Sutarčių interpretavimas

1.1.What is a contract? 4
1.2. Contract language 4
1.2.1. Capacity 5
1.3. Capacity 6
1.4. Written and oral contracts 6
1.5. Offer and acceptance 8
1.6. Give and take 9
1.6.1. Acceptance 10
1.6.2. The Reasonable Person 11
1.7. Non-acceptance 11
1.7.1. Conditions 12
1.7.2. Consideration 12
1.8. In consideration 12
1.8.1. Reliance 14
1.8.2. Agents 15
1.9. Agents who exceed their authority 16
1.9.1. Delegations and Assignments 16
2.1. When is a contract not a contract? 17
2.1.1. Illegality 17
2.2. Is it or isn’t it a contract? 18
2.2.1. Duress 19
2.2.2. Undue Influence 20
2.2.3. Fraud 20
2.3. When someone forces you to sign 21 2.3.1. Mistake 21
2.3.2. Statutes of Limitations 22
2.3.3.Changing Situations 23
2.4. Should the buyer still dew are? 24
2.4.1. Unconscionability 24
2.5. Fill in the blanks 24
2.6. Practical contracts 25
2.7. Getting out of a contract 26
2.8. Read the fine print 27
2.9.Get it in writing 28
The major theme of this article is that the interpretation off contracts – their possible amplification, correction, and modification by adjudicators — is in the interests of contracting parties. The reasons are no doubt well-appreciated in at least a general sense: interpretation may improve on otherwise imperfect contracts; and the prospect of interpretation allows parties to write simpler contracts and thus to conserve oncontracting effort.
As background, we know from common experience that parties may fail to provide for certain events in their contracts (suppose that they overlook the possibility of a leeap year) and that they often employ broad terms that do not reflect their wishes in particular circumstances (suppose that they specify that material A should be used in construction but that they would really prefer substitution of material B if

