. 164,

Carlisle v. Bragg has attracted unfavourable comment in legal writings and the following is an example of the criticisms of the judgment written shortly after its issuance:

A man who signs a document which he has not taken the trouble to read, who makes therein a promise on which other persons may act to their detriment, and who is found by a jury to have acted without reasonable care, is not liable for the consequences of his act to the party who has suffered by reliance on his promise, unless the document, the nature and contents of which he has neglected to ascertain, should chance to be a negotiable instrument; or unless the promisee, whose identity he has also neglected to ascertain, should chance to be a person to whom he owes a duty to take care. Such is the decision of the Court of Appeal in Carlisle and Cumberland Banking Co. v. Bragg [1911] 1 K.B. 489, 80 L.J.K.B. 472.

Shortly stated, the Court was asked to say which of two innocent parties should suffer for the fraud of a third, and the Lords Justices decided in favour of the man whose admitted negligence was the cause of the trouble.

[Anson, Carlisle and Cumberland Banking Co. v. Bragg, (1912) 28 L.Q. Rev. 190, 190]

Although the decision in Carlisle v. Bragg was the subject of much criticism, it was adopted by the majority of this Court in Prudential Trust Co.

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Ltd. et al. v. Cugnet, supra. As previously mentioned, Cartwright J. in his dissenting judgment recognized the flaws in the Court of Appeal’s decision and refused to follow it, adopting instead the rule recognized prior to Carlisle v. Bragg that a person who was negligent in executing a written instrument, whether or not it was a bill of exchange, was estopped, as against an innocent transferee, from denying the validity of the document. He also recognized that “negligence” in the sense that the term was used in relation to the plea of non est factum, connoted carelessness, rather than the attributes of the term in the law of tort. This aspect of the matter was dealt with, at p. 935, in this way:

It may be said that the term negligence is inappropriate because it presupposes a duty owed by Cugnet Senior to Canuck, but in the passages quoted the term is, I think, used as meaning that lack of reasonable care in statement which gives rise to an estoppel. As it was put by Sir William Anson [(1912), 28 L.Q.R. 190 at 194] in an article on Carlisle v. Bragg:—

And further, there seems some confusion between the negligence which creates a liability in tort, and the lack of reasonable care in statement which gives rise to an estoppel. Bragg might well have been precluded by carelessness from resisting the effect of his written words, though the Bank might not have been able to sue him for negligence.

The law in Canada prior to the decision of the House of Lords in Saunders has been summarized by Professor Fridman as follows:

The Canadian situation, prior to the Saunderscase, would appear to have been that there was considerable sympathy for the position of some illiterate, ill-educated, or otherwise disadvantaged parties, who signed a document, perhaps not fully realizing what was involved. But for non est factum to be pleaded successfully, the party raising the plea would have to show some kind of misconception, not necessarily fraudulently induced, as to the intended legal effect of the document. Negligence does not seem to have played a very large part in the thinking of Canadian judges in this context: although they were concerned with the sort of intentshown by the signer of the document. [Fridman, The Law of Contract in Canada(1976) 109]

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It was not until Saunders v. Anglia Building Society, supra, that the law was put back to the position which it was in after Foster v. Mackinnon. It is interesting to note that in doing so all the judges dealt with the meaning of the word negligence as employed by the Court in Foster v. Mackinnon as meaning “carelessness” in the same way that Cartwright J. did in Prudential, supra. Thus the rule with reference to non est factum in the United Kingdom requires that the defendant be not guilty of carelessness in order to be entitled to raise the defence of non est factum.

It is not necessary for us to concern ourselves with the second leg of Saunders v. Anglia, supra, namely, those circumstances in which a defendant who has not been guilty of negligence may raise the defence of non est factum. Here the respondents, by concurrent findings below, were found to be negligent or careless. I do note in passing, however, that it was the consensus of the several members of the House of Lords participating in the Saunders case, supra, that for the principle to operate, the document must be fundamentally different, either as to content, character or otherwise from the document that the signor intended to execute. Prior to this decision the plea of non est factum was available only if the mistake was as to the very nature or character of the transaction. It was not sufficient that there be a mistake as to the contents of the document: Howatson v. Webb, [1907] l.Ch. 537, affirmed [1908] 1 Ch. 1; Muskham Finance Ltd. v. Howard, [1963] 1 Q.B. 904. This distinction was rejected by the House of Lords in favour of a more flexible test. In the words of Lord Pearson (at p. 1039): “In my opinion, one has to use a more general phrase, such as ‘fundamentally different” or ‘radically different’ or ‘totally different’.” Lord Wilberforce at pp. 1026-27 concluded that the principle would come into play on “rare occasions”.

The decision of the House of Lords in Saundershas been considered by a number of Canadian courts. In Commercial Credit Corporation Ltd. v. Carroll Bros. Ltd. (1971), 20 D.L.R. (3d) 504 (Man. C.A.), the question of whether the prin-

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ciples laid down in Saunders are good law in Canada was left open by the Court. In a number of more recent decisions, however, the reasoning of the House of Lords has been directly applied: Custom Motors Ltd. v. Dwinell (1975), 61 D.L.R. (3d) 342, 12 N.S.R. (2d) 524 (N.S.C.A.); Bank of Nova Scotia v. Battiste (1979), 22 Nfld. & P.E.I.R. 192 (Newfoundland Trial Division);Canadian Imperial Bank of Commerce v. Kanadian Kiddee Photo Ltd. and Romano,[1979] 3 W.W.R. 256 (B.C.S.C).

