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CHAPTER 7
THE TERMS OF A CONTRACT
Objectives
After studying this chapter, you should have an understanding of
the difference between implied and express terms
how judges determine and interpret the content of a contract
how a party can use terms as a business tool to protect itself from liability

Learning Outcomes

Understand the difference between express and implied terms of a contract (pages 142144)
Understand how courts interpret written contracts, especially when the parties intentions
are not clearly expressed or the contract contains ambiguous language (pages 145148)
Recognize how parties enumerate conditions in contracts that allow them to escape from
their obligations if those conditions occur (page 152)
Understand how a stronger party may reduce or eliminate any obligation to pay a damage
claim by including exemption clauses in a contract (page 155)
Recognize that consumers are bound by electronic standard form contracts even when
they had no power to negotiate better terms (page 150)

Chapter Summary
The nature, scope, and extent of the obligations of the parties to a contract are known as the terms
of the contract. The terms may be express, as when they have been specifically mentioned and
agreed on by the parties, or they may be implied. Since the court has considerable discretion to
imply a term or not, parties are best advised to make their agreement as clear and explicit as
possible. How courts will resolve a contractual dispute over terms is an open question, as is any
matter that proceeds to litigation. An important evidential rule that guides a judge is known as the
parol evidence rule. It prevents the introduction of evidence that varies or adds to the terms of a
written contract when the contract is clear and intended to be the sole source of the parties
obligations. Entire contract clauses are used to propel a court to apply the parol evidence rule in
any given case. An important planning function of contract law lies in the fact that it permits
parties to manage the risk of future uncertainties. Additionally, it permits them to establish, in
advance, the extent of responsibility for breach through limitation clauses and exemption clauses.
Furthermore, parties can bargain for what will be payable in the event of breach. Such a term will
be enforceable, provided the amount is a genuine pre-estimate of damages and not a penalty.
Courts may refuse to apply a clause that disadvantages a consumer if the business in question
failed to take reasonable steps to ensure that the consumer was alerted to the clause in question in
circumstances where it appears the consumer has not assented. Courts are less likely to assist the
commercial or industrial customer, however, on the basis that sophisticated business interests
should be left to take care of themselves.
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Study Outline
Use this outline to prepare a complete set of notes for this chapter.
Termspage 142
______________________________________________________________________
Express Terms__________________________________________________________
______________________________________________________________________
Judicial Interpretation of Express Termspage 142
______________________________________________________________________
______________________________________________________________________
How Courts Interpret Contracts ____________________________________________
______________________________________________________________________
Rules of construction _________________________________________________
Enforce plain meaning of words ______________________________________
Give effect to parties intention ______________________________________
Implied Terms __________________________________________________________
______________________________________________________________________
Business efficacy ____________________________________________________
Customs in the trade of the transaction____________________________________
______________________________________________________________________
Previous dealings between the parties ____________________________________
______________________________________________________________________
Statutory requirements ________________________________________________
______________________________________________________________________
Sale of Goods Act _________________________________________________
______________________________________________________________________
Entire Contract Clause ___________________________________________________
______________________________________________________________________
Contractual Quantum Meruit ______________________________________________
______________________________________________________________________
The Parol Evidence Rulepage 148 _______________________________________
Evidence of Electronic Contracts ___________________________________________
______________________________________________________________________
Using Contractual Terms to Manage Riskpage 151
______________________________________________________________________
______________________________________________________________________
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Changed Circumstances __________________________________________________

______________________________________________________________________
Conditional Agreements __________________________________________________
______________________________________________________________________
Conditions subsequent ________________________________________________
Conditions precedent _________________________________________________
Limitation of Liability Clause______________________________________________
______________________________________________________________________
Exemption Clause _______________________________________________________
______________________________________________________________________
Liquidated Damages Clause _______________________________________________
______________________________________________________________________
Electronic Standard Form Contractspage 156
______________________________________________________________________
______________________________________________________________________
Shrink-Wrap Agreements _________________________________________________
______________________________________________________________________
Question of enforceability______________________________________________
______________________________________________________________________
Click-Wrap Agreements __________________________________________________
______________________________________________________________________
Question of enforceability______________________________________________
______________________________________________________________________
Browse-Wrap Agreements ________________________________________________
______________________________________________________________________
Question of enforceability______________________________________________
______________________________________________________________________

