Part 7: Interpretation of Contracts

Duhaime's Contract Law: 1 - 2 - 3 - 4 - 5 - 6 - 7 - 8

"The law has outgrown its primitive stage of formalism when the precise word was the soverign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be "instinct" with an obligation.... If that is so, there is a contract."

Wood v Lucy Duff-Gordon 222 NY 88 (1917)

The courts are frequently asked to resolve disputes around the meaning of certain words in contracts given, as they often are, to drafting by the parties themselves, and not legal experts.

A wide range of general interpretation rules guide the courts in their inevitable (and unenviable) task of having to interpret a contract which is, on the face of it, ambiguous (Mensa moment: if both parties agree on a certain interpretation to be given to a term in a contract, a court has no reason or justification for pursuing the matter further and should accept this interpretation).

• A court will always try to discover the intentions of the contracting parties using the plain, ordinary and popular meanings of the words used. Reference to a common usage dictionary is perfectly in order. A court should not try to re-write a contract using interpretation rules but, rather, to use these rules to pinpoint the intentions of the parties at the moment of contract.
  
  

  Machintger v. Hoj Industries Ltd. (1992)

  Courts will imply a term into a contract based on a test of "necessity.... In determining what is necessary, regard must be had to both the inherent nature of a contract and of the relationship thereby established." Examples repeated by the court included the duty of care imposed on a servant, restrictive covenants such as a contract not to disclose confidential information, not to betray secret processes or the duty of an employer not to require his employee to perform an illegal act. The court, in this case, said that the requirements for reasonable notice in employment contracts fall into the category of terms implied by law since this duty was not displaced by express contrary agreement.

  Madill v. Chu, 1977 2 SCR 400

  As a general rule, clauses in an insurance policy providing coverage are interpreted liberally or broadly in favour of the insured and those clauses excluding coverage are construed strictly against the insurer.

• It should be assumed that no article of the contract is void of any meaning or superfluous but must have some purpose. It is only where no clear alternate interpretation is available to remove absurdity or ambiguity from an article, that the court will void an article of a contract.

• A court can refer to words that have been crossed out, or words in headings, margins, recitals or preamble for the purposes of interpreting terms of the contract which are ambiguous.

• Where ambiguity is an issue, a court may refer to the factual circumstances under which the contract was signed or agreed upon to assist in interpretation. These could include letters or earlier agreements but not earlier drafts.

• The same word used in one place in a contract should be given the same meaning throughout the document.

• The word "may" is permissive and not obligatory. The word "about", "approximately" or "almost" do not constitute any guarantee that the signatory will meet or exceed estimates worded in such a fashion unless performance falls significantly short of these estimates.

• A court may even incorporate a business custom into a contract if it is so certain, universal and notorious as to be worthy of judicial notice unless this trade or commercial usage was unknown to one of the parties (or not reasonably known) or contradicted by a specific term in the contract. This would apply within the context of certain industries or professions which have standard operating procedures.

• Where a contract is open to two different but equally probable interpretations, it is interpreted against the author, especially if there is a power imbalance between the parties ("verba fortius accipiuntur contra proferentem").
  
  

  Scott v. Wawanesa Mutual Insurance Co. (1989)

  If language of an insurance contract is ambiguous, the contra proferentem doctrine applies. But: "... when the wording is clear and unambiguous, courts should not give it a meaning different from that which is expressed by its clear terms, unless the contract is unreasonable or has an effect contrary to the intention of the parties." In this case, a majority of Canada's Supreme Court thought that the insurance clause in question was unequivocal and "the damages suffered by the appellants are clearly excluded."

• If a conflict develops between a type-written part and a hand-written insertion, the contract will be interpreted giving more weight to the hand-written part.

• The "parol evidence rule" applies which holds that verbal evidence ("parol") will not be allowed to contradict a written contract. To this, there are several exceptions. For example, some provinces have trade practice legislation which, for consumer transactions, the parol evidence rule is set aside if the alleged verbal agreement purports to prove deception or unconscionability. The text of British Columbia's Trade Practice Act (as of January 1997) reads as follows:

  "In a proceeding in respect of a consumer transaction, a rule of law respecting parol or extrinsic evidence, or a term or provision in a consumer transaction, shall not operate to exclude or limit the admissibility of evidence relating to the understanding of the parties as to the consumer transaction or a particular term or provision of it."