In my view, with all due respect to those who have expressed views to the contrary, the dissenting view of Cartwright J. (as he then was) in Prudential, supra, correctly enunciated the principles of the law of non est factum. In the result the defendants-respondents are barred by reason of their carelessness from pleading that their minds did not follow their hands when executing the mortgage so as to be able to plead that the mortgage is not binding upon them. The rationale of the rule is simple and clear. As between an innocent party (the appellant) and the respondents, the law must take into account the fact that the appellant was completely innocent of any negligence, carelessness or wrongdoing, whereas the respondents by their careless conduct have made it possible for the wrongdoers to inflict a loss. As between the appellant and the respondents, simple justice requires that the party, who by the application of reasonable care was in a position to avoid a loss to any of the parties, should bear any loss that results when the only alternative available to the courts would be to place the loss upon the innocent appellant. In the final analysis, therefore, the question raised cannot be put more aptly than in the words of Cartwright J. in Prudential, supra, at p. 929: “…which of two innocent parties is to suffer for the fraud of a third”. The two parties are innocent in the sense that they were not guilty of wrongdoing as against any other person, but as between the two innocent parties there remains a distinction significant in the law, namely that the respondents, by their carelessness, have exposed the innocent appellant to risk of loss, and even though no duty in law was owed by the respondents to the appellant to safeguard the appellant

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from such loss, nonetheless the law must take this discarded opportunity into account.

In my view, this is so for the compelling reason that in this case, and no doubt generally in similar cases, the respondent’s carelessness is but another description of a state of mind into which the respondents have fallen because of their determination to assist themselves and/or a third party for whom the transaction has been entered into in the first place. Here the respondents apparently sought to attain some advantage indirectly for their daughter by assisting Johnston in his commercial venture. In the Saunders case, supra, the aunt set out to apply her property for the benefit of her nephew. In both cases the carelessness took the form of a failure to determine the nature of the document the respective defendants were executing. Whether the carelessness stemmed from an enthusiasm for their immediate purpose or from a confidence in the intended beneficiary to save them harmless matters not. This may explain the origin of the careless state of mind but is not a factor limiting the operation of the principle of non est factum and its application. The defendants, in executing the security without the simple precaution of ascertaining its nature in fact and in law, have nonetheless taken an intended and deliberate step in signing the document and have caused it to be legally binding upon themselves. In the words of Foster v. Mackinnon this negligence, even though it may have sprung from good intentions, precludes the defendants in this circumstance from disowning the document, that is to say, from pleading that their minds did not follow their respective hands when signing the document and hence that no document in law was executed by them.

This principle of law is based not only upon the principle of placing the loss on the person guilty of carelessness, but also upon a recognition of the need for certainty and security in commerce. This has been recognized since the earliest days of the plea of non est factum. InWaberley v. Cockerel (1542), 1 Dy. 51. a., for example, it was said that:

…although the truth be, that the plaintiff is paid his money, still it is better to suffer a mischief to one man

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than an inconvenience to many, which would subvert a law: for if matter in writing may be so easily defeated, and avoided by such surmise and naked breath, a matter in writing would be of no greater authority than a matter of fact…

More recently in Muskham Finance Ltd. v. Howard, supra, at p. 912, Donovan L.J. stated:

Much confusion and uncertainty would result in the field of contract and elsewhere if a man were permitted to try to disown his signature simply by asserting that he did not understand that which he had signed.

The appellant, as it was entitled to do, accepted the mortgage as valid, and adjusted its affairs accordingly. For example, the appellant released Suwald from the chattel mortgage held by the appellant.

I wish only to add that the application of the principle that carelessness will disentitle a party to the document of the right to disown the document in law must depend upon the circumstances of each case. This has been said throughout the judgments written on the principle of non est factum from the earliest times. The magnitude and extent of the carelessness, the circumstances which may have contributed to such carelessness, and all other circumstances must be taken into account in each case before a court may determine whether estoppel shall arise in the defendant so as to prevent the raising of this defence. The policy considerations inherent in the plea of non est factum were well stated by Lord Wilberforce in his judgment in Saunders, supra, at pp. 1023-24:

The law… has two conflicting objectives: relief to a signer whose consent is genuinely lacking…; protection to innocent third parties who have acted upon an apparently regular and properly executed document. Because each of these factors may involve questions of degree or shading any rule of law must represent a compromise and must allow to the court some flexibility in application.

The result in this case has depended upon the intervention by this Court in the development and the principle of non est factum and its invocation in a way inconsistent with that applied many years

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ago in the Prudential case, supra. The respondents have pleaded their case in the courts below and in this Court consistent with the result in the Prudential judgment. In these circumstances consideration can and should be given to the application of the general principle that costs follow the event. The appellant, of course, was required to persevere to the level of this Court in order to bring about a review of the reasoning which led to the determination in the Prudential case. The respondents, on the other hand, acted reasonably in founding their position upon that decision notwithstanding the revision of the law of England consequent upon the judgments in Saunders, supra. In all these circumstances, therefore, I would award to the appellant costs only before the Court of First Instance with no costs being awarded either party in the Court of Appeal or in this Court.

Appeal allowed.

Solicitors for the appellant: Weir & Foulds, Toronto.

Solicitors for the respondents: Lawlor& Leclaire, Richmond Hill.


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