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SELF-ASSESSMENT
Key Terms
Briefly define each term in the space provided.
Express termpage 142
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Rules of constructionpage 143
______________________________________________________________________
______________________________________________________________________
Implied termpage 144
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Entire contract clausepage 148
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Contractual quantum meruitpage 148
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Parol evidence rulepage 148
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Condition subsequentpage 153
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Condition precedentpage 153
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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Limitation of liability clausepage 155

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Exemption clausepage 155
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Liquidated damages clausepage 158
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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Matching
Match each term to its definition below by writing the correct letter in the space provided.
A
B
C
D
E
F
G
H
I
J

Condition precedent
Condition subsequent
Entire contract clause
Exemption clause
Express term
Contractual quantum meruit
Implied term
Limitation of liability clause
Liquidated damages clause
Parol evidence rule

1. ____ A provision of a contract that states one partys promise to another.

2. ____ A clause that is not in a contract but is necessary to give effect to the parties
intention.
3. ____ Awarding one party a reasonable sum for the goods or services provided under a
contract.
4. ____ A restriction on evidence that changes the terms of a written contract.
5. ____ A term in a contract in which the parties agree that their contract is complete as
written.
6. ____ An event that brings a contract to an end if it occurs.
7. ____ An event that suspends obligations under a contract until it occurs.
8. ____ A term that limits a damage claim.
9. ____ A term that excludes any damage claims.
10. ____ A term that pre-sets a damage claim.

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Questions
Write a short, point-form answer for each question in the space provided. To help you
understand the chapter, it is recommended that you also use additional paper to write a full
and complete essay answer for each question.
1. What is meant by the terms of a contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
2. Why is it important to include terms in a contract that deal with price, quantity, and
warranties associated with a product?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
3. Explain how rules of construction used by courts to interpret contracts are often
conflicting.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
4. Does writing a term into a contract reduce all risk with respect to understanding the
term? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
5. How does a court address vague or ambiguous terms?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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6. What rule governs if one party has drafted a contract and used vague or ambiguous
language? What is the rationale for the rule?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
7. What is the legal result if contract language is so ambiguous that it cannot be
understood?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
8. What does the law require of contractual parties with respect to good faith?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
9. When will the courts imply a term in a contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
10. What is implied by either common law or applicable legislation with respect to the sale
of goods and services?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
11. What is an entire contract clause?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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12. What was the legal conclusion of the Corey Developments Inc v Eastbridge
Developments (Waterloo) decision?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
13. Identify the three forms that contracts can take. Does form affect enforceability?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
14. Explain the parol evidence rule and its exceptions.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
15. What happens to contractual obligations if a disaster strikes?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
16. Identify three ways that a party can deal with the risk of a change in the price of a good
over the life of a contract.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
17. What is a risk of building flexibility into a contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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18. Explain why conditional agreements are essential. What effect does using conditions
subsequent and conditions precedent have on a contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
19. In what instances are real estate agreements based on a condition?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
20. What liability results when a party fails to meet its contractual obligations?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
21. What is the purpose of a limitation of liability clause?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
22. What classic legal test is stated in Hadley v Baxendale (1854), 9 ExCh 341?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
23. What is the purpose of an exemption clause?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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24. What clause facilitates consensus and choice in contracts in relation to remedies for
breach of contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
25. What type of clause could cause a court to set aside a term in a standard form contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
26. What did Abrams v Sprott Securities Ltd (2003), 67 OR (3d) 368 (CA) distinguish in the
Fraser Jewellers case?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
27. What is a shrink-wrap agreement and what is its legal status in Canada?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
28. What is a click-wrap agreement and what is its legal status in Canada?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
29. Identify the controversy regarding the enforceability of browse-wrap agreements and
explain how such controversy can be avoided.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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30. When is a liquidated damages clause enforceable?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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ANSWERS
Key Terms
Express termpage 142
A provision of a contract that states a promise explicitly.
Rules of constructionpage 143
Guiding principles for interpreting or constructing the terms of a contract.
Implied termpage 144
A provision that is not expressly included in a contract but that is necessary to give effect to
the parties intention.
Entire contract clausepage 148
A term in a contract in which the parties agree that their contract is complete as written.
Contractual quantum meruitpage 148
Awarding one party a reasonable sum for the goods or services provided under a contract.
Parol evidence rulepage 148
A rule that limits the evidence a party can introduce concerning the contents of the
contract.
Condition subsequentpage 153
An event or a condition that, when it occurs, brings an existing contract to an end.
Condition precedentpage 153
An event or a condition that, until it occurs, suspends the parties obligation to perform their
contractual obligations.
Limitation of liability clausepage 155
A term of a contract that limits liability for breach to something less than would otherwise be
recoverable.
Exemption clausepage 155
A term of a contract that identifies events causing loss for which there is no liability.
Liquidated damages clausepage 158
A term of a contract that specifies how much one party must pay the other in the event of
breach.