• The parol evidence rule has been severely criticized by numerous law reform experts; that it is "ambiguous" and "more honoured in its breach than its observance." Nevertheless, it still forms an important part of Canadian contract law.
  
  

  Hawrish v. Bank of Montreal (1969)	Hawrish personally guaranteed a loan to a company but on the bank manager's assurance that the guarantee would be released if another guarantee, from the company's directors, was obtained. This latter guarantee was obtained but Hawrish's was not released. Nothing in the guarantee document suggested that it was of limited duration. "The appellant's argument fails on the ground that the collateral agreement allowing for the discharge of the appellant cannot stand as it clearly contradicts the terms of the guarantee bond which states that it is a continuing guarantee."
  Bauer v. Bank of Montreal (1980)	"This (verbal or parol) evidence would go towards imposing a limit on the bank's rights with respect to the security given by the debtor. This would clearly contradict the terms of the guarantee which, as has been pointed out, gave the bank the right to abstain from registration and perfection of security. On this basis, it would be impossible under the parol evidence rule and any collateral agreement founded upon it could not stand."
  J. Evans & Son (Portsmouth) Ltd. v. Merzario (Andrea) Ltd. (1976)	In a contract for the transoceanic shipment of goods, a clause stated that the shipper "reserves to itself complete freedom in respect of ... procedure to be followed in the handling and transportation of the goods." But there was a verbal agreement in which the defendant promised that they would transport the plaintiffs cargo below deck. The court's decision: "The question is whether the company can rely on those exemptions. I do not think so. The cases are numerous in which oral promises have been held binding in spite of written exempting conditions... There was a plain breach of the oral promise." One of the judges thought that the contract was "partly oral, partly in writing.... In such a case the court does not require to have recourse to lawyers' devices such as collateral oral warranty in order to seek to adduce evidence which would not otherwise be admissible. The court is entitled to look at all the evidence.... One has to treat the promise that no container would be shipped on deck as overriding any question of exempting conditions."
  Gallen v. Butterley (1984)	Subsequent to oral assurances that buckwheat would smother weeds, farmers entered into a contract which contained the words: "no warranty ... pertaining to the seed sold ... and will not in any way be responsible for the crop." The buckwheat planted did not act as a weed control and the crops were smothered and destroyed. The British Columbia court decided that the evidence showed an oral warranty that defeated the "the strong presumption" in favour of the written contract. It then issued a series of "comments" about the parol evidence rule: The rule is a rule of evidence. One can introduce evidence to prove a collateral agreement provided it does not contradict the written agreement because it cannot be that the parties would agree to two contracts which disagree with each other. Since the written contract was demonstrably made, "reasons requires one to conclude that the oral one, contradicting it, was never made." The principle is not absolute; it is "not a tool for the unscrupulous to dupe the unwary." The court can look for evidence of an intention to create a binding oral agreement such as it did, albeit unsuccessfully, in the Hawrish and Bauer cases summarized above. "If the contract is induced by an oral misrepresentation that is inconsistent with the written contract, the written contract cannot stand." "The principle does not apply with equal force where the oral representation adds to, subtracts from or varies the agreement recorded in (as opposed to contradicting) the document." The parol evidence rule is a "strong" presumption that a written contract represents the whole agreement between the parties; "strongest when the oral representation is alleged to be contrary to the document and somewhat less strong when the oral representation only adds to the document." The presumption is not as strong for a printed form document "though it would be a strong presumption in both cases." The presumption would also be "less strong where the contradiction was between a specific oral representation and an .. exclusion clause that excludes liability for any oral representation whatsoever."

