Chapter 7: Contract Interpretation Emond Montgomery Publications Chapter 7: Contract Interpretation

Chapter 7: Contract Interpretation Emond Montgomery Publications Chapter 7: Contract Interpretation Learning Outcomes Describe the goal of contract interpretation. Distinguish among representations, terms, conditions, and warranties. Explain the parol evidence rule. Understand the legal rules relating to exclusion and penalty clauses. Explain the concept of frustration as it relates to contracts, and distinguish between frustration and impossibility.

The Goal of Interpretation: Making the Contract Work Emond Montgomery Publications The Goal of Interpretation: Making the Contract Work Contract cases come before the courts because Parties disagree about the meaning of a term, or A party wants to escape the consequences of a contract Courts have developed rules for contract interpretation Primary aim in contract interpretation is to give effect to the intention of the parties

The Goal of Interpretation: Making the Contract Work Emond Montgomery Publications The Goal of Interpretation: Making the Contract Work Major concepts used by courts in interpreting contracts include: Classifying contract provisions Assessing evidence to prove the meaning of a provision Interpreting exclusion and penalty provisions Determining frustration

Contract Provisions: Representations, Terms, Conditions and Warranties Emond Montgomery Publications Contract Provisions: Representations, Terms, Conditions and Warranties A representation is a statement made to induce someone to enter a contract It is NOT a part of the contract Misrepresentation of a material fact that induces a party to enter a contract may render the contract void or voidable Note: disclaimer clauses limiting liability for pre-contract representations must be brought to the attention of the contracting party See for example, Hirsh v. duBrule, [2006] A.J. No 1712 (Prov. Ct.)

Emond Montgomery Publications Contract Provisions: Representations, Terms, Conditions and Warranties (cont’d) A term is a provision of a contract. Terms fall into two categories: Condition: an essential term of a contract, the breach of which denies the innocent party the benefit of the contract, or defeats the purpose of the contract Warranty: a minor term of a contract, the breach of which does not defeat the contract’s purpose Whether the term is a condition or a warranty will affect if the contract is breached It is not always obvious whether a term is a condition or warranty See for example, Herron v. Hunting Chase Inc., 2001 ABQB 1134

Emond Montgomery Publications The Search for Certainty: The Parol Evidence Rule, Its Exceptions and Rectification Parol evidence rule: if a contract is in writing and is clear, no other written or oral evidence is admissible to contradict, vary, or interpret the agreement Where wording is clear, the court will interpret the agreement without looking at outside evidence Where wording is ambiguous, the court may use outside evidence to interpret the contract (these are exceptions to the parol evidence rule)

Emond Montgomery Publications The Search for Certainty: The Parol Evidence Rule, Its Exceptions and Rectification (cont’d) Exceptions to the parol evidence rule include: Ambiguous contract language Essential collateral agreements Essential implied term Condition precedent existing outside the contract Rectification

Emond Montgomery Publications The Search for Certainty: The Parol Evidence Rule, Its Exceptions and Rectification (cont’d) AMBIGUOUS CONTRACT LANGUAGE If the term is unclear or uncertain, external evidence may be used to interpret the agreement For example, Certus Developments Inc. v. Strategic Equity Corp., [2006] AJ No 1104 ESSENTIAL COLLATERAL AGREEMENT If a separate contract to the contract being considered affects how the contract being considered should be interpreted, the separate contract can be considered

Emond Montgomery Publications The Search for Certainty: The Parol Evidence Rule, Its Exceptions and Rectification ESSENTIAL IMPLIED TERM If a contract by custom or convention contains a term that has been inadvertently left out, a party may produce outside evidence of customs and conventions to show that its omission was a mistake CONDITION PRECEDENT EXISTING OUTSIDE THE CONTRACT If the parties agree to a condition precedent, the a party may adduce external evidence of the condition precedent

Emond Montgomery Publications The Search for Certainty: The Parol Evidence Rule, Its Exceptions and Rectification (cont’d) RECTIFICATION If the term agreed to in negotiations is inadvertently omitted from the written document, a party may ask to have that term included by way of rectification or correction of the document provided: A mistake has been made in recording the intentions of the parties There is evidence of common intention There is clear and cogent evidence of the mistake

Exclusion and Penalty Clauses Emond Montgomery Publications Exclusion and Penalty Clauses EXCLUSION (EXEMPTION) CLAUSES An exclusion/exemption clause is a clause in a contract that limits the liability for negligence in performing the contractual obligations or from failing to carry them out Fraud by the party relying on the exclusion clause will not be excluded, regardless of the wording of the clause In general, for an exclusion clause to be effective the party relying on the exclusion clause must provide notice to the other party of the clause before the contract is entered into