Matching
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Epage 142
Gpage 144
Fpage 148
Jpage 148
Cpage 148
Bpage 153
Apage 153
Hpage 155
Dpage 155
Ipage 158

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Questions
1. What is meant by the terms of a contract?
Page 142: The terms of a contract are the promises made by one party to another by virtue
of offer and acceptance.
2. Why is it important to include terms in a contract that deal with price, quantity, and
warranties associated with a product?
Page 142: It is important that the essential terms of a contract be express so that each party
knows its obligations and the obligations of the other side. Parties negotiating a contract
should be very careful not to make assumptions about any aspect of the transaction as only
terms, not assumptions, have legal weight.
3. Explain how rules of construction used by courts to interpret contracts are often
conflicting.
Page 143: General principles that courts use to interpret contracts are often conflicting. For
example, courts are required to rely on the ordinary meaning of words to enforce a contract
as it is written, based on how a reasonable person would interpret the words. However,
courts also try to give effect to the parties intentions that may not be expressed in the words
of the contract. In any given case, it is impossible to predict which rule the court will use
when application of both rules would lead to different conclusions.
4. Does writing a term into a contract reduce all risk with respect to understanding the
term? Explain.
Page 142: No. Even express terms in a contract may use language that is ambiguous or
vague, making interpretation difficult.
5. How does a court address vague or ambiguous terms?
Page 142: Assuming the existence of the contract is not in doubt, a court will assign as
reasonable a meaning as possible to vague or ambiguous terms.
6. What rule governs if one party has drafted a contract and used vague or ambiguous
language? What is the rationale for the rule?
Page 142: If the contract has been drafted by one party, any ambiguity in language will be
construed against the drafting party in favour of the other party. The rationale for the rule is
that the drafter should bear the risk of unclear language.
7. What is the legal result if contract language is so ambiguous that it cannot be
understood?
Page 143: The contract will fail for uncertainty, and none of the promises it contains will be
enforceable.
8. What does the law require of contractual parties with respect to good faith?
Page 145: The law requires that parties to a contract exercise their rights under that
agreement honestly, fairly, and in good faith. This standard is breached when a party acts in
bad faith manner in the performance of obligations under the contract.

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9. When will the courts imply a term in a contract?