•  Were a law such as the Statute of Frauds requires a certain kind of contract to be in writing, it is enough that the contract be signed by the person against whom enforcement is sought even though the plaintiffs to a contract suit did not themselves sign the contract. Where a written contract is required, the contract should contain, as a minimum, the names and signature of the party against whom the contract is to be enforced, identification of the property and the price. Provincial legislation varies substantially on the requirement of a written document to ensure the enforceability of a contract. British Columbia only requires a written document for guarantee (answering for the debt or default of another) and land contracts. Manitoba has eliminated the Statute of Frauds entirely.

  "Subject to this Act and any Statute in that behalf, a contract of sale may be made in writing, either with or without seal, or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties; provided that nothing in this section shall affect the law relating to corporations." {From B.C.'s Sale of Goods Act, 1996.}

  Dynamic Transport Ltd. v. Oak Detailing Ltd. (1978)	A contract for the sale of "four acres more or less" was challenged as being "not sufficiently certain to satisfy the Statute of Frauds." But the court constructed the contract, including reference to the conduct of the parties, to make reasonable adjustments for a warehouse that sat on the border of the proposed division. "Courts have gone a long way in finding a memorandum in writing sufficient to satisfy the Statute of Frauds," wrote the court.
  Deglman v. Guaranty Trust Co. (1954)	A nephew said that while he lived with, and cared for, his aunt, she had promised him the house they lived in. Upon her death, the court rejected his claim because there was no written document as required under the Statute of Frauds for contracts concerning land. The court stated that to succeed in a case of this nature, the acts relied upon as part performance must be "as could be done with no other view or design than to perform that agreement." But the court did allow a quantum meruit claim for the value of his services, considerably less then the value of the real property.
  Thompson v. Guaranty Trust Co. (1974)	A labourer worked with a farmer for fifty years, the latter promising to convey the property to him upon his death. This was done but the will was lost. The evidence showed total commitment by the labourer to the farm over the course of those fifty years and there was third-party testimony to the effect that the deceased farmer had stated his wish that the farm go to the labourer. The court allowed the land transfer to the labourer despite the absence of a written document required under the Statute of Frauds because of the circumstances, the evidence and that the actions of the labourer were referable to, and indicative of, a contract dealing with the farm.
  Lensen v. Lensen (1984)	The court expounded on the requirements to circumvent the Statute of Frauds requirements for claiming a land contract without a written document. In this case, the large investments of the son could hardly be equated with that of a tenant. In addition, the court found that the son had passed up on other chances to buy land because he believed that the family farm had been dedicated to him. Acting upon the alleged contract to his detriment "is an important circumstance when determining whether or not the acts relied upon are sufficient enough."
  Currie v. Thomas (1985)	On matters of contracts of sale of land and the requirement of a written document under the Statute of Frauds, if there was "sufficient part performance", the requirement of a valid written contract is lifted. Quoting from a 1976 English decision, Steadman v. Steadman, the court said that "to do this, the plaintiff has to prove that (i) on balance of probability he acted to his detriment; (ii) it was more probable than not he so acted because he was contractually obliged to the defendant to do so; (iii) such actions were consistent with the oral agreement which he alleges."

• Where a written and signed contract is required, a signature need not be at the end of the contract, as long as it does not appear to be restricted to one or more specific terms next to which it is apposed. The fact that a contract is hand-written by a defendant may suffice in lieu of signature. Initials may also be enough.

• Alterations inserted after the time of signature, without the consent of the other party, are not permissible and may result in the rescission of the contract.

• "Time is of the essence" means that any violation of deadlines contained in the contract will equate to a breach of contract. Any delay will allow the other party to terminate the contract. "Time is of the essence" can be presumed in some contracts.

• A fine distinction is made with regards to articles that set out an amount another party must pay for non-performance (called "liquidated damages"). As a general rule, the court will not enforce penalty clauses but it will enforce articles which "pre-determine damages". The most important factor in determining whether a clause is a penalty clause or a pre-determination of damages is the reasonableness of the amount.