Exclusion and Penalty Clauses (cont’d) Emond Montgomery Publications Exclusion and Penalty Clauses (cont’d) EXCLUSION (EXEMPTION) CLAUSES (cont’d) Contra proferentum rule is a rule of contract interpretation used when dealing with ambiguous terms according to which a court will choose the interpretation that favours the party who did not draft the contract

Exclusion and Penalty Clauses (cont’d) Emond Montgomery Publications Exclusion and Penalty Clauses (cont’d) EXCLUSION (EXEMPTION) CLAUSES (cont’d) Canadian law no longer uses the notion of fundamental breach in determining whether a party can rely on an exclusion clause In Tercon Contractors Ltd. v. British Columbia, [2010] 1 SCR 69, the Supreme Court developed a 3-part analytical scheme to determine if an exclusionary clause is enforceable: Does the exclusion clause apply to the circumstances of the case? If the clause applies, was it unconscionable? Should the clause be enforced on the basis of public policy?

Exclusion and Penalty Clauses (con’t) Emond Montgomery Publications Exclusion and Penalty Clauses (con’t) PENALTY CLAUSES A penalty clause is a term in a contract that imposes a penalty for default or breach Three forms of penalty clauses are: Clauses that provide for low compensation for specific harm done Clauses that prohibit suing for breach of contract and allows substitution of other goods and repairs Liquidated damages clauses

Emond Montgomery Publications Frustration The doctrine of frustration of contract permits parties to a contract to be relieved of the contractual obligations because of the occurrence of an event beyond their control that makes it impossible for them to perform the contract

Frustration (cont’d) FACTORS AFFECTING FRUSTRATION OF CONTRACTS Emond Montgomery Publications Frustration (cont’d) FACTORS AFFECTING FRUSTRATION OF CONTRACTS Situations that can lead to a contract being frustrated: An impossibility arising from an act of a third party An impossibility arising from a natural force (i.e., fire or flood) An impossibility arising from the party who is arguing that the contract is frustrated An impossibility arising from a change in the law that was not contemplated by the parties An impossibility arising from a serious delay that was not caused or contemplated by the parties, etc.

Emond Montgomery Publications Frustration (cont’d) The courts use two approaches to develop the law of frustration of contract: The assumption of an implied term of the contract permitting termination, and The construction of the purpose of the contract to decide whether the contract could be terminated because its purpose could not be fulfilled

Frustration (cont’d) FRUSTRATION BASED ON IMPLIED TERM THEORY Emond Montgomery Publications Frustration (cont’d) FRUSTRATION BASED ON IMPLIED TERM THEORY Based on the idea that the contract the parties agreed to, by its nature, must have implied certain things in order for the contract to be performed If the contract cannot be performed because some intervening event makes it impossible then the contract may be frustrated Objective test See, for example, Kerrigan v. Harrison, (1921), 62 SCR 374

Frustration (cont’d) FRUSTRATION BASED ON CONSTRUCTION THEORY Emond Montgomery Publications Frustration (cont’d) FRUSTRATION BASED ON CONSTRUCTION THEORY The contract may become impossible to perform because the very purpose of the contract ceased to exist The courts will attempt to determine what the common objective of the agreement was If intervening events make the fulfillment of the contractual purpose impossible, then the contract has been frustrated Test is subjective

Emond Montgomery Publications Frustration (cont’d) DISTINGUISHING BETWEEN IMPOSSIBILITY AND FRUSTRATION Impossibility refers to situations where performance is physically or legally impossible Frustration includes situations where performance is physically or legally possible, but results would be very different from the purpose of the contract contemplated by the parties

Frustration (cont’d) COMMON LAW REMEDIES FOR FRUSTRATION Emond Montgomery Publications Frustration (cont’d) COMMON LAW REMEDIES FOR FRUSTRATION At common law, when a contract is frustrated, the positions of the parties “crystallize” The courts generally decline to provide remedies for frustrated contract However, in some cases because of unfairness the courts have intervened For example, Fibrosa Spolka Akcyjna v. Fairbairn Combe Barbour Ltd., [1942] 2 All E.R. 122

Frustration (cont’d) LEGISLATION GOVERNING FRUSTRATION OF CONTRACTS Emond Montgomery Publications Frustration (cont’d) LEGISLATION GOVERNING FRUSTRATION OF CONTRACTS Today, most provinces deal with the inadequacy of common law frustration remedies through statutes such as the Ontario Frustrated Contracts Act Acts do not provide rules to decide when a contract has been frustrated, but provide remedies for frustration