Pages 144147: After a contract is made and something happens that is not covered by the
express terms of the contract, the courts may be asked to imply a missing term to give effect
to the parties intention. A judge will do so if satisfied that the parties had intended for the
contract to contain the missing term. The courts will imply terms based on a number of
grounds:
Business efficacy: a judge is entitled to imply terms necessary to make the contract
workable. For example, the courts are increasingly willing to imply a term of good faith
in commercial contracts.
Customs in the trade of the transaction: courts will rarely imply a term based on trade
customs unless the custom is widespread.
Previous dealings between the parties: courts may imply a term from past deals.
Statutory requirements: Sale of goods legislation requires certain terms to be included in
all contracts for the sale of goods.
10. What is implied by either common law or applicable legislation with respect to the sale
of goods and services?
Page 148: The law in both instances will imply a promise to pay a reasonable price for those
goods or services. The obligation is not to pay whatever price a supplier chooses to charge
or whatever price a customer is willing to pay, but to pay a reasonable amount as determined
by a judge. This is known as contractual quantum meruit, which is Latin for as much as is
merited or deserved.
11. What is an entire contract clause?
Page 148: An entire contract clause is a term in a contract in which parties agree that their
contract is complete as written. The function of the clause is to require a court to determine
the parties obligations based only on what is recited in the contract itself.
12. What was the legal conclusion of the Corey Developments Inc v Eastbridge
Developments (Waterloo) decision?
Page 150: An entire contract clause, while important, is not absolute. A court will assess the
totality of circumstances surrounding a contract that has an entire contract clause,
particularly if it appears that reliance on the clause and the parol evidence rule might
otherwise allow one party to dupe another and cause an obviously unjust outcome.
13. Identify the three forms that contracts can take. Does form affect enforceability?
Page 148: Contracts can be (1) entirely oral, (2) entirely written, or (3) both oral and written.
The form of a contract does not affect its enforceability as long as the party claiming there is
a contract can prove it.
14. Explain the parol evidence rule and its exceptions.
Page 148: Most contracts do not have to be in writing. However, if the parties have made a
written contract, the written language is clear, and the document is intended to contain all
the terms of the contract, no other evidence, such as oral discussions, can be used to change
or add to the contract. However, evidence outside the contract can be considered in the
following instances:
There is a possible problem with the formation of the contract, such as fraud.
The contract was intended to be partly oral and partly written.
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A contractual promise is contained in a separate, oral contract.

The language of the contract is ambiguous, in which case evidence outside the written
contract can be used to resolve the ambiguity.
15. What happens to contractual obligations if a disaster strikes?
Page 151: If disaster strikes, such as when a plant burns, railways go on strike or are closed,
and so on, the obligations in a contract are normally enforceable unless a clause to the
contrary is included. The doctrine of frustration may provide some legal relief but it
operates only in very limited circumstances and cannot be assumed to provide an avenue of
escape.
16. Identify three ways that a party can deal with the risk of a change in the price of a good
over the life of a contract.
Page 152: (1) A party can provide a formula that sets the price of the goods supplied in a
manner tied to market value. (2) The party can set the price according to the cost of
materials plus a specific percentage for profit. (3) The parties can agree to reopen
negotiations or terminate the contract if specified events occur, such as a commodity price
reaching a certain level.
17. What is a risk of building flexibility into a contract?
Page 152: Building flexibility into a contract might create a document that is so vague that
the parties run the risk of having no contract at all. The flexibility must still have clarity so
as to be understandable.
18. Explain why conditional agreements are essential. What effect does using conditions
subsequent and conditions precedent have on a contract?
Page 153: Conditional agreements are important when one party wants to incur contractual
obligations only under certain circumstances. Conditions subsequent bind the parties to a
contract pending fulfillment of the condition. If the condition occurs, the contract is
terminated. Conditions precedent suspend any obligations under the contract until the
condition occurs. Common examples of conditions precedent include real estate transactions
that are subject to financing or rezoning.
19. In what instances are real estate agreements based on a condition?
Page 153: Purchasers of real estate often rely on the conditional agreement by making the
contractual obligation to buy and sell subject to rezoning, subdivision approval, annexation
of property by a municipality, mortgage financing, and provision of essential services.
20. What liability results when a party fails to meet its contractual obligations?
Page 154: The party that fails to meet its contractual obligations will be liable for breach of
contract and is responsible to the other side for any reasonably foreseeable damages the
breach may have caused.
21. What is the purpose of a limitation of liability clause?
Page 154: A party who breaches a contract is responsible for damages suffered by the
injured party. However, the parties can agree in the contract to limit liability for breach to a
lesser amount. The clear words of a contract can place a limit on damages.