f an unusual problem arises with A). To explain why parties write such incomplete contracts, it is frequently suggested that some eventualities are hard to anticipate or describe in advance, that leaving contracts incomplete saves time and effort, and that fashioning highly refined contracts would be impractical1y costly.
The object of this theme is – to find out the fundamentals of the contract, bars to a contract. To find out these things, we have to do some tasks.
Our tasks :
1. To explain what is contracts, how to know, when You have a deal, and when not.
2. How can the illeaglity of the contracts be interpreted.
3. How to make a good contract, that after Your sign it, that You could be sure, You won‘t have any prroblems.
To find all these things out, we will need a lot of literature, we will take some opinions of famous lawyers. The finding is, that this work will explain all the main things about contracts, how to make them, how to prepare, how and when to sign and lastly who and how can interpret it.1. FUNDAMENTALS OF CONTRACT LAW
1.1.What is a contract?
Having an appreciation for the fundamental principles of contract law will enable you to answer many of your own qu
uestions about everyday consumer transactions.
A contract consists of voluntary promises, which the law will enforce, between competent parties to do, or not to do, something. These binding promises may be oral or written. Depending on the situation, a contract could obligate someone even ifhe or she wants to call the deal offbefore receiving anything rrom the other side. The details of the contract — who, how, what, how much, how many, when, etc. — are called its provisions or tenus.
You donot need a lawyer to form a contract. If you satisfy the maturity and mental capacity requirements, discussed below, you don’t need anyone else (besides the other party). But it probably is a good idea to see a lawyer before you sign complex contracts, such as business deals or contracts involving large amounts of money.
In order for a promise to qualify as a contract, it has to be supported by the exchange of something of value between the participants or parties. This something is called consideration. Consideration is most often money, in exchange for property or services, but can be some other bargained-for benefit or detriment (as explained more fully below). The final qualification for a contract is that th
he subject of the promise (including the consideration) may not be illegal.
An example: Suppose a rriend agrees to buy your car, an Edsel in less-than-mint condition, for $1,000. That is the promise. The money is the consideration for the sale. You benefit by getting the cash. Your rriend benefits by getting the Edsel. Since it is your car, the sale is legal, and you and your friend have a contract.1.2. Contract language
A valid contract does not have to be printed, legalistic-looking document. Nor does it have to be called a contract. A typed or even handwritten “agreement,” ” letter of agreement” or “letter of understanding” signed by the parties or even e-mailed between them will be valid if it meets the legal requirements of a contract. Don’t sign something assuming it’s not a contract and therefore not important.
It is also common for the word “contract” to be used as a verb meaning “to enter into a
contract.” And we speak of contractual relationships to refer to the whole of sometimes complex relationships or transactions, which may comprise one or many contracts.1.2.1. Capacity
Not just anyone can enter into a contract. In order to make an enforceable contact, people have to be ab
ble to understand what they’re doing. That requires both maturity and mental capacity. Without both of these, one party could be at a disadvantage in the bargaining process, which could invalidate the contract.
In this sense, maturity is defined as a certain age a person reaches — regardless of whether he or she is in fact “mature.” State laws permit persons to make contracts if they have reached the age of majority (the end of being a minor), which is usually age eighteen. That does not mean minors canot make contracts, by the way. But courts may choose not to enforce some of them. The law presumes that minors need to be protected trom their lack of maturity, and won’t allow, for example, a Porsche salesman to exploit a minores naivete by enforcing a signed sales contract whose real implications a young person is unlikely to have comprehended. Sometimes this results in minors receiving benefits (such as goods or services) and not having to pay for them, though they would have to return any goods still in their possession. This would apply even to minors who are emancipated — living entirely on their own — who get involved in contractual relationships, as weU as to a minor who lives at home but is unsupervised long enough to get into a contractual fix.
A court may require a minor or the minor’s parents to pay the fair market value (not necessarily the contract price) for what courts call necessaries (what you and I would likely call “necessities”). The definition of a “necessary” depends entirely on the person and the situation. It probably will always include food and probably will never include CD’s, Nintendo cartridges or Porsches. Minors who reach full age and do not disavow their contracts may then have to comply with all their terms, and in some states, courts may require a minor to pay the fair value of goods or services purchased and received under a contract that minor has disavowed.
Parents who give their children access to home computers hooked up to the Internet should consider the situation that may arise if a child uses their credit card information online. This includes information that may be stored in the computer or at a website that recognizes your home computer and, of course, doesn’t know that a minor is the actual “shopper.” From the point of view of the website owner, the parent is the customer, and you may have a hard time avoiding liability for a contract (such as for the purchase of merchandise) that your children have entered into using your Internet identity.
There are other people, besides minors, who may not be able to fonn enforceable contracts.
While the age test for legal maturity is easy to detennine, the standards for detennining mental capacity are remarkably complex and differ widely :trom one state to another. One common test is whether someone has the capacity to understand what he or she was doing and to appreciate its effects when the deal was made. Another approach is evaluating whether someone has self-control, regardless of his or her understanding.
That brings up the question of whether an intoxicated person can be held to a contract. Very often someone who is “under the influence” can get out of a contract. The courts don’t like to let a voluntarily intoxicated person revoke a contract with innocent parties this way __ but if the evidence shows that someone acted like a drunk when making a contract, a court may well assume that the other party probably was trying to take advantage. On the other hand, if someone doesn’t appear to be intoxicated, he or she probably will have to follow the tenns ofthe contract. (The key in this area may be a person’s medical history. Someone who can show a history of alcohol abuse, blackouts, and the like, may be able to void the contract, regardless of his or her appearance when the contract is made. This is true especially ifthe othe.r party involved knew about the prior medical history.)1.3. Capacity
We’ve discussed the fundamental requirements for competence to make a contract — maturity and mental capacity. Of course, it should go without saying that there’s an even more fundamental requirement: that both parties be people. In the case of a corporation or other legal entity, which the law considers a “person,” this could be an issue. A problem in the formation or status of the entity could cause it to cease existing legally, thus making it impossible to enter into a contract. In that case, however, the individuals who signed the contract on behalf of the legally nonexistent entity could be personally liable for fulfilling the contract.
Historically, the law has had other criteria for capacity. Slaves, married women and convicts were at one time not considered capable of entering into contracts in most states. Even today, certain American Indians are regarded as wards of the U.S. government for many purposes, and their contract-law status is similar to that of minors.1.4. Written and oral contracts
Some people mistakenly believe that an oral contract oisnot worth the paper itos printed on.O But many types of contracts don’t have to be written to be enforceable. An example is purchasing an item in a retail store. You pay money in exchange for an item that the store warrants (by implication, as discussed later) will perform a certain function. Your receipt is proof of the contract.
As with a written contract, the existence of an oral contract must be proved before the courts will enforce it. But as you can imagine, an oral contract can be very hard to prove — you seldom have it on video. An oral contract is usually proved by showing that outside circumstances would lead a reasonable observer to conclude that a contract most likely existed. Even then, there is always the problem of what the terms of the oral contract were.
Although most states recognize and enforce oral contracts, the safest practice is to put any substantial agreement in writing. Get any promise from a salesperson or an agent in writing, especially ifthere already is a written document that might arguably be a contract covering any part ofthe same deal. If the court concludes that the parties intended the written document–a handwritten “letter of agreement” or “understanding,” an e-mail, or even an order form–to contain all its tenns and be a complete statement of all understandings between the parties, then the court will be very hesitant to add words or terms to the document. This is the important parol evidence rule, under which courts typically look only to unrefuted (uncontested) testimony to help them “fill in the b]anks” of a contract. Anything not in that written contract would be deemed not to be part of the deal.
Writing down the terms of a good-faith agreement is the best way to ensure that all parties are aware of their rights and duties — even if no party intends to lie about the provisions of the agreement.
Having said that, know that there are some contracts which are completely unenforceable if theyore not in writing. This requirement, which exists in varying forms in nearly all the states, had its origins in the famous statute of frauds, an English law dating from 1677. It refers to “frauds” because it attempts to prevent fraudulent testimony in support of nonexistent agreements. In most states, the courts will enforce certain contracts only if they are in writing and are signed by the parties who are going to be obligated to full fill them. These contracts often include:
• any promise to be responsible for someone else’s debts — often called a surety contract or a guaranty; one example would be an agreement by parents to guarantee payment of a loan made by a bank to their child;
• any promise, made with consideration, to marry (though this rule has been eliminated in many states);
• any promise that the parties cannot possibly fulfill within one year from when they made the promise;
• any promise for the sale of goods worth more than $500 or lease of goods worth more than
$1,000 (the amounts may vary from state to state);
• any promise to bequeath property (give it after death);
• any promise to sell stocks and bonds (this provision is eliminated in some states).
Some states have additional requirements for written contracts. These statutes are designed to prevent fraudulent claims in areas where it is uniquely difficult to prove that oral contracts have been made, or where important policies are at stake, such as the dependability of real estate ownership rights. Promises to extend credit are often in this category. One typical area of state regulation is automobile repairs; many states require that estimates for repair work be given in writing. If they arenot, and the repair is done anyway, the contract may not be enforceable, and the repair shop may not be able to get its money if the customer disputes authorizing the repairs.
Where a written contract is required, a signature by the party to be charged –. that is, the person whom the other party wants to hold to the contract — is also necessary. A signature can be handwritten, but a stamped, photocopied, or engraved signature is often valid as well, as are signatures written by electronic pens. Even a simple mark or other indication of a name may be enough. What matters is whether the signature is authorized and intended to authenticate a writing, that is, indicate the signer’s execution (completion and acceptance) of it. That means that you can authorize someone else to sign for you as well. But the least risky and most persuasive evidence of assent is your own handwritten signature.
Incidentally, hardly any contracts require notarization today. Notary publics or notaries, once important officials who were specially authorized to draw up contracts and transcribe official proceedings, act now mostly to administer oaths and to authenticate documents by attesting or certifYing that a signature is genuine. Many commercial contracts, such as promissory notes or loan contracts, are routinely notarized with the notary’s signature and seal to ensure that they are authentic, even where this is not strictly required. Many technical documents required by law, such as certificates of incorporation and real property deeds, must be notarized if they are going to be recorded in a local or state filing office.1.5. Offer and acceptance
Offer and acceptance are the fundamental parts of a contract, once capacity is established. An offer is a communication by an offeror of a present intention to enter a contract. (The offeror is the person making the offer.) It is not simply an invitation to bargain or negotiate. For the communication to be effective, the offeree (the one who is receiving the offer) must receive it. In a contract to buy and sell, for an offer to be valid, all of the following must be clear:
• Who is making the offer?
• What is the subject matter of the offer?
• How many ofthe subject matter does the offer involve (quantity)?
• How much is offered (price)?
Let’s say you told your friend, “I’ll sell you my mauve-colored Edsel for one thousand dollars.”
You’re making the offer, your friend is receiving it, and the car is the subject matter. Describing the car as a mauve Edsel makes your friend reasonably sure that both of you are talking about the same car (and only one of them). Finally, the price is $1,000. It’s a perfectly good offer.
Advertisements are not offers, as much as they seem like it. Instead, courts usually consider advertisements an “expression of intent to sell” or an invitation to bargain.1.6. Give and take
A contract can only come about through the bargaining process, which may take many forms. This chapter discusses the definitions of consideration, offer, and acceptance. All the principles discussed here will have to be present, in some form, in any contract.
