In my post, 'What Happens When a Contract is Breached?', I introduced the different ways a breached contract may be addressed. If a dispute reaches the courts, there are two principles of interpretation that the court will follow:
Letter of the Law - the strict and literal interpretation of the contract as it is written.
Spirit of the Law - the underlying purpose, intent, and principle behind the contract.
Canadian courts generally prioritize the intent of the parties and fairness, but they also adhere to clear contractual wording to ensure legal certainty.
The Letter of the Law will take precedence when the following conditions exist:
Clear and Unambiguous Wording: If the contract is clear, courts generally enforce it exactly as written.
Formal Commercial Agreements: In business contracts, strict adherence to wording ensures predictability in commercial dealings.
Entire Agreement Clauses: Many contracts include a clause stating that only the written terms apply, limiting the ability to rely on implied terms.
The parties are sophisticated businesses negotiating at arm's length.
The Spirit of the Law will take precedence when the following conditions exist:
Ambiguous Terms: If wording is unclear, courts will interpret the contract based on the intent of the parties at the time of signing.
Implied Terms: In some cases, courts imply terms into a contract based on business customs or fairness principles.
Good Faith Performance: Since Bhasin v. Hrynew (2014), the Supreme Court of Canada has emphasized the duty of good faith in contractual performance, ensuring that parties act honestly and fairly.
Unconscionability: If one party takes unfair advantage of another, courts may refuse to enforce strict terms.
Two additional doctrines influencing interpretation include:
A. Contra Proferentem
If a contract term is unclear, it is interpreted against the party who drafted it. This principle ensures fairness in contracts with unequal bargaining power, such as employment agreements or consumer contracts.
B. Parol Evidence Rule
Courts generally do not consider outside evidence beyond the written contract unless:
The contract is ambiguous.
There is evidence of fraud, misrepresentation, or mistake.
The contract is incomplete.
As I have mentioned before, I am not a legal professional and am not providing legal advice. But being aware of these concepts is important for when you plan on entering into a contract, when managing a contract, and when a conflict or breach of contract occurs.
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