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22. What classic legal test is stated in Hadley v Baxendale (1854), 9 ExCh 341?
Page 154: See footnote 17 at the bottom of the page. In that case, the classic legal test for
foreseeability in contract is stated: Where two parties have made a contract which one of
them has broken, the damages which the other party ought to receive in respect of such
breach of contract should be such as may fairly and reasonably be considered either arising
naturally, . . . such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as the probable result of the breach of it.
23. What is the purpose of an exemption clause?
Page 155: Through an exemption clause, a party can identify events or circumstances
causing loss for which it has no liability at all.
24. What clause facilitates consensus and choice in contracts in relation to remedies for
breach of contract?
Pages 154155: The ability of contractual parties to agree to limit liability for breach to
something less than would otherwise be recoverable through the use of a limitation of
liability clause facilitates consensus and choice in contract.
25. What type of clause could cause a court to set aside a term in a standard form contract?
Page 155: A clause containing stringent and onerous provisions contained in a standard form
contract must be drawn to the customers attention. Failure to do so could allow a court to
set aside the term.
26. What did Abrams v Sprott Securities Ltd (2003), 67 OR (3d) 368 (CA) distinguish in the
Fraser Jewellers case?
Page 156: See footnote 18 at the bottom of the page. The Abrams v Sprott case distinguished
Fraser Jewellers by narrowing in three ways the proposition that a person will be assumed
to have read and understood any contract he or she has signed: first, the Fraser proposition
depends on the absence of misrepresentation by the party seeking to rely on the written
agreement (the party seeking to rely on the clause had no legal obligation to draw it to the
other partys attention); second, it depends on there being no special relationship between
the parties; and third, a person cannot rely by way of estoppel on a statement induced by his
or her own misrepresentation.
27. What is a shrink-wrap agreement and what is its legal status in Canada?
Page 156: A shrink-wrap agreement (also called a shrink-wrap licence) is an agreement
whose terms are enclosed with a product, such as pre-packaged software. Usually, there is
no notice to the effect that opening the package constitutes agreement to the terms. The
terms normally cover warranties, remedies, or other issues relating to the use of the product,
such as prohibiting the user from making copies. Today, the common practice is to put the
terms inside the box and refer to them on the outside of the box. In Canada, it is uncertain
whether shrink-wrap agreements are enforceable.
28. What is a click-wrap agreement and what is its legal status in Canada?
Page 156: A click-wrap or web-wrap agreement (or licence) is an agreement that appears on
a users computer screen when that user attempts to download software or purchase goods
or services online. The user is instructed to review the terms before assenting by clicking an
I accept button, a hyperlink, or an icon. Usually, the user cannot proceed without agreeing
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to the terms. In Canada, the validity of this method of contracting has been upheld by the
courts.
29. Identify the controversy regarding the enforceability of browse-wrap agreements and
explain how such controversy can be avoided.
Page 156: Because the browse-wrap agreement does not require the user to do anything
unequivocal to signify assentsuch as electronically checking a boxits status as a
contract has been controversial. To avoid argument regarding enforceability, e-vendors
should consider not using browse-wrap agreements at all and instead require their customers
to do something affirmative to signify assent, such as clicking an icon.
30. When is a liquidated damages clause enforceable?
Page 158: A liquidated damages clause sets out in the contract what one party must pay to
the injured party in the event of a breach. The clause is enforceable if it is a genuine preestimate of the damages that the injured party will likely suffer. However, it will not be
enforced if it is interpreted to be a penalty clause that sets an exorbitant amount as a remedy
for the injured party.

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