An offer doesn’t stay open indefinitely, unless the offeree has an option, which is an irrevocable offer (discussed below). Otherwise, an offer ends when:
• the time to accept is up — either a “reasonable” amount oftime or the deadline stated in the offer;
• the offeror cancels (revokes) the offer;
• the offeree rejects the offer;
• the offeree dies or is incapacitated.
An offer is also closed, even if the offeree has an option, if:
• a change in the law makes the contract illegal;
• something destroys the subject matter ofthe contract (see below);
Note that there are special kinds of contracts called options. An option is an agreement, made for consideration, to keep an offer open for a certain period. For example, in return for a fifty-dollar payment today, you might agree to give your friend until next Friday to accept your offer to sell her your Edsel for $1,000. Now you have an option contract. The fifty dollars is not a down payment or
a deposit, but the price of the option. Selling an option puts a limit on your ability to revoke an offer, a limit that the optionee (the option-holder) bargains for with you in return for the fifty dollars.1.6.1. Acceptance
A contract is not complete unless an offer is accepted. But what, exactly constitutes the acceptance of an offer? Acceptance is the offeree’s voluntary, communicated agreement or assent to the terms and conditions of the offer. Assent is some act or promise of agreement. An easy example of an assent might be your rriend saying, “I agree to buy your mauve Edsel for one thousand dollars.”
Generally, a valid acceptance requires that every material term agreed to be the same as in the offer. In addition, if the offer requires acceptance by mail, you must accept by mail for the offer to be effective. Be aware that under the mailbox rule, an offer accepted by mail is usually effective when you put the letter in the mailbox, not when it is received — unless the terms for acceptance state otherwise. If there’s no such requirement, you just have to communicate your acceptance by some reasonable means (not by carrier pigeon, smoke signals or •channeling. but by telephone, mail, e¬mail or facsimile). On the other hand, an assent that is not quite so specific but is crystal-clear in its meaning would also suffice — such as, in the Edsel example, saying, “It’s a deal. I’ll pick it up tomorrow.” The standard is whether a reasonable observer would think there was an assent.
In most cases, silence does not constitute acceptance of an offer. It isn’t fair to allow someone to impose a contract on you unless you go out of your way to stop it. Hence your cable TV company cannot force a contract for additional services on you simply because you failed to reject its offer. Yet there are circumstances where failure to respond may have a contractual effect. Past dealings between the parties, for example, can create a situation in which silence constitutes acceptance. Suppose a fire insurance company, according to past practice to which you have assented, sends you a renewal policy (which is in effect a new contract for insurance) and bills you for the premium. If you kept the policy but later refused to pay the premium, you would be liable for the premium. This works to everyone’s benefit: If your house burned down after the original insurance policy had expired but before you had paid the renewal premium, you obviously would want the policy still to be effective. And the insurer is protected from your deciding to pay the premium only when you know you have sustained a casualty loss.
On the other hand, speechless acts can constitute an acceptance. Any conduct that would lead a reasonable observer to believe that the offeree had accepted the offer qualifies as an acceptance. Suppose you say, “Ed, I will pay you fifty dollars to clean my garage on Sunday at nine o’clock a.m.” If Ed shows up at nine o’clock a.m. on Sunday and begins cleaning, he adequately shows acceptance (assuming you’re home or you otherwise would know he showed up).
To take another example, you don’t normally have to pay for goods shipped to you that you didn’t order (a later section will discuss this in more detail). You otherwise would only have to allow them to be taken back at no cost to you. But if you owned a shop and you put them on display in your store and sold them, you would have accepted the offer to buy them from the wholesaler and you would be obligated to pay the invoice price. Sometimes this is called an implied (as opposed to an express) contract. Either one is a genuine contract.1.6.2. The Reasonable Person
Throughout this and any other law book, the word “reasonable” will appear many times. Very often you’ll see references to the reasonable man or the reasonable person. Why is the law so preoccupied with this mythical being?
The answer is that no contract can possibly predict the infinite number of disputes that might arise under it. Similarly, no set of laws regulating liability for personal or property injury can possibly foresee the countless ways human beings and their property can harm other people or property. Since the law can’t provide for every possibility, it has developed the standard of the “reasonable person” to furnish some uniform standards and to guide the courts.
Through the fiction of the “reasonable person,” the law creates a standard that the judge or jury may apply to each set of circumstances. It is a standard that reflects community values, rather than the judgment of the people involved in the actual case. Thus a court might decide whether an oral contract was formed by asking whether a “reasonable person” would conclude from people’s actions that one did exist. Or the court might decide an automobile accident case by asking what a “reasonable person” might have done in a particular traffic or hazard situation.
A contract usually is .in effect- as soon as the offeree transmits or communicates the acceptance __ unless the offer has expired or the offeror has specified that the acceptance must be received before it is effective, or before an option expires . In these situations, there’s no contract until the offeror receives the answer, and in the way specified, if any.1.7. Non-acceptance
An agreement to agree is seldom a contract, because it suggests that important terms are still missing. Rarely will a court supply those terms itself. An agreement to agree is another way of saying that there has not yet been a meeting of the minds, although the parties would like there to be. Another common question people have, as funny as it sounds, is whether a joke can be an offer.
That depends on whether a reasonable observer would know it’s a joke, and on whether the acceptance was adequate. In our Edsel example, you probably couldn’t get out of the contract by saying, “How could you think I’d sell this for $1,000? I meant it as ajoke!” On the other hand, if someone sued you because you “backed out” on your “promise” to sell her France for fifteen dollars, the joke would be on her — no one could have reasonably thought you were serious.1.7.1. Conditions
Most contracts have conditions. People often use the word “condition” to mean one of the terms of a contract. But a more precise definition is that a condition is an event that has to occur before one or both parties must perform.
A condition can be a promise. For example, if your friend, from out earlier case, had said, “I’ll buy your mauve Edsel only if you deliver it to me by midnight,” and you accept that condition, you have both promised him delivery by midnight and made that a condition of the contract. On the other hand, many conditions involve uncertain events not under the direct control of the parties to the contract. Thus neither of them can promise anything about the condition, but the conditions sti]] must be fulfilled for the contract to go forward. Examples are conditioning a home purchase on obtaining financing, on the sale of the buyer’s present home, or on an acceptable home inspection report.1.7.2. Consideration
In order for a contract to exist, both sides must give some consideration. There is a crucial principle in contract law ca]]ed mutuality of obligations. It means that both sides have to be committed to giving up something or doing something. If either party reserves an unqualified right to bailout, that person’s promise is illusory: no promise at all.1.8. In consideration
The doctrine that consideration is critical to formation of a contract came about in the last few centuries. Until then elaborate formality rather than consideration was the chief requirement. The necessary formalities were a sufficient signed writing, a seal or other testation of authenticity, and delivery to whomever would have the rights under the contract. A seal could be an impression on wax or some other surface, bearing the mark (often found on a • signet ring•) of the person making the promise. The vestiges of the seal remain in some contracts, where the initials “L.S.” (for the Latin locus sigilli, “place of the seal”), or simply the word “seal,” is printed to represent symbolically the authentication of the contract’s execution. Even today, traditional Jewish wedding contracts are made on these formal bases: a writing by the groom, an attestation by witnesses, and delivery (also witnessed) to the bride.
There is no minimum amount of consideration required to effect a contract. A price is only how people agree to value something, so there’s no absolute standard of whether a price is fair or reasonable. The courts presume that people will only make deals that they consider worthwhile. So if you make a contract to sell your car for one dollar, a court will probably enforce it. (But don’t sell it for $1,000 and just report a one-dollar sale to the state to avoid paying the full sales tax. It’s unethical, illegal, and dangerous: many states have systems in place to check for just such abuses.) The exception is something that would “shock the conscience ofthe court.”
Consideration is any promise, act, or transfer of value that induces a party to enter a contract. Consideration is a bargained-for benefit or advantage, or a bargained-for detriment or disadvantage. A benefit might be receiving $10. First dibs on Super Bowl tickets might be an advantage. A disadvantage may involve promising not to do something, such as a promise not to sue someone. For these purposes, even quitting smoking, done with the reasonable expectation of some reward or benefit from someone else, is regarded as a detriment: Even though it’s good for your health, it cost you effort that you otherwise would not have made. And even if it were effortless, your commitment to forbear from engaging in lawful conduct would still constitute consideration.
For example, you could agree to give your car to your friend in exchange for her promise that she’ll stop letting her schnauzer out late at night. Your friend is giving up what is presumably her right to let her dog out any time she wants. In return, you are giving up that Edsel. Other types of consideration include a promise to compromise an existing dispute. Consideration has to be a new obligation, because someone who promises to do what he or she is already obligated to do hasn’t suffered any detriment, or bestowed anything the other party wasnet: already entitled to.
For example, suppose you agree to have a contractor paint your house this Thursday for $500.
Before starting, though, his workers demand higher wages. He tells you on Wednesday night that he settled the strike but now the job will cost $650. You need the house painted before you leave town n Friday, and there’s no time to hire another contractor, so you agree to the new price. But the new “agreement” (the new price) is not enforceable by him. Under the original contract, he already had to paint your house for $500. He should have figured the possible increased costs into the original price. You didn’t get anything of benefit from the modified “contract,” since you already had his promise to paint the house. There is no new contract because there is no new consideration. Therefore, you only owe $500 __ the old agreement remains in effect. Along the same lines, police officers are never entitled to reward money posted for catching fugitives or turning in information leading to someoneos conviction. That‘s their job.
Just because con.sideration has to be new doesnot mean a contract can never be voluntarily renegotiated. It only means that no one can force another party to renegotiate by taking advantage of an existing agreement. In the housepainting example, you may agree to a renegotiation even though it would technically not be enforceable. Perhaps you think the painter “deserved” more than he had agreed to take, or want to maintain a good to relationship with him. (Considerations like these are what motivate many sports teams to “renegotiate” their stars’ salaries. Though they have no legal obligation to do so, they nonetheless may decide to keep their stars “happy.”)
While it‘s true you can go to the other party and ask for more money, keep in mind that whenever you get involved in a deal, you are taking a risk that it might be less beneficial for you than you planned when you agreed to the contract terms. The other party doesn’t have to ensure your profit, unless the two of you included that in your bargain.
Based on the rule of consideration, a promise to make a gift is not usuaUy enforceable, if it truly is only a promise to make a gift, because a gift lacks the two-sided obligation discussed above. But if the person promising the gift is asking for anything in return, even by implication, a contract may be formed. The key, again, is consideration.1.8.1. Reliance
I wrote earlier that consideration is a two-way street, and that both parties must get some for a contract to be formed. There is an exception to that rule. Sometimes a contract will be formed by the reliance of one party on another person”s promise, even if the one making the promise hasnot gained anything. The concept of reliance is that a contract may be formed if one party reasonably relies on the other’s promise. That means that he or she does more than expect to receive what was promised. He or she has to do something that wouldn’t have been done, or fail to do something that would have been done, but for the promise. If that reliance causes some loss, he or she may have an enforceable contract.
Suppose that rich Aunt Alice loves your kids. On previous occasions she has asked you to buy them expensive presents and has reimbursed you for them. This past summer, she told you she would like you to build a swimming pool for the kids, and send her the bill. You did so, but moody Aunt Alice changed her mind. Now she refuses to pay for the pool, and claims you can’t enforce a promise to make a gift. The pool, however, is no longer considered a gift. You acted to your detriment in reasonable reliance on her promise, by taking on the duty to pay for a swimming pool you would not nonnally have built. Aunt Alice has to pay if you prove that she induced you to build the pool, especially ifthis understanding was consistent with many previous gifts. Remember,
