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CHAPTER 10 - 13, BU231.docx

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Alison Blay- Palmer

CHAPTER 10 – THE INTERPRETATION OF CONTRACTS Two approaches to interpretation of express terms:  Strict or plain- meaning approach- an approach that restricts interpretation to the ordinary or dictionary meaning of a word  Liberal approach- an approach that looks to the intent of the parties and surrounding circumstances, and tends to minimize, but does not ignore, the importance of the words actually used Special Types of Contracts  Insurance contracts – interpretation of insurance contracts must 1. Follow the contra proferentem rule – a rule of contract interpretation that prefers the interpretation of a clause that is least favorable to the party that drafted the clause 2. Construe coverage provisions broadly, and 3. Interpret exclusion clauses narrowly  Note: Exemption clauses- is a clause in a contract that exempts a party from liability The Parol Evidence Rule  Parol evidence rule- a rule preventing a party to a written contract from later using parol evidence to add to, subtract from, or modify the final written contract o “Parol”- means extrinsic to or outside of the written agreement  The parol evidence rule does not exclude evidence of an oral agreement that the parties may reach after they have entered into the written agreement  Collateral agreement- a separate agreement between the parties made at the same time as, but not included in, the written document  Condition precedent- any set of circumstances or events that the parties stipulate must be satisfied or must happen before their contract takes effect o Exceptions to the Parol Evidence Rule – a court will admit parol evidence about a missing term when:  The written agreement does not contain the whole agreement;  The missing term is part of a subsequent oral agreement;  The missing term is part of a collateral agreement for which there is separate consideration; or  The missing term is a condition precedent to the written agreement Implied Terms as a Method of Interpretation  Implied term- a term not expressly included by the parties in their agreement but which, as reasonable people, they would have included had they thought about it. A term will be implied if it is obviously necessary to accomplish the purpose of the contract SLIDES: Interpretation of Contracts  Ambiguity in language o Multiple meanings o Special usage of words  Trade expressions (e.g. baker’s dozen is 13 not 12)  Local custom – e.g. expressions specific to a geographical location, e.g. what is a “stone”?  Units of time: what is a “week”? – often depends on industry  Trade Customs: o $1,000.00 to build cabinets o Does the price include materials or not? o If the cost was $300,000.00 to build a house, then would the materials be included or not? What is the different –the language is not clear, this is where the courts need to interpret Interpretation of Express Terms  Strict Approach o Dictionary definition o Plain meaning of the words used  Liberal Approach o Looks to intentions of the parties at the time of contract formation, e.g. the purpose of the parties in drafting the contract o Looks to the circumstances surrounding contract negotiations Credibility  Issue of Evidence o Judge must make determination as to whose story is more believable o The more witnesses or other evidence available is of great assistance in making the determination o Most contract negotiations do not occur conveniently before witnesses, but are rather conducted between only the parties to the contract o Often it is necessary to have a third party bystander settle the dispute o Are judges any more skilled at determining credibility than the average person? o Courts do have the option of making the contract void for uncertainty – but, they will usually make every effort to enforce contracts Parol Evidence Rule  Parol- as in “extrinsic”  Not to be confused with Parole as in “released early from prison for good behaviour”  A rule preventing a party to a contract from adding a term previously agreed upon but not included in the final written contract  A party cannot go to court and introduce evidence that something outside of the document was excluded from the contract  Parol = extrinsic or “outside”  Rule only applies to terms that a party is trying to have added to the contract – does not apply to other evidence surrounding the contract  Problems with the rule” o Effect on the Standard Form Contract- won’t include “bonus clauses”  How to get around the rule: o Written document was not intended to embody the whole contract o Parol Evidence Rule does NOT exclude oral agreement reached AFTER the parties have entered into the written contract o Collateral Agreement – separate agreement between the parties, but not included in the written document – needs separate consideration Condition Precedent  Another exception to the Parol Evidence Rule: o Condition Precedent  Any set of circumstances or events that the parties stipulate must be satisfied or must happen before their contract takes effect, condition precedent is acceptance, but with certain conditions that must be met before you can follow through with the contract  Not to be confused with a “conditional acceptance” Interpretation – Implied Term  Implied term: o A term not expressly included by the parties in their agreement but which, as reasonable people they would have included had they thought about it  Terms established by Custom – o Terms implied from long established practices in a particular industry (some are now codified in the Sale of Goods Act) CHAPTER 11 – PRIVITY OF CONTRACT AND THE ASSIGNMENT OF CONTRACTUAL RIGHTS Privity of Contract  Third party- a person who is not one of the parties to a contract but is affected by it  Privity of contract- the relationship that exists between parties to a contract  Vicarious performance- a third party performs contractual obligations on behalf of the promisor who remains responsible for proper performance o Vicarious performance is acceptable provided that the contract does not specify personal performance Trusts  Trust- an arrangement that transfers property to a person who administers it for the benefit of another person  Trustee- a person or company who administers a trust  Beneficiary- a person who is entitled to the benefits of a trust  Beneficial owner- a person who, although not the legal owner, may compel the trustee to provide benefits to him  Trust agreement- the document that conveys property to a trustee to be used for the benefit of a third party beneficiary  Constructive trust- a relationship that permits a third party to obtain performance of a promise included in a contract for his benefit  Undisclosed principal- a contracting party who unknown to the other party, is represented by an agent  Principled exception- allows third parties to rely upon a contractual exemption clause when the parties to the contract intended to include them, and their activities come within the scope of the contract and the exemption clause o Exceptions to the privity of contract rule: insurance, the undisclosed principle, contracts concerning land, and principled exception Third Parties Who May Play a Role in a Contract  There are many ways in which a third party to the original contract may acquire rights under it or become subject to duties to perform: o Through vicarious performance, such as an employee carrying out the obligations of one of the parties to the contract o When an exemption clause applies to a third party o Through a trust where a trustee confers benefits on a third party o Through an insurance contract under which the insurer promises to pay a third party in the event that a particular risk occurs o When an agent makes a contract on behalf of an undisclosed principal o When a party acquires an interest in land and becomes subject to rights and duties owed to a third person previously registered against the land o When contractual rights are assigned to a third party Assignment of Rights – involves two contracts  Assignment- the transfer by a party of its unperformed rights under a contract to a third party  Assignor- a party that assigns its rights under a contract to a third party  Promisor- the party obligated to provide the benefit  Assignee- a third party to whom rights under a contract have been assigned  Assign- transfer to another person outside the contract  Choses in action- rights to intangible property such as patents, stocks and contracts that may be enforced in the courts  Choses in possessions- rights to tangible property that may be possessed physically  Statutory assignment- an assignment that complies with statutory provisions enabling the assignee to sue the other party without joining the assignor to the action (the assignment was absolute (unconditional and complete), it was in writing, and the promisor received notice of it in writing  Equitable assignment- an assignment other than a statutory assignment  Set off- the right of a promisor to deduct an existing debt owed to him by the promisee  Executor- the personal representative of a deceased person named in his or her will  Intestate- when a person dies without leaving a will  Administrator- the personal representative of a person who dies intestate  Receiving order- a court order to commence bankruptcy proceedings  Bankrupt- declared insolvent by the court Negotiable Instruments  Negotiable instrument- a written contract containing a promise, express or implied, to pay a specific sum of money to the other of a designated person or to “bearer”  Negotiation- the process of assigning a negotiable instrument  Endorse- sign one’s name on a negotiable instrument  Holder- a party who acquires a negotiable instrument from the transferor o Notice to the Promisor- the written notice is necessary before an assignee may take advantage of a statutory assignment and the notice protects an assignee against the risk of the promisor being unaware of the assignment and paying the assignor or other assignees o Notice is not necessary for the transfer of a negotiable instrument because the promisor is liable to pay only one person, the holder of the instrument for the time being Principles of Assignment  Equitable Assignments o Partial or conditional in nature; promisor must receive notice of assignment before obligated to pay o Assignor must participate in any lawsuit o Subject to the equities  Statutory Assignments o Provincial statutory requirements: complete (not partial), unconditional, and written o Promisor to receive notice of transfer before being obligated to pay o Assignor need not participate in any lawsuit o Subject to the equities  Negotiable Instruments o Federal statutory requirements: Bill of Exchange Act applicable to promissory notes, cheques, bills of exchange o Promisor need not receive notice before obligated to pay o Previous holders need not participate in any lawsuit o Not subject to the equities (except for consumers o Currency special rules SLIDES Privity of Contract  Privity of Contract o The relationship that exists between the parties to a contract  Rule: o If there is no privity between the parties then there is no right to obtain legal remedy based in contract law o There may be opportunity to obtain