RSM225 Lec 10

Interpretation of Contracts

• courts interpret express terms in contracts (the actual words used)

• If the contract language is ambiguous, courts consider:

  • The surrounding circumstances and negotiations.

  • Industry practices (what’s common in that field).

  • Past dealings between the parties.

Parol Evidence Rule

• Once a contract is put in writing, any prior or side agreements (oral or written) cannot be used to add or change terms.

• This rule only applies to the terms of the agreement—not to things like:

  • Mistake/Fraud/Undue influence

• Exceptions to the Parol Evidence Rule:

  • If the written contract suggests there are oral terms, they are admitted.

Oral agreements made after the written contract may be valid—if there's new consideration.

Implied Terms

• Courts can add implied terms when a contract doesn’t address an issue.

• These are terms that reasonable people would assume are part of the deal

• But courts will NOT:

  • Rewrite the contract.

  • Imply terms that contradict express terms

Privity of Contract

• Only parties to a contract can sue or be sued under it.

• Example: If Anne contracts with Cal to pay Bob, Bob can’t sue Cal directly—he’s not a party to the contract. Bob can sue Anne, and Anne can sue Cal.

• Exceptions exist (insurnace)

Novation

• A new contract that replaces an old one.

• Could involve:

  • New subject matter (changing the terms).

  • New party (substituting someone else).

Vicarious Performance

• Anne arranges for someone else (Cal) to perform her obligation to bob.

• Anne is still responsible unless:

  • Bob agrees to the change.

  • Performance doesn’t need to be personal, and Cal is equally capable.

Assignment of Rights

• A party can assign their rights (e.g., right to receive money), but not their obligations.

• Once Bob gets notice of the assignment:

  • He must pay the assignee.

  • If he mistakenly pays the assignor, he still owes the assignees

Ways to Discharge:

1. Performance – both parties complete their duties.

2. Agreement – parties mutually cancel/alter the contract.

3. Frustration – an unexpected event makes performance impossible.

Law – e.g., time limit runs out under the Limitations Act.

Discharge by Agreement

• Can be done by:

  • Waiver – both parties agree to cancel an unperformed obligation.

  • Alteration – small changes = amendments; big changes = new contract.

  • Accord and Satisfaction – accepting less performance in place of original duty.

Termination clause – contract includes an option to end it.

Discharge by Frustration

• A serious unexpected event occurs after the contract is made.

• Conditions:

  • No one’s fault.

  • Not discussed in contract.

  • Changes the obligation significantly.

• If frustration applies:

  • Payments may need to be refunded.

  • Party may recover expenses (depends on law).

Breach of Contract

• A breach occurs when a party:

  • Refuses to perform.

  • Makes performance impossible.

  • Doesn’t fulfill a term.

  • Minor breach (warranty)

    • Term is non-essential.

    • Other party must continue and can sue for damages

• Major breach (condition)

  • Term is essential.

  • Other party can:

    • End the contract.

    • Sue for damages.

    • Or continue and still sue.

Repudiation

• When one party clearly refuses to perform (before or during performance time).

• The other party can:

  • Accept repudiation, end the contract, and sue.

  • Continue performing—but risks not getting performance back

Failure to Perform

• May be:

  • Complete (no performance at all).

  • Partial (some performance).

• In installment contracts, failure can lead to termination if:

  • Future performance is likely to also be defective.

  • The deficiencies are serious.

Substantial Performance

• If most of the contract is done, and the rest is minor:

  • Performing party can still enforce contract.

  • Other party can sue for damages (but not terminate).

Exemption Clauses

• Clauses that limit liability or excuse performance.

• Enforceable if:

  • Clearly worded.

  • Parties had equal bargaining power.

  • Courts often strictly interpret these clauses.

• Can be unfair if one party has all the power.