however, that you still have to live with your Aunt Alice.1.8.2. Agents
You can have someone enter into a contract on your behalf, but only with your permission. The law refers to such an arrangement as agency. We couldn’t do business without it. For example, when you buy a car, you bargain and finally cut a deal with the salesperson. But she doesn’t own the car she’s selling you. She might not even have a car. She is an agent, someone with the authority to bind someone else __ in this case, the car dealership — by contract. The law refers to that someone else as the principal. Most of the sales people you deal with are agents. As long as agents do not exceed the authority granted them by their principals, contracts they make bind their principals as if the principals had made the contracts themselves. If something went wrong with the contract, you would sue the principal– not the agent — if you couldn’t resolve the dispute in a friendly manner. An agent normally does not have any personal obligation.
While acting on behalf of principals, agents are required to put their own interests after those of the principal. Therefore, they may not personally profit beyond what the principal and agent have agreed to in their agency contract. That means they cannot take advantage of any opportunity which, under the terms of the agency, should be exploited for the principal.
When an agent exceeds her authority, there are a number of factors that determine whether the contract can be enforced against the principal. Under the doctrine of apparent authority, if the person she’s dealing with doesn’t reasonably understand that she’s exceeding her authority, the principal may be bound by the contract negotiated by the agent. If the other person was not being reasonable in believing that the agent was acting within her authority, the contract will only be enforceable against the principal if the principal has knowingly permitted the agent to do this sort of thing in the past.
What is reasonable belief in the scope of the agent”s authority? Suppose the teenage boy wearing a service-station uniform and a nose-ring who fills your gas tank and checks your oil — and who appears to be an agent, to some limited degree, of the service station — offers to sell you the whole service station in return for the sleek mauve Edsel you are driving. It’s not reasonable for you to assume he has that power when common sense tells you he can only sell you his boss’s gasoline and oil for a fixed price.
In contrast, if an insurance agent wrote you an insurance policy fTom her company that exceeded the policy amount she was authorized to write, but the insurer never told you this, you
would be acting reasonably to assume she was authorized, and you probably would be entitled to collect on a claim above his limit.1.9. Agents who exceed their authority
On occasion, while making a contract, an agent might exceed the authority granted by the principal. An example might involve an automobile salesperson who signs a contract on behalf of a car dealer which, without the dealer’s authority, gives the customer a warranty for 40,000 extra miles. In that case, the dealer might very well be bound by the contract.1.9.1. Delegations and Assignments
You can transfer your duties under a contract to someone else, unless the contract specifically prohibits such a transfer. The law refers to a transfer of duties or responsibilities as a delegation. If, however, someone contracts with you because of a special skill or talent only you have, you may not be able to transfer your duty. Such cases are quite rare. There are arguably no car mechanics who are so good at tuning an engine that they may not delegate someone else to do it for them — unless they specifically promise to do it themselves. On the other hand, if you hire specific entertainers to perform at your wedding, they may not send other entertainers (no matter how talented) as substitutes without your permission.
A transfer of rights, called an assignment, is more flexible than a transfer of duties. For example, you may wish to transfer the right to receive money ftom a buyer for something you have sold. Generally, a contract right is yours to do as you wish with it, as long as you didn’t agree in the contract not to assign the right. You can sell it or give it away, though most states require you to put an assignment in writing, especially if it is a gift.
There are exceptions to the rule that assignments may be made fteely. If an assignment would substantially increase the risk, or materially change the duty of the other party to the contract, the contract may not be assignable, even if its terms contain no explicit agreement to the contrary. Such an assignment would be regarded as unfairly upsetting the expectations the other party had when he or she entered the contract, and so that party would no longer be obligated by the terms ofthe contract.
For example, suppose you made a contract for fire insurance on a garage for your Edsel. Then a notorious convicted arsonist and insurance cheat contacted you upon release ftom prison and asked you to sell him the garage and assign him your rights under the garage’s fire insurance policy.
You would probably both be in for a disappointment, even if the insurance policy didn’t prohibit assignment. Since the insurer made its decision to insure in part based on your solid citizenship, insuring the arsonist would greatly increase the insurer”S burden by exposing it to a risk it never anticipated.2. BARS TO A CONTRACT
2.1. When is a contract not a contract?
In the last chapter we discussed what you need to make a contract. Now we‘ll consider what kinds ofthings could still prevent a legally-enforceable contract ITom being formed. These are often described as contract defenses. You should understand them because if one or more of them is present, and provable, you might be in much better shape ifyouore having trouble with the terms of a -deal- you might have thought you were stuck with.2.1.1. Illegality
Illegal contracts — such as a -contract- on someone”s life — are not enforceable. Courts will not help someone collect an illegal gambling debt, or payment for illegal drugs or prostitution. The law treats these contracts as if they never existed — they are unenforceable or void. This is the contract defense of illegality.
Similarly, some contracts that are not specifically outlawed nonetheless will not be enforced if a court determines that enforcement would violate public policy. An example would be a contract to become a slave, which may not be prohibited by any specific statute but offends the law’s view of what kinds of contracts society will permit.
There are some situations where a contract was legal when entered into, but the law changes before it is executed by all parties. Generally speaking, the Constitution forbids lawmakers from passing laws that would impair the rights people bargain for in contracts, but there are many law books filled with exceptions to this general rule. Therefore, a contract is usually considered by courts in light of the law that applied at the time the contract was made — unless the change in the law involves a compelling public policy.
The key, then, is whether the new law reflects an important public policy. Here’s an example of a law that did not involve such a policy. A contract between a railroad and a property owner who leased a right-of-way to the railroad provided that the railroad was not responsible for any fire damage to the property caused by locomotives. Later, the state legislature required certain precautions against fire damaging an adjoining property. The court held that, even ifthat law would have made the contract illegal (because it didn’t include the newly-required precautions), because it was passed after the contract was made the law did not affect the contract.
Typically, however, courts say that because of a change in public policy as a result of the change in the law, they will not enforce the old contract. Obviously, a contract to sell someone a slave could not be enforced after slavery became illegal; neither could you enforce a contract to purchase a banned assault rifle that was made before the ban went into effect. This works both ways: a contract that was illegal when made usually will not be enforced, even though it would be legal if entered into today. After World War II, one party wanted to enforce a contract that violated wartime price-controls. The court ruled that a contract that was so damaging to the public good when made (and when no change in the law was anticipated) should never be enforced. To do so would have been to provide an incentive to enter into illegal contracts in the hope that they will someday be enforceable — a bad prescription for effective public policy.
Remember that an illegal contract is different from an immoral contract. The courts will only enforce a moral code that the law (or “public policy”) already reflects, such as laws against prostitution or stealing. You may feel that X-rated movies or fur coats are immoral, but as long as they’re legal, they can be the subjects of enforceable contracts. What if it is illegal to gamble in your state, but you go on line and gamble over the Internet using your credit card? Chances are you will still have to pay your losses. The website operator may be in violation of local law, and you may be also. But your credit card agreement probably requires you to pay your gambling debts regardless, and until this area is regulated and controlled you must assume that when you put your money on the line, online, that you may never see it again – exactly the bargain you make whenever you gamble.2.2. Is it or isn’t it a contract?
People now know that a contract has to be made between willing, competent parties. Also, the contract must concern a legal subject matter. The preceding chapter also discussed many aspects of consideration.
But applying these principles isn’t always easy. Sometimes special protections in the law complicate matters. If successfully invoked, only one of these may be needed to provide a complete defense against someone claiming you owe him or her money or something else you supposedly
promised. It would prompt a court to resolve the dispute as ifthere never were a contract. Since the contract is void, neither party may enforce its terms in court against the other.
Other contracts are voidable, but not automatically void. What’s the difference? A contract produced by fraud is not automatically void. People who are victimized by fraud may have the choice of asking a court to declare the contract void or to reform (rewrite) it. On the other hand, if they went along with the contract for a substantial period of time, they could lose their right to get out of it. This is called ratification, and is based on the idea that they have, by their actions, made it clear that they are able to live with the terms. A checklist of contract defenses appears in this chapter.2.2.1. Duress
You donet usually have to worry about being held to a contract that you “entered into• against your will. A contract that someone agrees to under duress is void. Duress is a threat or act that overcomes someone’s free will. The classic case of duress is a contract signed by someone “with a gun to his head.” That means literally. Since this kind of duress is very rare — and often very hard to prove — the defense of duress is rarely successful.
Duress is more than persuasion or hard selling. Persuasion in bargaining is perfectly legal. It also isn’t duress when your ftiend says, “I would never pay that much for a Edsel in had a choice.” She does have a choice: buy a nice Taurus instead. But if she wants that mauve Edsel, she “has to” pay what the owner demands. In contrast, duress involves actual coercion, such as a threat of violence or imprisonment.
Besides being done by threats of physical violence, it may be duress to threaten to abuse the court system to coerce your agreement, i.e., to tell someone that I‘ll tie you up in litigation for ten years. There is also economic duress. That was alluded to earlier when the contractor demanded more money after his workers went on strike and you needed your house painted before you left the country. This isn’t the same as “driving a hard bargain.” Rather, the contractor had already made a deal. When the contractor threatened to withhold his part of the deal, he left you with no practical choice but to agree. The classic case is where the supplier of a necessary ingredient or material threatens, on short notice and at a critical time, not to deliver it — in violation of an existing contract __ unless he or she gets more favorable terms. Courts have set aside contracts made under such economic duress.
A lawyer can tell you how to protect yourself, helping you determine whether you have assumed any obligation, and what legal rights you might have besides disavowing the contract. With duress, it’s important to act quickly, since the courts are especially skeptical of a claim of duress made long after the danger has passed.2.2.2. Undue Influence
There are other uses of unfair pressure, less severe than duress, that void a contract. One contract defense is called undue influence, which doesn’t involve a threat. Rather, it’s the unfair use of a relationship of trust to pressure someone into an unbalanced contract. Undue influence cases usually involve someone who starts out at a disadvantage, perhaps due to illness, age, or emotional vulnerability. The other person often has some duty to look out for the weaker one’s interests.
An example would be an adult child who “persuades” his elderly, failing mother to sell him the family homestead for a pittance. The sale contract would be unenforceable because of undue influence, regardless of whether the mother otherwise had the capacity to make a contract.2.2.3. Fraud
A contract can be also be canceled by a court because of ftaud. Fraud is when one person knowingly makes a material misrepresentation that the other person reasonably relied on and that disadvantaged that other person. A material misrepresentation is an untrue statement of “fact” that is important to the deal, “material” meaning it would affect the terms youocl agree to it if you knew the truth. In many states, this misrepresentation doesn’t have to be made on purpose to make the contract voidable.
Consider our earlier example involving a car sale. You offered to sell your Edsel to a fi-iend. Suppose you knew it had no transmission, and you knew she wanted it for the usual purpose of driving it. You told her it was working fine, and she relied on your statement. Then the contract you made may be set aside on the grounds of fraud.
Here, there is no issue of the statement being merely the seller’s opinion, or exaggerated “sales talk” or puffery that people know not to believe literally. You didn’t merely say it was a great car when really it was a mediocre car. Saying it’s “great” is just an opinion, while ftaud requires an outright lie, or a substantial failure to state a material fact about an important part of the contract. For that reason __ and because dishonest people often know well the fine line between ftaud and puffing – actual ftaud that will invalidate a contract is a lot less common than people think.