• Exclusion clauses that prevent damage claims based on the contract are legal although they cannot operate to protect a party from fraud. Exclusions clauses must be brought to the attention of all parties and will be interpreted strictly against the author. A party can never agree to waive the right to address itself to a court of law absolutely and for all purposes for contractual redress although it can be bound to an agreement to prior arbitration or be bound to a waiver against a claim for damages. Mind you, even if a contracting party retains the right to petition a court, a court will, barring fraud, uphold a validly signed exclusion clause. All this may be tempered by provincial legislation. For example, many provinces have insurance and sale of goods legislation which restricts or regulates the use of exclusion clauses. However, the parties remain free to contract out of the provincial legislation.
  
  

  Parker v. South Eastern Railway Company (1877)	"In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature and, in the absence of fraud, it is wholly immaterial that he has read the agreement and does not know its contents.... There may be cases in which a paper containing writing is delivered by one party to another in the course of a business transaction, where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition and should be put in his pocket unread. For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll." According to the court, the customer is bound by the exempting condition if he or she knows that the ticket is issued subject to it or if the company did what was reasonably sufficient to give him notice of it.
  Thornton v. Shoe Lane Parking Ltd. (1971)	Entering into a parking garage, a patron paid his money into an automatic teller and out came a ticket. Although the patron did not notice it, the ticket contained a notice "This ticket is issued subject to the conditions of issue as displayed on the premises." There was also a notice board outside that read "All cars parked at owners risk." The judge decided that the liability exemption condition did not apply because the contract was concluded when the patron put his money into the machine. "The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late (the patron having already paid). The contract has already been made."
  Interphoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. (1989) draw to attention or else	A photo company lent 47 pictures to a design company. In little letters, the document which accompanied the photos said that the recipient would have to pay £5 a day per picture if the pictures were not returned after 14 days. The design company officer phoned the photo company when he received the photos and indicated that he was interested in several of the photos. The pictures were then returned several weeks later and the photo company sued for £3,783, which worked out to be £5 per picture per day that the photos were retained past the 14-day viewing period. This appeared to the court to be an extravagant penalty clause. "If one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party. In the present case, nothing was done by the plaintiff to draw the defendant's attention particularly to (the) condition."
  Spurling (J.) Ltd. v. Bradshaw (1956)	Eight orange juice casks belonging to Bradshaw were stored with Spurling, who had a no-liability clause inserted into the contract of warehousing including that all risks were assumed by Bradshaw. When the goods were handed over to Bradshaw's agent, it was discovered that contents of three of the casks were damaged. The judge said that a liability exemption clause will not operate to excuse a fundamental ("radical; a breach which goes to the root of (the contract)") breach of the contract. But this case did not merit any "exceptional treatment" as it had been adequately brought to the attention of Bradshaw. The court was also impressed with the fact that Bradshaw did not complain of the condition throughout the eight months of storage and during which he made the monthly payments.
  McCutcheon v. David MacBrayne Ltd. (1964) past dealings irrelevant	A car was lost when a ferry boat sank, partly due to the negligence of the operator. A liability exclusion clause existed but this one time, the car owner had not signed it. The ferry boat operator tried to rely on previous dealings with the passenger to have the exclusion clause implied. The court said no. "Previous dealings are relevant only if they prove knowledge of the terms, actual and not constructive, and assent to them."
  Tilden Rent-A-Car v. Clendenning (1978) quickie contracts	A man had a car accident and later pleaded guilty to a charge of impaired driving. His car rental agreement said that the rental company's insurance would not cover accidents occasioned while the driver was intoxicated. The court found that the exclusion clause did not apply: "The party seeking to rely on such terms should not be able to do so in the absence of first having taken reasonable measures to draw such terms to the attention of the other party." The court said that in ordinary commercial situations, where the parties have ample time to review the contract, the assumption could be that the signatory fully acknowledged acquiescence to its terms. But car rental agreements are signed quickly; in fact "the speed with which the transaction is completed is said to be one of the attractive features of the services provided."
