The law of contracts is shifting and changing and every business, no matter the industry, is affected. The Alberta Court of Appeal is placing far greater emphasis on the real practical circumstances and knowledge of the parties.
As law students, we were always taught that every contract must stand on its own. The parties and the court must be able to determine the full meaning of the contract by reading the document. This cannot be done by reference to any circumstances surrounding the contract or outside evidence to interpret the meaning of any clause.
The Court of Appeal has now recognized that contracts are not formed in a legal vacuum. They are part of a much larger picture and that picture will be considered when interpreting a contract.
The Court of Appeal stated the following four principles:
1. The court must consider the surrounding circumstances even when the contract is not ambiguous.
2. Outside evidence can only be used to interpret the contract and not to vary, replace or fill in missing portions.
3. A “term of art”* used in a specific industry must be used and applied even when it is not defined in the contract.
4. A practical common sense approach must be used in determining what the parties to a contract intended – not a technical legal approach.
This writer is pleased to see the continuing shift away from a strict legal and technical interpretation in favour of looking at the big picture. To put it simply: it makes the law more accessible and is part of a continuing trend of making the law work for you.
This decision also increases importance of writing and using clear unambiguous contracts that both parties understand. If the document is unclear and ends up in court the trial will be even longer and more expensive as the court has more issues to consider.
Please call us if you require assistance in drafting or reviewing a contract.
* Term of Art is a common definition that everyone in a particular industry understands and is not the common dictionary definition of the word or words. Also commonly referred to as jargon or buzzwords. Examples: chip in computers; B2B in business; hat trick in hockey.