2.3. When someone forces you to sign

Between the defenses of duress and undue influence, you should never have to fear a court holding you liable for a contract that someone forces you to sign. Both concepts are hard to define, though, and people often use them interchangeably. Also, their limits vary from one state to another. If you think either might apply to an agreement you want to get out of, see a lawyer.

2.3.1. Mistake

Sometimes it seems unfair to hold a party to a contract they entered into by mistake, but this is a slender reed indeed on which to seek to avoid a contract. The other party”S fraud is very different from your mistake, assuming the other party didn’t know about your mistake. The defense of unilateral mistake is almost impossible to prove, even ifthe mistake is about the most important terms of the contract. If allowed liberally, it would lead to a lot of abuse. People would claim they made a mistake in order to get out of a contract they didn’t like, even though they had no valid legal defense. Therefore, courts hardly ever permit such a defense, and even then, mostly in specialized business cases.
Courts have permitted a mistake defense most commonly if there has been an honest error in calculations. The calculations must be material to the contract, and the overall effect must be to make the contract unconscionable (discussed below), that is, unfairly burdensome. Such mistakes often happen when a unit of government puts public work out for bid. If a contractor mistakenly bids five million dollars to construct a bridge and a road, when the true cost to build the bridge alone was five million dollars, he or she might be able to raise this defense. Even then, however, if several months have elapsed and the government has materially relied on the mistaken figures before the mistake is discovered (for example, by taking a number of steps to move the process forward), then it would be unfair to the government to cancel the deal, and the defense would probably fail.
Of course, if you explicitly state your mistaken idea, the other party has a duty to correct you. Then the issue is no longer one of mistake but of fraud. In our car-sale example, suppose the car’s heater worked, but not too well, and you, the seller, knew that. Under contract law, if you and your friend hadn’t discussed it, you probably wouldn’t have to tell your friend about it. But suppose your friend told you, “The best thing about this car is that it’s so hard to find an Edsel with a perfect heater.” Then y.ou would be obliged to tell your friend that the heater was faulty. If you didn’t, many states would permit your friend to set aside the contract, or would allow your friend to collect damages for repairs required on the heater.
Having said this, the best defense is a good offense. Don’t assume anything important or questionable. Ask the questions now — before you sign. On the other hand, if both sides make a mistake, they share an erroneous basic assumption. Then, in order to avoid injustice, the court will sometimes set aside the contract, under the theory of a mutual mistake.
The classic case of mutual mistake occurred when someone sold a supposedly infertile cow for eighty dollars. It turned out soon afterward that the cow was pregnant, which made her worth $800. The court ruled that since both parties thought they were dealing with a barren cow, the contract could be set aside.
This does not mean that contracts always have a built-in guarantee against mistakes. As you can imagine, this is a very tricky and unpredictable area. After all, many people make purchases on the understanding that the object is worth more to one person than to the other. You wouldn’t pay $80 for a cow if she were not worth at least $80.01 to you. That is, you figure you’re somewhat better off with the cow than with the $80, given your circumstances and opportunities. (Economists call this amount the “marginal benefit.”) Similarly, the seller would not sell her if she were worth more than $79.99 to the seller, given the selleres circumstances and opportunities. Both people have to be getting some benefit to agree to the sale. In the case of the cow, both buyer and seller understood clearly — but mistakenly -¬that the cow could not get pregnant. It’s as ifthey made the contract for a subject that turned out not to exist.
How serious does a mutual mistake have to be before a court will set aside a contract for that reason? To take our example, various courts would draw the line on mistake between $80.01 and $800 at different places, if they would be willing to draw it at all. Competent legal advice about the law in your state is crucial if you are considering voiding a contract because of a mistake.2.3.2. Statutes of Limitations
You should also be aware of statutes of limitations. These are laws setting time limits during which a lawsuit can be brought. The typical deadline for bringing a contract action is six years trom the time the breach occurs. The idea of this policy is that everyone is entitled, at some point, to “close the book” on a transaction. It encourages people to move on and reduces the uncertainty that, for example, businesses would face if they could be sued for breaching contracts that no one alive in the organization remembers.2.3.3.Changing Situations
Sometimes changing circumstances make a contract impossible to perfonn. Suppose that you hire a contractor to paint your house on Thursday, and it bums down Wednesday night through no fault of your own. Then the contract will be set aside, because there’s no way to perform it. You won’t have to pay the painter, under the doctrine of impossibility of performance. Both of you are out of luck. The same is true if the contract covers a specific kind of product, and it becomes unavailable because of an act of God, such as an earthquake or blizzard. Courts usually will not enforce such a contract.
For example, Suppose you contract to deliver one hundred barrels of a specific grade of oil trom a specific Arabian oil field by a certain date. Then an earthquake devastates the oil field, making recovery of the oil impossible. You’re probably off the hook under these circumstances.
This doctrine is also known as impracticability of performance, which reflects the fact that it may apply even if perfonnance is not literally impossible, but is still seriously impractical.
Sometimes changed circumstances radically change the costs of perfonning a contract, without making it literally impossible to do so. Courts probably would enforce the contract, on the grounds that the new circumstances were foreseeable, and that the possibility of increased costs was or could have
been built into the contract. For instance, suppose again that you contract to deliver one hundred barrels of Arabian oil. This time, fighting breaks out in the Persian Gulf, interrupting shipping and greatly increasing the cost of the oil. When a court considers these facts, it’s likely to say that you should have foreseen the possibility of fighting and built that risk into the price. The contract will stand.
On the other hand, sometimes a change in conditions doesn’t make performance impossible or impractical, but it does make performance meaningless. The legal term for this is frustration of purpose. One famous case decided around the turn of the century involved a man who rented an apartment in London to view the processions to be held in connection with the coronation of the King of England. Because ofthe King’s illness, the coronation was canceled. The court excused the renter from paying for the room. Through no fault of his own, the whole purpose of renting it — which the people who owned the room knew — had disappeared. Such cases, though, are rare indeed. More typically, you take your chances when you make a contract in expectation of some third party’s or outside force’s action; many contracts have a term excusing the parties from performance if any of a number of specified events occur.
There are three important criteria for a contract to be set aside for frustration of purpose. First, the frustration must be substantial — nearly total, and with almost no chance at improved benefit. Second, the change in circumstances must not be reasonably foreseeable. Third, the frustration must not have been your fault.2.4. Should the buyer still dew are?
The well-known Latin maxim caveat emptor — “let the buyer beware” — is a strict rule placing the risk in a transaction with the buyer. Under this rule each party is protected only by inspecting and analyzing a potential transaction, because there is no remedy if there is a hidden problem. In fact, this “ancient” law really predominated only in the 19th and early 20th centuries, when the idea of “the sanctity of the contract” reigned. More common are the principles of ‘Just prices” and fair dealing in transactions. They are part of religious law, medieval law, and more recently statutory law -_ particularly the consumer
traud acts prohibiting unfair or deceptive acts and practices. Having said that, every buyer should recognize that the first line of defense is common sense, and not depend on an expensive lawsuit and a sympathetic judge to save him or her trom a bad deal or sharp practice.2.4.1. Unconscionability
On rare occasions, a court may let a party out of a contract because the court deems it “unconscionable” (trom the word “conscience”). Unconscionability means that the bargaining process or the contract’s provisions “shock the conscience of the court.” An example would be selling thousands of dollars of rhumba lessons to a ninety-five-year-old invalid on social security. An unconscionable contract is one that produces a result unfairly surprising due to hidden or obscure language, or, as in the example given above, is grossly unfair, perhaps due to a lack of bargaining power. Its terms suggest that one party took unfair advantage over the other one when they negotiated it. The courts are reluctant to use this weapon, but consumers have a better chance with it than anyone else, especially in installment contracts.
The important thing to remember is that you shouldn’t rely on unconscionability in making a contract. Though courts sometimes will void contracts on these grounds, the application of unconscionability is uncommon, uneven, and unpredictable. Make the effort to understand all the tenns of a contract and don’t enter into it if it seems too one sided. After all, it’s also “unconscionable” to let someone take advantage of you.2.5. Fill in the blanks
There are many kinds of fonn contracts. One is the kind you simply have to sign if you want to get insurance or a loan, or if you’re financing a car. These are called contracts of adhesion __ if you want the deal, you have to “adhere” or stick to the terms. “Click box” contracts for software or other computer-related merchandise, or access to websites, are also contracts of adhesion.
Another common kind of fonn contract is one with numerous blanks on it, which can be filled in with the names of the parties, the monetary terms, dates, etc. These are used commonly for the sale of homes and for leases on real estate. There are two main points to be aware of regarding these forms, which can be purchased at stationery stores:
First, while they may be standardized, there’s no such thing as a “standard contract.” Many innocuous-looking forms are available in several different versions, each fulfilling the same function _ for example, an apartment lease – but each subtly different. One might be a “landlord’s” contract, where the preprinted terms are more favorable to the landlord, while a nearly identical one is a “tenant’s” contract. In any event, don’t let anyone tell you it’s “standard.” Insist on crossing out or changing any term you don’t like. If the other party refuses to accept changes that are important to you, then don’t sign the contract. In today’s economy, there is usuany more than one source for the product or service you want.
Second, fill in an the blanks! A contract with your original signature but containing blank spaces can be like a blank check if altered unscrupulously. Be sure all blanks are filled, either with specific terms or straight lines to indicate that nothing goes there. And insist on your own copy with the other side’s original signature. If it’s a computerized “click box” situation, print out a copy of what you’re agreeing to. If you can’t, at least consider this a red flag.
Third, if the contract involves a significant amount of money to you or your family, take it to a lawyer before you sign. This is especiaUy important in real estate transactions, where there is typically plenty of room to bargain. There is no such thing as a “preliminary” agreement. An “agreement” is just that — a contract.2.6. Practical contracts
Sometimes you look at a form contract, throw up your hands, and decide not to read it. There doesnot seem to be much room to negotiate with a form contract. Believe it or not, it pays to read them. Failure to read a contract is virtually never a valid legal defense. In most states the courts have held that people are bound by all the terms in a contract, even if they didn’t read the contract before signing it (unless the other party engaged in fraud or unconscionable conduct). Don’t trust the other party to tell you what it means; even with good intentions, he or she could be mistaken. Also, be suspicious if the salesperson urges you to “never mind, it’s not important.” (Ask the salesperson, “If it’s not important, is it okay to cross out the whole paragraph?”) Where a substantial amount of money is at stake, take the time to sit down with the form, and underline parts you do not understand. Then find out what they mean horn someone you trust.
At the same time, you have to be realistic about exercising your right to read a form contract. At the car rental counter at the airport, you probably don’t have time to read the contract and get an explanation of the terms you don’t understand. Even if you did take the time, with whom would you negotiate? The sales clerk almost certainly doesn’t have the authority to change the contract (but see the discussion on page 13 on contracts of adhesion). Similarly, while you should know “what your getting into” when agreeing to the license terms of a commercially sold software program, no negotiation is possible. If you want the program, you have to agree.2.7. Getting out of a contract
A contract may be set aside if competent parties have not made it voluntarily. It also may be set aside if there was grossly insufficient consideration. In addition, certain contracts must be in writing, or they are also unenforceable. Here is a list of other contract defenses discussed in this chapter.
• Illegality;
• Duress;
• Undue influence;
• Fraud;
• Mistake;
• Unconscionability;
• impossibility and impracticability of performance;
• frustration of purpose.
If you can prove any ofthese, the contract will probably be deemed void or voidable. In either case it is practically as if there never were a contract. If either party paid money, it would have to be returned.
Don‘t: ever rush to sign on the dotted line because you”re afraid to lose the bargain of a lifetime. Rarely will a truly great bargain not be there tomorrow. For all the great deals you rush into that work out fine, the one you will remember is the one that went sour — where they socked you with the fine print you didn’t bother to read. A great bargain won’t fall into your lap, anyway. It requires a lot of footwork, research, and comparison shopping. If you’ve done all that, it’s unlikely that someone else is right behind you who has done it also.
While working out the terms of a written contract, you may sometimes see or hear reference to a contract rider. A rider is a sheet of paper (or several pages) reflecting an addition or amendment (change) to the main body of a contract. Often it’s simpler to put changes in a rider, which supersedes any contradictory parts of the main contract, than to try to incorporate the changes on the original form.
People are often intimidated by ofine print.o It•s a good idea to get over that, because often the fine print contains terms that could greatly affect your personal finances beyond what the actual deal would lead you to believe. It may contain details about credit terms, your right to sue and your right to a jury in a lawsuit.
You don‘t: need a law degree to at least try to read the fine print. Often if you sit down with it, sentence by sentence, you’ll find that you can understand a lot more than you expect, especially in states that have passed “plain English” laws requiring that consumer contracts use nontechnical, easy-to¬understand words. You will at least, by expending the effort, identifY which terms raise questions for you. The trick is not to be intimidated by the salesperson or the fine print in the contract.2.8. Read the fine print
Perhaps the most unpleasant part of making contracts comes after negotiating your best deal. It occurs when a salesperson presents you with a form contract, which is often one or two pages of tiny print that you might not understand even if you could read it. But the law usually assumes that you read and, to a reasonable extent, understand any contract you sign.
Once you”Ve divined the meaning of a contract, itos in your hands to decide whether the bargain is one you want to enter into. You never have to accept a contract. Every part of a contract is open for negotiation, at least in theory. Just because the salesperson gave you a form contract doesn’t mean that you have to stick to the form. You can cross out parts you don’t like. You can write in terms that the contract doesn’t include, such as oral promises by a salesperson. (Make sure that all changes to the form appear on all copies that will have your signature; initial altered but unsigned pages and have the other party do the same.)
That doesn’t mean the other side has to agree to your changes. You have no more power to dictate terms than they do. But if you get a lot of resistance on what seem to be reasonable issues, take a hard look at with whom you are dealing — especially if they resist your request to put oral promises in writing.
Having said all that, there will be times when a contract is just too inscrutable to understand. “Legalese“ most often occurs in contracts that include some type of credit terms, such as when you buy something on installment payments. Itos just this kind of legalese that could threaten your property rights in your house or other important property, so it pays to make sure you know what youore signing. The parts of this book on consumer credit and automobiles explain many of these terms.2.9.Get it in writing
When dealing with a written contract, a court will almost always treat the contract’s terms as the final, complete contract. The court usually wi1I not even consider oral promises that are not in the contract. The main exception to this is when oral promises are used fraudulently to induce one party into signing the contract in the first place. That is, the party is persuaded by the fraudulent oral promise to enter into a contract he or she otherwise would have avoided. The general rule prohibiting evidence of oral promises in all other cases protects both parties, since they know that once they sign the contract, they have clearly and finally set the terms.
Don’t be swayed if the salesperson orally promises you an extended warranty or a full refund if you’re not completely satisfied. Get it in writing. If the sales person refuses to put it in writing, walk away from the deal.
Many states now require plain-English consumer contracts, with potentially confusing sections or clauses in precise, standard tenns that nearly anyone can understand. Even if not legally required, more and more merchants are having contracts prepared this way for customer relations. Federal and state truth-in-Iending laws require providers (or grantors) of credit to furnish specific infonnation about credit contracts in clearly understandable fonn.
Finally, the legal doctrine regarding contracts of adhesion may protect you. As mentioned briefly earlier, these are contracts in which you have little or no bargaining power, as often is the case in many of the fonn contracts discussed above, such as loan documents, insurance contracts, and automobile leases. The consumer has some protection, however. Courts generally assume that such contracts have been drafted to provide maximum benefit to lender, lessor, or insurance company. So when a dispute arises over tenns or language, the courts usually interpret them in the way most favorable to the consumer.
In one case, for example, a woman tried to collect on an airline trip insurance policy she had purchased. The insurance company held that the policy applied only to a trip on “scheduled airline” and that “technically” under some obscure regulations the woman’s flight was not “scheduled,” even though she had eveI)’ reason to believe that it was. The court held in favor of the woman, saying the ordinal)’ insurance buyer’s understanding should apply.
There is a further protection for consumers. Even contracts that are not contracts of adhesion are interpreted or construed to favor the party who didn’t draft them. Like the doctrines of unconscionability and fraud discussed earlier, this rule isn’t something to depend on prior to signing a contract. Rather it’s a defense that you and your lawyer may raise if a problem arises and the situation warrants.FINDING
Suppose, for instance, that a contract specifies specific performance, and it is obvious to the court that erformance is inefficient because the cost of performance far exceeds the value to the buyer. This does not imply that the court should interpret the contract as excusing performance. Since the parties may well have chosen specific performance to enhance the buyer’s incentives to invest,43 the best thing for the court to do may well be to enforce specific performance (that is, the court may know that the purpose of specific performance is to improve investment incentives and that ex post efficiency, here nonperformance, will come about through renegotiation).
Another factor of interest is asymmetry of information between the contracting parties. In the model, the parties were assumed to have symmetric information. If they do not, then two of the conclusions reached do not hold. The optimal interpretation of the term might be to override it to obtain the efficient action, even though that interpretation is not best on average for the set of individuals who write the observed contract, thus contradicting Proposition .The second major difference in conclusions when information is asymmetric is that the optimality of allowing parties to opt out of interpretation might not hold. For instance, some individuals who sign installment payment agreements for consumer goods that allow the seller to repossess if they are even a day late in making payments might overestimate the likelihood that they will make all payments on time. By signing an opt out clause, they guarantee the repossession feature of the contract even though it may be against their interests; disallowing opt out might therefore be socially beneficial.
Another factor not considered is the indescribability of events. In particular, a
reason that parties do not write very detailed contracts is that some events may not be readily describable (perhaps because these events do not happen to be in the conscious minds of the parties at the time of contracting). If so, the events named in contractual terms would be restricted to the set of describable events. This restriction, however, would not alter the main conclusions about the optimal method of interpretation,46 and it would seem to make interpretation more valuable because indescribability would increase the need to modify terms in the light of the realization of outcomes.
Legal practice. Several points about the interpretation of contracts in practice seem worth making in the light of the foregoing analysis. First, as stated at the outset, contractual interpretation is an important function of the courts and interpretation is much more often concerned with the overriding of terms and related matters than with the filling of gaps in the sense of unprovided for contingencies.

