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

2. 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.

3. The Goal of Interpretation: Making the Contract Work
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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

4. The Goal of Interpretation: Making the Contract Work
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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

5. Contract Provisions: Representations, Terms, Conditions and Warranties
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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.)

6. 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

7. 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)

8. 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

9. 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

10. 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

11. 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

12. Exclusion and Penalty Clauses
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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

13. Exclusion and Penalty Clauses (cont’d)
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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

14. Exclusion and Penalty Clauses (cont’d)
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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?

15. Exclusion and Penalty Clauses (con’t)
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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

16. 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

17. Frustration (cont’d) FACTORS AFFECTING FRUSTRATION OF CONTRACTS
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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.

18. 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

19. Frustration (cont’d) FRUSTRATION BASED ON IMPLIED TERM THEORY
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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

20. Frustration (cont’d) FRUSTRATION BASED ON CONSTRUCTION THEORY
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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

21. 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

22. Frustration (cont’d) COMMON LAW REMEDIES FOR FRUSTRATION
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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

23. Frustration (cont’d) LEGISLATION GOVERNING FRUSTRATION OF CONTRACTS
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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