BU231 Lecture Notes - Collateral Contract, Condition Precedent, Sobeys

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23 Nov 2012
Chapter 10: The Interpretation of Contracts
Parties may disagree about the meaning of a contract once its formed. We now
discuss the nature of these disagreements and how they are resolved.
Relationship Between Formation and Interpretation of Contracts
When two sides disagree they can either realize that the original terms were too
ambiguous for acceptance, and thus void, or concede different meanings
In construing we are not dealing with fraud or deceit, each party believes their
interpretation of the contract is correct and the other party is wrong
Interpretation of Express Terms
Two Approaches to Interpretation
oStrict / Plain – Meaning Approach
Restricts interpretation to the ordinary or dictionary meaning of a
word, words can still have many different definitions
oLiberal Approach
Looks to the purposes of the parties in drafting their agreement,
what did they intend?
Stresses circumstances surrounding the contract as well as
negotiations, knowledge of each party
How the Courts Apply the Approaches
oEg. Does ‘build’ imply supplying the materials
oTo build literally means to construct, but in many circumstances it may
include the supply of materials
oSince there is an ambiguity the court will look outside the contract to
surrounding circumstances
Hear evidence of previous transactions between the parties,
investigate whether materials were previously supplied
Even look to whether there is evidence of discussing the cost of
materials during negotiations
How Courts Choose Between Conflicting Testimonies
oCourt is reluctant to accept direct testimony of one party rather than the
other, it will seek a corroboration from a third party most often
oAs a last resort a court will choose between versions, basing its decision
on the credibility of the parties themselves, which story seems more
Special Usage of Words
oAnother important element is special usage of words in particular trades
and in particular areas of the country
ie. ‘Build’ means strictly labour in carpentry in Ontario
oEvidence of special usage is not necessarily conclusive, a court may
decide that a word was used in its general manner, not special
Contra Preferentum
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If one side wrote the whole contract, then we should favorably rule
towards the person with no input,
Goal of the Courts: To Give Validity to Contracts
Frequently it may seem easier to degree agreement unenforceable, but then courts
would not encourage reliance on seriously made agreements
Courts lean towards keeping an agreement alive
oIf at all possible the courts will assign a meaning to ambiguous words in
order to make the contract enforceable
Sale of Goods Act
oGoods - means all property personal, other than things in action and
money, and includes produce, industrial growing crops, and things
attached to or forming part of the land that are agreed to be severed before
sale or under the contract of sale;
oSale - includes a bargain and sale as well as a sale and delivery
Caveat Emptor
oBuyer beware
Implied Conditions and Warranties
oTitle – You have to own the good originally to sell it, have rights to sell it
oDescription – Goods should match description in catalogue
oQuality – Previously used / refurbished…
If the buyer explicitly or implicitly demonstrates a need for a
product from a seller of that type, there an implied condition that
the goods will be reasonably fit for such purpose
oSample – Your product should be same as the sample, free of defects
oRole of Exemption Clause –
Where any right, duty or liability would arise under a contract of
sale by implication of law, it may be negatived or varied by
express agreement or by the course of dealing between the parties,
or by usage, if the usage is such as to bind both parties to the
If a party seeks to rely on one it should be brought to the attention
of the other party
Likely to be upheld if it is industry practice
When dealing with the public sufficient notice needs to be given
Contra preferentum will apply
Parol Evidence
‘Parol’ means ‘outside of’ original agreement
Involves information about negotiations outside the written contract
May shed light on choice of words in current contract
oLook to earlier drafts for any patterns in dialogue of developing contract
Examples: earlier drafts of the contract, previous offers, letters, emails, phone
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oOften used to prove misrepresentation, duress, mistake etc.
Parol Evidence Rule
According to this rule, a party cannot later add a term previously agreed upon
between parties but not included in the final form of the contract
oEg. One party may persuade the other to leave a term out because it will
be confusing or because the employer may object to it
This evidence may not be used to add a term to an existing written contract.
oDoes not exclude evidence about the legality of the contract, the capacity
of the parties, mistake, duress, undue influence or fraud. Why? Because
these involve only the circumstances, not the written document itself
o Written contract is not the entire agreement
If a party can show that the writing was not intended to contain the
whole contract, but merely a part of it, then you may introduce
evidence of these oral terms
Eg. A Producing a small written document for the bank of
B to the effect that they will deliver # units of x in order for
B to begin production.. Doesn’t matter if the written
document goes against the original document because its
not meant as entire contract
oOutside term is a collateral contract (has its own consideration)
Entirely separate undertaking agreed on by parties, but not
included in the written contract, probably because written contract
seemed inappropriate place for it
Collateral agreement may be enforced as a separate contract quite
independent of written document
As such it needs its own o/a/c/i to be considered as
oCondition precedent to the contract
Condition precedent is any set of circumstances or events that
parties stipulate must be satisfied or happen before their contract
takes effect
Doesn’t need to be in writing, even if it falls within Statute of
Frauds or Sale of Goods Act
If the party claiming that a condition precedent was agreed on and
not met can produce evidence to support the claim, a court will
recognize it and declare the large written contract void
Implied Terms
Second approach is to consider whether the intention of the parties can be
achieved only by acknowledging the existence of an implied term
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