Second, the ability of parties to control interpretation by explicitly opting out of interpretation of a term is circumscribed, even though a legal policy of allowing such opting out often is socially desirable . (Still, the reluctance of courts to allow opting out could be justified by a concern that a party to the contract is opting out of interpretation because, as just noted above, and unlike in the model, he has less information than the other party and fails to understand that opting out disadvantages him or because of ambiguity in the meaning of words.)
Third, the issue of the use of evidence extrinsic to contracts in their interpretation is of significance in actual practice and is also much debated. Whereas it was assumed in Section 5 that extrinsic evidence was perfect, this evidence is highly imperfect in reality and is very costly to consider (especially because of the tendency of parties to contest negotiating history, oral statements, course of dealing). Thus, the question whether the value of extrinsic evidence in contractual interpretation exceeds its cost to the parties is a real one. Accordingly, the ability of the to control whether the courts will examine extrinsic evidence would seem to be of subsantial importance to them. However, their power to limit interpretation to the written contract is restricted (which is of a piece with their difficulty in opting out of interpretation altogether). Possibly this is due to the courts’ belief that the parties’ true desires should be discovered at trial, without due regard to the cost to the parties of the necessary inquiry.THE LIST OF LITERATURE
1. Anderlini, Luca, Leonardo Felli, and Andrew Postlewaite. 2001. Courts of Law and Unforeseen Contingencies. University of Pennslyvania Law School, Institute for Law and Economics, Research Paper No. 01-05.
2. Ayres, Ian and Robert Gertner. 1989. Filling Gaps in IncompleteContracts: An Economic Theory of Default Rules. Yale Law Journal. 99: 87-130.
3. Battigalli, Pierpaolo, and Giovanni Maggi. 2002. Rigidity, Discretion, and the Costs of Writing Contracts. American Economic Review. 92: 798-817.
4. Bebchuk, Lucian, and Steven Shavell. 1991. Information and the Scope of Liability for Breach of Contract: The rule of Hadley v. Baxendale. Journal of Law, Economics, and Organization. 7: 284-312.
5. Bernstein, Lisa. 1996. Merchant Law in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms. University of Pennsylvania Law Review. 144:1765-1821
6. Cohen, George M. 2000. Implied Terms and Interpretation in Contract Law, in Encyclopedia of Law and Economics, Boudewijn Bouckaert and Gerrit de Geest, editors, 3: 78-99. Cheltenham, UK:

Edward Elgar.


The courts are frequently asked to resolve disputes around the meaning of certain words in contracts given, as they often are, to drafting by the parties themselves, and not legal experts. A wide range of general interpretation rules guide the courts in their inevitable (and unenviable) task of having to interpret a contract which is, on the face of it, ambiguous:

• If both parties agree on a certain interpretation to be given to a term in a contract, a court has no reason or justification for pursuing the matter further and should accept this interpretation.
• A court will always try to discover the intentions of the contracting parties using the plain, ordinary and popular meanings of the words used. Reference to a common usage dictionary is perfectly in order. A court should not try to re-write a contract using interpretation rules but, rather, to use these rules to pinpoint the intentions of the parties at the moment of contract.
Machintger v. Hoj Industries Ltd. (1992) Courts will imply a term into a contract based on a test of “necessity.. In determining what is necessary, regard must be had to both the inherent nature of a contract and of the relationship thereby established.” Examples repeated by the court included the duty of care imposed on a servant, the duty not to disclose confidential information, not to betray secret processes or the duty of an employer not to require his employee to perform an illegal act. The court, in this case, said that the requirements for reasonable notice in employment contracts fall into the category of terms implied by law since this duty was not displaced by express contrary agreement.

• It should be assumed that no article of the contract is void of any meaning or superfluous but must have some purpose. It is only where no clear alternate interpretation is available to remove absurdity or ambiguity from an article, that the court will void an article of a contract.
• A court can refer to words that have been crossed out, or words in headings, margins, recitals or preamble for the purposes of interpreting terms of the contract which are ambiguous.
• Where ambiguity is an issue, a court may refer to the factual circumstances under which the contract was signed or agreed upon to assist in interpretation. These could include letters or earlier agreements but not earlier drafts.
• The same word used in one place in a contract should be given the same meaning throughout the document.
• The word “may” is permissive and not obligatory. The word “about”, “approximately” or “almost” do not constitute any guarantee that the signatory will meet or exceed estimates worded in suc.h a fashion unless performance falls significantly short of these estimates.
• A court may even incorporate a business custom into a contract if it is so certain, universal and notorious as to be worthy of judicial notice unless this trade or commercial usage was unknown to one of the parties (or not reasonably known) or contradicted by a specific term in the contract. This would apply within the context of certain industries or professions which have standard operating procedures.
• Where a contract is open to two different but equally probable interpretations, it is interpreted against the author, especially if there is a power imbalance between the parties (“verba fortius accipiuntur contra proferentem”).
Scott v. Wawanesa Mutual Insurance Co. (1989) If language of an insurance contract is ambiguous, the contra proferentem doctrine applies. But “when the wording is clear and unambiguous, courts should not give it a meaning different from that which is expressed by its clear terms, unless the contract is unreasonable or has an effect contrary to the intention of the parties.” In this case, a majority of Canada’s Supreme Court thought that the insurance clause in question was unequivocal and “the damages suffered by the appellants are clearly excluded.”

• If a conflict develops between a type-written part and a hand-written insertion, the contract will be interpreted giving more weight to the hand-written part.
• The “parol evidence rule” applies which holds that verbal evidence (“parol”) will not be allowed to contradict a written contract. To this, there are several exceptions. For example, some provinces have trade practice legislation which, for consumer transactions, the parol evidence rule is set aside if the alleged verbal agreement purports to prove deception or unconscionability. The text of British Columbia’s Trade Practice Act (as of January 1997) reads as follows:
“In a proceeding in respect of a consumer transaction, a rule of law respecting parol or extrinsic evidence, or a term or provision in a consumer transaction, shall not operate to exclude or limit the admissibility of evidence relating to the understanding of the parties as to the consumer transaction or a particular term or provision of it.”
• The parol evidence rule has been severely criticized by numerous law reform experts; that it is “ambiguous” and “more honoured in its breach than its observance.” Nevertheless, it still forms an important part of Canadian contract law.
Hawrish v. Bank of Montreal (1969) Hawrish personally guaranteed a loan to a company but on the bank manager’s assurance that the guarantee would be released if another guarantee, from the company’s directors, was obtained. This latter guarantee was obtained but Hawrish’s was not released. Nothing in the guarantee document suggested that it was of limited duration. “The appellant’s argument fails on the ground that the collateral agreement allowing for the discharge of the appellant cannot stand as it clearly contradicts the terms of the guarantee bond which states that it is a continuing guarantee.”
Bauer v. Bank of Montreal (1980) “This (verbal or parol) evidence would go towards imposing a limit on the bank’s rights with respect to the security given by the debtor. This would clearly contradict the terms of the guarantee which, as has been pointed out, gave the bank the right to abstain from registration and perfection of security. On this basis, it would be impossible under the parol evidence rule and any collateral agreement founded upon it could not stand.”
J. Evans & Son (Portsmouth) Ltd. v. Merzario (Andrea) Ltd. (1976) In a contract for the transoceanic shipment of goods, a clause stated that the shipper “reserves to itself complete freedom in respect of . procedure to be followed in the handling and transportation of the goods.” But there was a verbal agreement in which the defendant promised that they would transport the plaintiffs cargo below deck. Th.e court’s decision: “The question is whether the company can rely on those exemptions. I do not think so. The cases are numerous in which oral promises have been held binding in spite of written exempting conditions. There was a plain breach of the oral promise.” One of the judges thought that the contract was “partly oral, partly in writing.. In such a case the court does not require to have recourse to lawyers’ devices such as collateral oral warranty in order to seek to adduce evidence which would not otherwise be admissible. The court is entitled to look at all the evidence.. One has to treat the promise that no container would be shipped on deck as overriding any question of exempting conditions.”
Gallen v. Butterley (1984) Subsequent to oral assurances that buckwheat would smother weeds, farmers entered into a contract which contained the words: “no warranty . pertaining to the seed sold . and will not in any way be responsible for the crop.” The buckwheat planted did not act as a weed control and the crops were smothered and destroyed. The British Columbia court decided that the evidence showed an oral warranty that defeated the “the strong presumption” in favour of the written contract. It then issued a series of “comments” about the parol evidence rule:
• The rule is a rule of evidence. One can introduce evidence to prove a collateral agreement provided it does not contradict the written agreement because it cannot be that the parties would agree to two contracts which disagree with each other. Since the written contract was demonstrably made, “reasons requires one to conclude that the oral one, contradicting it, was never made.”
• The principle is not absolute; it is “not a tool for the unscrupulous to dupe the unwary.” The court can look for evidence of an intention to create a binding oral agreement such as it did, albeit unsuccessfully, in the Hawrish and Bauer cases summarized above.
• “If the contract is induced by an oral misrepresentation that is inconsistent with the written contract, the written contract cannot stand.”
• “The principle does not apply with equal force where the oral representation adds to, subtracts from or varies the agreement recorded in (as opposed to contradicting) the document.”
• The parol evidence rule is a “strong” presumption that a written contract represents the whole agreement between the parties; “strongest when the oral representation is alleged to be contrary to the document and somewhat less strong when the oral representation only adds to the document.”
• The presumption is not as strong for a printed form document “though it would be a strong presumption in both cases.”
• The presumption would also be “less strong where the contradiction was between a specific oral representation and an .. exclusion clause that excludes liability for any oral representation whatsoever.”

• Where a law such as the Statute of Frauds requires a certain kind of contract to be in writing, it is enough that the contract be signed by the person against whom enforcement is sought even though the plaintiffs to a contract suit did not themselves sign the contract. Where a written contract is required, the contract should contain, as a minimum, the names and signature of the party against whom the contract is to be enforced, identification of the property and the price. Provincial legislation varies substantially on the requirement of a written document to ensure the enforceability of a contract. British Columbia only requires a written document for guarantee (answering for the debt or default of another) and land contracts. Manitoba has eliminated the Statute of Frauds entirely.
“Subject to this Act and any Statute in that behalf, a contract of sale may be made in writing, either with or without seal, or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties; provided that nothing in this section shall affect .the law relating to corporations.” {From B.C.’s Sale of Goods Act.}
Dynamic Transport Ltd. v. Oak Detailing Ltd. (1978) A contract for the sale of “four acres more or less” was challenged as being “not sufficiently certain to satisfy the Statute of Frauds.” But the court constructed the contract, including reference to the conduct of the parties, to make reasonable adjustments for a warehouse that sat on the border of the proposed division. “Courts have gone a long way in finding a memorandum in writing sufficient to satisfy the Statute of Frauds,” wrote the court.
Deglman v. Guaranty Trust Co. (1954) A nephew said that while he lived with, and cared for, his aunt, she had promised him the house they lived in. Upon her death, the court rejected his claim because there was no written document as required under the Statute of Frauds for contracts concerning land. The court stated that to succeed in a case of this nature, the acts relied upon as part performance must be “as could be done with no other view or design than to perform that agreement.” But the court did allow a quantum meruit claim for the value of his services, considerably less then the value of the real property.

Thompson v. Guaranty Trust Co. (1974) A labourer worked with a farmer for fifty years, the latter promising to convey the property to him upon his death. This was done but the will was lost. The evidence showed total commitment by the labourer to the farm over the course of those fifty years and there was third-party testimony to the effect that the deceased farmer had stated his wish that the farm go to the labourer. The court allowed the land transfer to the labourer despite the absence of a written document required under the Statute of Frauds because of the circumstances, the evidence and that the actions of the labourer were referable to, and indicative of, a contract dealing with the farm.
Lensen v. Lensen (1984) The court expounded on the requirements to circumvent the Statute of Frauds requirements for claiming a land contract without a written document. In this case, the large investments of the son could hardly be equated with that of a tenant. In addition, the court found that the son had passed up on other chances to buy land because he believed that the family farm had been dedicated to him. Acting upon the alleged contract to his detriment “is an important circumstance when determining whether or not the acts relied upon are sufficient enough.”
Currie v. Thomas (1985) On matters of contracts of sale of land and the requirement of a written document under the Statute of Frauds, if there was “sufficient part performance”, the requirement of a valid written contract is lifted. Quoting from a 1976 English decision, Steadman v. Steadman, the court said that “to do this, the plaintiff has to prove that (i) on balance of probability he acted to his detriment; (ii) it was more probable than not he so acted because he was contractually obliged to the defendant to do so; (iii) such actions were consistent with the oral agreement which he alleges.”