legal remedy through tort law where applicable  Rule can have harsh results- therefore systems have developed to get around the rule  Novation: o The termination of one contract and the creation of a new contract with the same or similar terms to introduce the third party to the contract o Has the effect of releasing the original party to the contract  Vicarious Performance o Where a third party performs on behalf of the promisor who remains responsible for proper performance o Don’t confuse it with vicarious liability in tort law o E.g. corporation cannot act without an agent who is performing vicariously, but the corporation remains liable for performance  Trusts o Where property has been transferred to a person who administers the property for the benefit of another o The third party who is obtaining the benefit has a “beneficial interest” in the property and has the right to enforce the trust agreement as the “true owner” of the property  Constructive Trusts: o The relationship that permits a third party to obtain performance of a promise included in a contract for his or her benefit o Original contract had to be meant to be irrevocable  A trust must be permanent with no option for the donor of the trust property to later change his/her mind  Exceptions to the rule o Insurance o Undisclosed principals o Contracts concerning land – tenancy agreements o Special Concessions to Commercial Practice  Collateral Contracts  Exemption Clauses Assignment of Rights  Definition: o A transfer by a party of its rights under a contract to a third party  The right to enforce a contract has an independent value from the price of the contract itself o This intangible right is what is being transferred  This right is referred to as a chose in action  Tangible goods are referred to as choses in possession  Parties to the assignment o 1) The promisor o 2) The assignor o 3) The assignee  Equitable Assignment: the original assignor is left a party to the transaction therefore in order to enforce the contract – all three parties must be made party to the legal action  The effect of the Conveyancing and Law of Property Act R.S.O. 1990 c. s.53 in Ontario: o Where an assignment meets the requirements of the act, that is:  The assignment was absolute (unconditional and complete); and  It was in writing; and  The promisor received notice of it in writing o Then it is a statutory assignment and the assignor is no longer bound to it  Notice to the promisor o ALL assignments require that the promisor be given notice of the assignment o It is notice to the promisor that is required and NOT consent from the promisor o If the promisor ignores the notice and pays the assignor, then the promisor will be in breach and will be required to pay again to the assignee  Assignee’s Title: o The assignee cannot obtain a better title than the assignor o The assignment is subject to any rights that the promisor had against the assignee before the promisor received notice of the assignment o E.g. equitable right of set-off, right of rescission, etc. Negotiable Instruments  Negotiable instruments are defined by the Bills of Exchange Act R.S.C. 1985 c. B-4  Definition o A written contract containing a promise express or implied to pay a specific sum of money to the order of a designated person or to bearer  Includes o Bills, cheques, promissory notes  Negotiation: o The process of assigning a negotiable instrument  Negotiable instruments can be negotiated by simply signing the item where it is made payable to a specific person or by just handing it over if it is payable to bearer  Parties to the negotiable instrument: o Promisor/Drawer, Drawee, Payee, Holder- still subject to the equities, Holder in Due Course- good title still passes (defined in BEA s.55(1)) CHAPTER 12 – THE DISCHARGE OF CONTRACTS The ways in which a contract may be discharged:  Discharge by performance, agreement, frustration, and operation of law o For a contract to be fully discharged by performance, both parties- not merely one of them- must fulfill their promises  Discharge a contract- cancel or end the obligations of a contract; make an agreement or contract inoperative  Tender of performance- an attempt by one party to perform according to the terms of the contract  Waiver- an agreement not to proceed with the performance of an existing contract  Accord and satisfaction- a compromise between contracting parties to substitute a new contractual obligation and release a party from the existing one  Novation- the parties to a contract agree to terminate it and substitute a new contract, there are two types of novation: o a material change in terms o a change in parties  Condition precedent- a future act or event that must happen before the parties are obligated to perform o Limits the parties to only one reason for not performing- the reason set out in the condition precedent  Condition subsequent- a future event that brings a promisor’s liability to an end if it happens o Example/ a buyer of a ticket for a baseball game has the benefit of a term in his contract that if the game is rained out before a stated inning, he will be given a ticket for another game  Act of god- the raging of the natural elements  Doctrine of frustration- the law excuses a party from performance when circumstances beyond the control of the parties have made performance impossible, pointless, or radically different from that contemplated by the parties o Frustration is available only in extreme circumstances that could not have been anticipated by the parties  Self-induced frustration- a party wilfully disables itself from performing
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