diff --git a/loop/contract.py b/loop/contract.py
index 7dc17f7..54165e7 100644
--- a/loop/contract.py
+++ b/loop/contract.py
@@ -56,6 +56,11 @@ def _read_json(path: Path, issues: list[dict]) -> dict[str, Any] | None:
         return None
     try:
         data = json.loads(path.read_text(encoding="utf-8"))
+    except UnicodeDecodeError as exc:
+        # Same rule as _validate_jsonl: undecodable bytes fail the file closed
+        # with a typed finding, never a traceback out of doctor_report (#107).
+        issues.append(ContractIssue("invalid_encoding", f"{path.name}: not valid UTF-8: {exc}", path))
+        return None
     except json.JSONDecodeError as exc:
         issues.append(ContractIssue("invalid_json", f"{path.name}: {exc}", path))
         return None
@@ -139,7 +144,12 @@ def _fallback_yaml(text: str) -> dict[str, Any]:
 def read_manifest(path: Path) -> dict[str, Any] | None:
     if not path.exists():
         return None
-    text = path.read_text(encoding="utf-8")
+    try:
+        text = path.read_text(encoding="utf-8")
+    except UnicodeDecodeError:
+        # Undecodable bytes are malformed content: fail safe to {} exactly like
+        # the malformed-YAML branch below, never propagate a traceback (#107).
+        return {}
     try:
         import yaml  # type: ignore
     except Exception:
diff --git a/loop/verdict.py b/loop/verdict.py
index c5cb62c..7ae0912 100644
--- a/loop/verdict.py
+++ b/loop/verdict.py
@@ -47,7 +47,9 @@ def _terminal_record(paths: LoopPaths) -> dict[str, Any]:
         )
     try:
         data = json.loads(path.read_text(encoding="utf-8"))
-    except (OSError, json.JSONDecodeError) as exc:
+    except (OSError, UnicodeDecodeError, json.JSONDecodeError) as exc:
+        # UnicodeDecodeError became reachable here once doctor_report stopped
+        # raising it (#107); the site-agnostic typed-contract test depends on it.
         raise VerdictError(f"terminal record is unreadable: {exc}") from exc
     if not isinstance(data, dict):
         raise VerdictError("terminal record is not an object")
diff --git a/scripts/test_contract_records.py b/scripts/test_contract_records.py
index 3d166e8..e4b1552 100644
--- a/scripts/test_contract_records.py
+++ b/scripts/test_contract_records.py
@@ -180,3 +180,28 @@ def test_repo_own_contract_still_validates_clean():
         pytest.skip("no live .loop contract in this checkout (gitignored run-state)")
     report = validate_contract(ROOT / ".loop")
     assert report["ok"] is True, report["issues"]
+
+
+def test_doctor_reports_invalid_encoding_for_an_undecodable_contract_object(tmp_path):
+    # #107: a terminal_state.json holding invalid UTF-8 bytes is a typed doctor
+    # finding, never a raw UnicodeDecodeError traceback out of doctor_report.
+    from loop.contract import doctor_report
+    from loop.scaffold import scaffold
+
+    workspace = tmp_path / "ws"
+    scaffold(workspace)
+    (workspace / ".loop" / "terminal_state.json").write_bytes(b"\xff\xfe{}")
+
+    report = doctor_report(workspace)
+    assert report["ok"] is False
+    assert any(i["code"] == "invalid_encoding" for i in report["issues"]), report["issues"]
+
+
+def test_read_manifest_fails_safe_on_undecodable_bytes(tmp_path):
+    # Mirrors the malformed-YAML rule stated inline in read_manifest: a manifest
+    # that cannot be decoded fails safe to {} rather than propagating a traceback.
+    from loop.contract import read_manifest
+
+    path = tmp_path / "manifest.yaml"
+    path.write_bytes(b"\xff\xfename: x")
+    assert read_manifest(path) == {}