• Where a written and signed contract is required, a signature need not be at the end of the contract, as long as it does not appear to be restricted to one or more specific terms next to which it is apposed. The fact that a contract is hand-written by a defendant may suffice in lieu of signature. Initials may also be enough.
• Alterations inserted after the time of signature, without the consent of the other party, are not permissible and may result in the rescission of the contract.
• “Time is of the essence” means that any violation of deadlines contained in the contract will equate to a breach of contract. Any delay will allow the other party to terminate the contract. “Time is of the essence” can be presumed in some contracts.
• A fine distinction is made with regards to articles that set out an amount another party must pay for non-performance (called “liquidated damages”). As a general. rule, the court will not enforce penalty clauses but it will enforce articles which “pre-determine damages”. The most important factor in determining whether a clause is a penalty clause or a pre-determination of damages is the reasonableness of the amount.
• Exclusion clauses that prevent damage claims based on the contract are legal although they cannot operate to protect a party from fraud. Exclusions clauses must be brought to the attention of all parties and will be interpreted strictly against the author. A party can never agree to waive the right to address itself to a court of law absolutely and for all purposes for contractual redress although it can be bound to an agreement to prior arbitration or be bound to a waiver against a claim for damages. Mind you, even if a contracting party retains the right to petition a court, a court will, barring fraud, uphold a validly signed exclusion clause. All this may be tempered by provincial legislation. For example, many provinces have insurance and sale of goods legislation which restricts or regulates the use of exclusion clauses. However, the parties remain free to contract out of the provincial legislation.
Parker v. South Eastern Railway Company (1877) “In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature and, in the absence of fraud, it is wholly immaterial that he has read the agreement and does not know its contents.. There may be cases in which a paper containing writing is delivered by one party to another in the course of a business transaction, where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition and should be put in his pocket unread. For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll.” According to the court, the customer is bound by the exempting condition if he or she knows that the ticket is issued subject to it or if the company did what was reasonably sufficient to give him notice of it.
Thornton v. Shoe Lane Parking Ltd. (1971) Entering into a parking garage, a patron paid his money into an automatic teller and out came a ticket. Although the patron did not notice it, the ticket contained a notice “This ticket is issued subject to the conditions of issue as displayed on the premises.” There was also a notice board outside that read “All cars parked at owners risk.” The judge decided that the liability exemption condition did not apply because the contract was concluded when the patron put his money into the machine. “The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late (the patron having already paid). The contract has already been made.”
Interphoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd. (1989)
draw to attention or else A photo company lent 47 pictures to a design company. In little letters, the document which accompanied the photos said that the recipient would have to pay £5 a day per picture if the pictures were not returned after 14 days. The design company officer phoned the photo company when he received the photos and indicated that he was interested in several of the photos. The pictures were then returned several weeks later and the photo company sued for £3,783, which worked out to be £5 per picture per day that the photos were retained past the 14-day viewing period. This appeared to the court to be an extravagant penalty clause. “If one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party. In the present case, nothing was done by the plaintiff to draw the defendant’s atten.tion particularly to (the) condition.”
Spurling (J.) Ltd. v. Bradshaw (1956) Eight orange juice casks belonging to Bradshaw were stored with Spurling, who had a no-liability clause inserted into the contract of warehousing including that all risks were assumed by Bradshaw. When the goods were handed over to Bradshaw’s agent, it was discovered that contents of three of the casks were damaged. The judge said that a liability exemption clause will not operate to excuse a fundamental (“radical; a breach which goes to the root of (the contract)”) breach of the contract. But this case did not merit any “exceptional treatment” as it had been adequately brought to the attention of Bradshaw. The court was also impressed with the fact that Bradshaw did not complain of the condition throughout the eight months of storage and during which he made the monthly payments.
McCutcheon v. David MacBrayne Ltd. (1964)
past dealings irrelevant A car was lost when a ferry boat sank, partly due to the negligence of the operator. A liability exclusion clause existed but this one time, the car owner had not signed it. The ferry boat operator tried to rely on previous dealings with the passenger to have the exclusion clause implied. The court said no: “previous dealings are relevant only if they prove knowledge of the terms, actual and not constructive, and assent to them.”
Tilden Rent-A-Car v. Clendenning (1978)
quickie contracts A man had a car accident and later pleaded guilty to a charge of impaired driving. His car rental agreement said that the rental company’s insurance would not cover accidents occasioned while the driver was intoxicated. The court found that the exclusion clause did not apply: “The party seeking to rely on such terms should not be able to do so in the absence of first having taken reasonable measures to draw such terms to the attention of the other party.” The court said that in ordinary commercial situations, where the parties have ample time to review the contract, the assumption could be that the signatory fully acknowledged acquiescence to its terms. But car rental agreements are signed quickly; in fact “the speed with which the transaction is completed is said to be one of the attractive features of the services provided.”
Karsales (Harrow) Ltd. v. Wallis (1956)
fundamental breach defeats exclusion clause A car was bought with “no condition or warranty that the vehicle was road worthy.” An earlier inspection of the vehicle had shown it to be road worthy, but it was no longer so upon delivery. The exclusion clause was set aside. “Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of this kind, no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential aspects. He is not allowed to use them as a cover for misconduct or indifference or to enable him to turn a blind eye to his obligations.. If he has been guilty of a breach of those obligations in a respect which goes to the very root of the contract, he cannot rely on the exempting clauses.”
Photo Production Ltd. v. Securicor Transport Ltd. (1980)
clause was unambiguous A security guard deliberately threw a match but not with the intent that a fire be created, which destroyed part of Photo Production’s building. The security agreement included an exclusion clause to the effect that “under no circumstances shall the company (Securicor) be responsible for any injurious act or default by any employee of the company.” The invalidity of exclusion clauses where a fundamental breach had occurred was discarded (see Karsales and Spurling above). Instead, exemption clauses are to be construed by the same rules of contract interpretation on whether or not a fundamental breach had occurred or not. Whether or not liability was excluded was to be decided simply on the construction of the contract. The court found the clause to be quite clear and unambiguous and. found that it precluded the liability of the security company.
Delaney v. Cascade River Holidays Ltd. (1983)
exclusion clause upheld A white-water rafting operator, just moments before the trip, quickly got the participants to sign a waiver. Three participants drowned including Delaney and his estate sued Cascade. A majority of the court held the exclusion clause was sufficient: “the deceased was informed that unless he signed the release form he would not be taken on the trip.” In this case, the court applied the rule that a party’s signature to a document meant that, absent fraud or misrepresentation, he agreed to the terms contained in that document.
Davidson v. Three Spruces Realty Ltd. (1977)
exclusion was unconscionable Plaintiff stored some valuables in a safety deposit vault managed by defendant which were later stolen. A liability exclusion clause was relied upon by the defendants. The judge refused to allow the defendant to rely on the exclusion clause. In this case, the plaintiffs were not asked to read the contract, they were not advised of its contents, they were told that it was not necessary to obtain additional insurance coverage and they were not given a copy of the contract. The court stated that it would not lightly interfere with the freedom to contract. But: “the terms of a contract may be declared to be void as being unreasonable where it can be said that in all the circumstances it is unreasonable and unconscionable to bind the parties to their formal bargain.” Important factors included whether the contract was a form contract, whether the contract came from negotiations or was a “sign here” contract, whether the attention of the plaintiffs was drawn to the exclusion clause, whether the exclusion clause was unusual, whether representations were made which would lead a reasonable man to conclude that the clause did not apply, did the clause make the bailee’s reasonable care obligation meaningless and would the acceptance of the clause lead to tacit acceptance of the court of “unacceptable commercial practice.”
Hurst v. Commercial Union Assurance Company of Canada (1978) A house was bought and left unoccupied for two months, in spite of a clause in an insurance contract that voided coverage if the house was left “vacant” for more than 30 consecutive days. A toilet stated to leak on about day 30 of the vacancy and was only discovered on day 40, at which time it had caused close to $10,000 damage. The court would not let the insurance company escape coverage. Because the relevant provincial insurance act allowed a court to void an exclusion clause if “unreasonable or unjust”, the court did so in this case, noting that it was restricted to the “peculiar circumstances of this case.”
Hunter Engineering Co. Inc. v. Synacrude Canada Ltd. (1989)
unconscionability or fundamental breach Gearboxes proved defective but only after the manufacturer’s one-year limitation period had expired. Canada’s Supreme Court found the manufacturer cleared of liability because of the exclusion clause but for differing reasons from the bench. Two of the judges (Dickson and La Forest) thought that Canada should eliminate the doctrine of fundamental breach invalidating exclusion clauses. Instead, exclusion clauses should be set aside, if at all, using the principles of unconscionability. Two other judges (Wilson and L’Heureux-Dubé) , preferred to retain the doctrine of fundamental breach in reviewing the validity of exclusion clauses and could not endorse a reference to the doctrine of unconscionability in the review of the validity of exclusion clauses. They adopted the following definition of such a breach: “where the event resulting from the failure of one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract.”

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