Photo of Joe BrennanBy Joe BrennanJanuary 07 2015
Business Law

Basic Principles of Contract Interpretation

This blog summarizes, at a very high level, the basic principles of contract interpretation.

The Goal – Reflect Intention of the Parties

To help the court find “an interpretation that reflects and promotes the intention of the parties at the time they entered into the contract.”

[Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888]

The Cardinal Rule – Intentions Are as Expressed in Written Document

“The court should give effect to the intentions of parties as expressed in their written document.”

[Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415]

The intent of the parties is determined by the words they used in the contract.  The court focuses on the written contract and the words used by the parties in that contract.

[Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129]

The “Parol Evidence Rule” – Do not Consider Extrinsic Evidence If Words are Unambiguous

The court does not consider evidence extrinsic to the words used by the parties to the written contract if that document is clear and unambiguous on its face.

[Eli Lilly]

Give Effect to Entire Contract

A court must, if possible, give effect to all of the provisions in a contract.

[BG Checo International Ltd. v. British Columbia Hydro & Power Authority, [1993] 1 S.C.R. 12]

A court cannot “simply pick and choose clauses – or parts of clauses – without considering the contract as a whole.”

[ATCO Electric Ltd. v. Alberta (Energy and Utilities Board), 2004 ABCA 215]

Harmonize Apparently Conflicting Terms

In order to give effect to all provisions in the contract, it may be necessary to “strive to harmonize apparently conflicting terms in a contract.”

[369413 Alberta Ltd. v. Pocklington, 2000 ABCA 307]

Specific Terms Often Qualify More General Terms

In striving to harmonize apparently conflicting terms, the court’s interpretation will often read specific terms as qualifying more general terms, that is to say that “the terms may be reconciled by taking the parties to have intended the scope of the general term to not extend to the subject matter of the specific term.”

[BG Checo].

Court May Consider Absence of Words in Contract

Although a court is not to consider evidence extrinsic to the words used by the parties if the written contract is clear and unambiguous on its face, a court may consider the absence of words in the contract.

[Geoffrey L. Moore v. Manitoba Motor League (c.o.b.) CAA Manitoba (2003), 10 R.P.R. (4th) 1 (Man C.A.)]

Court May Consider Background

The court may also consider the surrounding circumstances or the relevant background against which the contract was concluded.

[ATCO.]

Do Not Consider Crossed Out Words

Crossed out (or struck) words should not be considered in interpreting a contract.  For example, in Indian Moylbdenum Ltd. v. The King, [1951] 3 D.L.R. 497 (S.C.C.), it was held that “words deleted by the drawing of a line through them, and this deletion initialed by the parties, cannot be looked at.”

[Consolidated Bathurst]

Does an Ambiguity Exist?

An ambiguity in the words in the document arises when a contract is “reasonably susceptible of more than one meaning.”

[Hi-Tech Group Inc. v. Sears Canada Inc. (2001), 52 O.R. (3d) 97 (C.A.)]

However, mere difficulty in interpreting a contract is not the same as ambiguity.

[Northwestern Mechanical Installations Ltd. v. Yukon Construction Co. (1982), 37 A.R. 132.]

If Ambiguous, Courts May Apply Consider Extrinsic Evidence - Exception to Parol Evidence Rule

One exception to the parol evidence rule arises in the event of ambiguity in the language of the contract. In such instances, extrinsic evidence is admitted to clarify the meaning of the ambiguous words or phrases.

[United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316]

If Ambiguous, Promote a Sensible Commercial Result

In the face of ambiguity, the interpretation promoting a sensible commercial result is to be preferred.

[Consolidated Bathurst];

[Eli Lilly]

If Ambiguous, Court May Apply Contra Preferendum Doctrine

In addition, the presence of ambiguity allows a court to apply the contra preferentum doctrine and interpret an ambiguous provision against the party who drafted it.

[Consolidated Bathurst]

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Invitation for Discussion:

If you would like to discuss this blog in greater detail, or any other business, contract or securities law related matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice

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