Contract Interpretation

• Author: Carolyn MacLean/Alex Colangelo
• Pages: 207-240

207

The Goal of Interpretation: Making the

Contract Work ...................... 208

Contract Provisions: Representations,

Terms, Conditions, and Warranties .... 209

The Search for Certainty: The Parol

Evidence Rule, Its Exceptions, and

Rectification ........................ 213

Ambiguous Contract Language ......... 214

Essential Collateral Agreement .......... 215

Essential Implied Term ................ 216

Condition Precedent Existing Outside

Contract ....................... 217

Rectification ........................ 218

Exclusion and Penalty Clauses ........... 220

Exclusion (Exemption) Clauses .......... 220

Penalty Clauses. . . . . . . . . . . . . . . . . . . . . . 226

Privity of Contract ...................... 228

Novation .......................... 230

Vicarious Performance ................ 231

Trusts ............................. 232

Assignment of a Contract ............... 233

Equitable Assignments ................ 233

Statutory Assignments ................ 233

Defences and Assignments ............. 235

Assignments by Operation of Law ....... 237

Chapter Summary ...................... 238

Key Terms ............................. 238

Review Questions ...................... 238

Exercises .............................. 239

Learning Outcomes

After completing this chapter, you should be able to:

• 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.

• Understand the principle of privity of contract and

recognize exceptions to the principle.

Contract Interpretation

13

© [2023] Emond Montgomery Publications. All Rights Reserved.

208 PART II CONTRACT LAW

The Goal of Interpretation: Making the

Contract Work

Contract law is informally referred to as the pathology of law because the matter

comes to court only if there are problems with the contract as between the parties to

the agreement. Every contract case that comes to court does so either because one

party disagrees with the other about what the contract provisions mean or because

they know very well what the provisions mean and seek to escape the consequences

of that meaning. In either situation, the outcome will turn on the court’s interpretation of

the language of the agreement and its application to the conduct and/or intentions

of the parties to the contract. Over the centuries, the courts have established rules that

classify contract provisions to determine their consequences, resolve ambiguity or

uncertainty, and determine the consequences of attempts to use language to limit the

negative consequences of a contract for a party.

The primary aim of the court is to interpret contracts so as to find and give effect to

the intention of the parties. In examining intention, the court may pay some attention

to commercial realities but generally will not use the rules of interpretation to remake

a bad bargain. Instead, it will try to interpret a contract to salvage it, in whole or in

part, and make it work as the court determines the parties intended. Where a provision

is found to be so incoherent as to be impossible to interpret in a reasonable way, the

court may determine that provision to be void for vagueness but will try to save the

balance of the contract. Only as a last resort will the court declare a whole contract

void because its meaning and purpose are uncertain or because the original purpose

is impossible to carry out.

This does not mean a court will never intervene to declare a contract to be void or

voidable. It may do so where one or both parties have made a major mistake about an

important element of the contract. (Mistakes and their effects will be discussed in

Chapter 14.) As well, the court may find that the contract is frustrated and bring it to

an end where contract performance becomes impossible because of circumstances

beyond the control of either party.

Here we will introduce some of the major concepts used by courts to interpret

contracts (see Figure 13.1):

• Classifying contract provisions: We will examine how the courts classify and

interpret representations, terms, conditions, and warranties in a contract in

terms of the effect those provisions have on the rights and responsibilities of

the parties.

• Assessing evidence to prove the meaning of a provision: We will look at the

search for certainty and how the courts assess evidence using the parol

evidence rule to decide the meaning of unclear terms or provisions.

• Interpreting exclusion and penalty provisions: We will examine how the courts

interpret exclusion and penalty clauses, referring to provisions that seek to

enhance or limit liability and damages under a contract, to determine whether

there is a breach.

• Determining frustration: We will review the factors the courts take into account

to assess whether the contract has been frustrated in Chapter 15.

© [2023] Emond Montgomery Publications. All Rights Reserved.

CHAPTER 13 CONTRACT INTERPRETATION 209

Contract Provisions: Representations, Terms,

Conditions, and Warranties

The parties may make a number of statements to each other during contract negotia-

tions. Statements made in the course of negotiations are pre-contractual statements;

some but not necessarily all will form part of the contract as contractual terms. It is not

always clear whether a statement is part of the negotiating process or part of the

contract. When we establish that a statement is part of the contract, we have to then

determine the effect of the contract statement in terms of consequences for the par-

ties, particularly if there is a breach ofcontract.

We must first consider whether a statement is a representation or a term of the

contract. If a statement is a representation, it is not a part of the contract that either

party has agreed to. Instead, it is classified as a statement made by one party during

negotiation of the contract.

Representations are important in contract law because some misrepresentations

may permit the party who was misled to avoid the contract. A representation that is a

statement of fact, as opposed to an opinion, and that induced the other party to enter

into the contract is a material representation and may provide a basis for that party

to be relieved of its obligations under the contract. Misrepresentation will be discussed

in more detail in Chapter 14.

FIGURE 13.1 Interpretation of Contracts

Assessing

evidence

Concepts

Regarding

Interpretation

Classifying

contract provisions

Interpreting

exclusion and

penalty provisions

Determining

frustration

REPRESENTATION

Toronto (City) v Canadian Union of Public Employees, Local 79, 2021 CanLII 64663, 2021 CarswellOnt

10603 (LA)

In 2016, the Canadian Union of Public Employees, Local

79 (the Union) sued the City of Toronto (the City) for

ending their contract to provide paper cheques. The

Union claimed that the City failed to provide the Union

CASE

in

POINT

representation

a statement made to

induce someone to

enter into a contract

material representation

a statement of fact, not

opinion, made by one

party, of sufficient weight

to induce the other party

to enter into a contract

(Continued on next page.)

© [2023] Emond Montgomery Publications. All Rights Reserved.