  Karsales (Harrow) Ltd. v. Wallis (1956) fundamental breach defeats exclusion clause	A car was bought with "no condition or warranty that the vehicle was road worthy." An earlier inspection of the vehicle had shown it to be road worthy, but it was no longer so upon delivery. The exclusion clause was set aside. "Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of this kind, no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential aspects. He is not allowed to use them as a cover for misconduct or indifference or to enable him to turn a blind eye to his obligations.... If he has been guilty of a breach of those obligations in a respect which goes to the very root of the contract, he cannot rely on the exempting clauses."
  Photo Production Ltd. v. Securicor Transport Ltd. (1980) clause was unambiguous	A security guard deliberately threw a match but not with the intent that a fire be created, which destroyed part of Photo Production's building. The security agreement included an exclusion clause to the effect that "under no circumstances shall the company (Securicor) be responsible for any injurious act or default by any employee of the company." The invalidity of exclusion clauses where a fundamental breach had occurred was discarded (see Karsales and Spurling above). Instead, exemption clauses are to be construed by the same rules of contract interpretation on whether or not a fundamental breach had occurred or not. Whether or not liability was excluded was to be decided simply on the construction of the contract. The court found the clause to be quite clear and unambiguous and found that it precluded the liability of the security company.
  Delaney v. Cascade River Holidays Ltd. (1983) exclusion clause upheld	A white-water rafting operator, just moments before the trip, quickly got the participants to sign a waiver. Three participants drowned including Delaney and his estate sued Cascade. A majority of the court held the exclusion clause was sufficient: "the deceased was informed that unless he signed the release form he would not be taken on the trip." In this case, the court applied the rule that a party's signature to a document meant that, absent fraud or misrepresentation, he agreed to the terms contained in that document.
  Davidson v. Three Spruces Realty Ltd. (1977) exclusion was unconscionable	Plaintiff stored some valuables in a safety deposit vault managed by defendant which were later stolen. A liability exclusion clause was relied upon by the defendants. The judge refused to allow the defendant to rely on the exclusion clause. In this case, the plaintiffs were not asked to read the contract, they were not advised of its contents, they were told that it was not necessary to obtain additional insurance coverage and they were not given a copy of the contract. The court stated that it would not lightly interfere with the freedom to contract. But: "the terms of a contract may be declared to be void as being unreasonable where it can be said that in all the circumstances it is unreasonable and unconscionable to bind the parties to their formal bargain." Important factors included whether the contract was a form contract, whether the contract came from negotiations or was a "sign here" contract, whether the attention of the plaintiffs was drawn to the exclusion clause, whether the exclusion clause was unusual, whether representations were made which would lead a reasonable man to conclude that the clause did not apply, did the clause make the bailee's reasonable care obligation meaningless and would the acceptance of the clause lead to tacit acceptance of the court of "unacceptable commercial practice."
  Hurst v. Commercial Union Assurance Company of Canada (1978)	A house was bought and left unoccupied for two months, in spite of a clause in an insurance contract that voided coverage if the house was left "vacant" for more than 30 consecutive days. A toilet stated to leak on about day 30 of the vacancy and was only discovered on day 40, at which time it had caused close to $10,000 damage. The court would not let the insurance company escape coverage. Because the relevant provincial insurance act allowed a court to void an exclusion clause if "unreasonable or unjust", the court did so in this case, noting that it was restricted to the "peculiar circumstances of this case."
  Hunter Engineering Co. Inc. v. Synacrude Canada Ltd. (1989) unconscionability or fundamental breach	Gearboxes proved defective but only after the manufacturer's one-year limitation period had expired. Canada's Supreme Court found the manufacturer cleared of liability because of the exclusion clause but for differing reasons from the bench. Two of the judges (Dickson and La Forest) thought that Canada should eliminate the doctrine of fundamental breach invalidating exclusion clauses. Instead, exclusion clauses should be set aside, if at all, using the principles of unconscionability. Two other judges (Wilson and L'Heureux-Dubé) , preferred to retain the doctrine of fundamental breach in reviewing the validity of exclusion clauses and could not endorse a reference to the doctrine of unconscionability in the review of the validity of exclusion clauses. They adopted the following definition of such a breach: "where the event resulting from the failure of one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract."