Legal Fundamentals

for Canadian Business

Third Edition

Chapter 3
Formation of
Contracts

Copyright 2013 Pearson Canada Inc.

3-1

Learning Objectives
List the essential elements of a contract
Describe the process by which consensus is
reached
What is a valid offer and effective acceptance
Explain the principle of consideration
Recall the requirements of capacity and legality
Define the element of intention
Determine whether a written document is required
Copyright 2013 Pearson Canada Inc.

3-2

Contract
Contract a voluntary exchange of
promises or commitments that are
enforceable in our courts
Contract law mostly developed in the courts
Some statutory modifications

Copyright 2013 Pearson Canada Inc.

3-3

Consensus
Process of offer and acceptance
Parties come to a common understanding
Terms must be clear and unambiguous

Copyright 2013 Pearson Canada Inc.

3-4

Offer
Tentative promise that contains the terms of
the anticipated contract
Invitations to treat are not offers
Most advertisements, catalogues, displays

Offer must contain all important terms

Parties, property, and price
Other terms may also be required
(Continued)
Copyright 2013 Pearson Canada Inc.

3-5

Offer
(Continued)

Need not be in writing

May be verbal or implied by conduct

Exemption clauses must be communicated

Must be communicated at the time of entering
the contract, not later
May be on receipt, sign, or any way that it is
brought to the attention of the other party

Copyright 2013 Pearson Canada Inc.

3-6

End of Offer

End of specific time

End of reasonable time
Death or insanity of offeror
Revocation (if communicated)
Rejection
Counter-offer (acts as rejection)
Option agreement keeps offer open for a
specified time

Copyright 2013 Pearson Canada Inc.

3-7

Standard Form Contracts

No bargaining power
Ambiguities interpreted in favour of the
party forced to accept the terms
May be controlled by statute

Copyright 2013 Pearson Canada Inc.

3-8

Acceptance
Acceptance commitment by offeree to be
bound by terms of offer
Must be complete and unconditional
Addition of any terms = counter-offer

Must be communicated
Contract effective when and where
communicated
(Continued)

Copyright 2013 Pearson Canada Inc.

3-9

Acceptance
(Continued)

If specific form of acceptance required,

must comply or acceptance ineffective
Unilateral contract
Acceptance is performance of contract
Example: reward posters

Silence is not usually acceptance

May be implied by conduct
(Continued)
Copyright 2013 Pearson Canada Inc.

3 - 10

Acceptance
(Continued)

Post-box rule
Exception to rule that acceptance must be
communicated
Where use of mail is a reasonable form of
acceptance, acceptance is effective when
and where posted
Also applies to telegrams and possibly
couriers
Does not apply to facsimile or email
Copyright 2013 Pearson Canada Inc.

3 - 11

Consideration
An exchange of benefits is required
May be money, services, goods, promises
One-sided promises (gratuitous promises)
are not enforceable
Need not be reasonable, but benefit must be
specific
(Continued)

Copyright 2013 Pearson Canada Inc.

3 - 12

Consideration
(Continued)

Must be possible, legal, and of some value

Exception for services quantum meruit
must pay a reasonable amount for services
requested and received
If consideration has already been given, it
cannot support a new contract (i.e. past
consideration is no consideration)
(Continued)

Copyright 2013 Pearson Canada Inc.

3 - 13

Consideration
(Continued)

Parties can change contract obligations, but

all parties must receive new consideration
Gratuitous promises not binding on
promisor with some exceptions:
Taking less in full satisfaction of debt is binding by
statute
Promissory Estoppel reliance on gratuitous promise
may be used as a defence only
With a seal, no need to establish consideration

Copyright 2013 Pearson Canada Inc.

3 - 14

Void/Voidable Contracts
Void
There never was a contract
Both parties are free from obligations

Voidable
One party has the right to escape the contract;
contract valid until this is done
(Continued)

Copyright 2013 Pearson Canada Inc.

3 - 15

Void/Voidable Contracts
(Continued)

Copyright 2013 Pearson Canada Inc.

3 - 16

Capacity
Infants voidable contract
Anyone under the age of majority
Contract is binding on the adult, but not on the infant
Exceptions in many provinces for necessities and
beneficial contracts of service (but not in B.C.)
If infant ratifies contract (in writing or by implication)
after becoming an adult, he/she is bound
Infants liable for their own torts
(Continued)
Copyright 2013 Pearson Canada Inc.

3 - 17

Capacity
(Continued)

Insanity or intoxication - To escape a

contract for non-necessities
You must show you were so insane/intoxicated
that you did not understand transaction and
Other party to contract knew or should have
known of the insanity/intoxication and
You must repudiate contract as soon as possible
when sanity/sobriety is regained
(Continued)
Copyright 2013 Pearson Canada Inc.

3 - 18

Capacity
(Continued)

Statutory bodies may have limited capacity

e.g., Crown corporations, municipalities,
universities

Foreign governments and representatives

Diplomatic immunity

Status Indians under the current Indian Act

Capacity is limited to some extent to protect
from exploitation
Copyright 2013 Pearson Canada Inc.

3 - 19

Legality
Contracts that have unlawful objective or
illegal consideration are void
Legality may be set out in statutes
Insurance contracts must be intended to
cover a loss
Competition Act states agreements that
unduly limit competition are prohibited
(Continued)
Copyright 2013 Pearson Canada Inc.

3 - 20

Legality
(Continued)

Restrictive covenants permissible only if

Reasonable limit in time
Reasonable limit in area
Public interest is not harmed

Courts usually wont enforce restrictive

covenant against employees if it prevents
earning a living
Copyright 2013 Pearson Canada Inc.

3 - 21

Intention
Parties must intend legal consequences to
result from contract
Would a reasonable person have thought he/
she was entering into binding contract?
(Continued)

Copyright 2013 Pearson Canada Inc.

3 - 22

Intention
(Continued)

Presumptions
Domestic/Social relationships
No intention to be bound

Commercial relationships
Intention to be bound

May be rebutted
Apply reasonable person test

Copyright 2013 Pearson Canada Inc.

3 - 23

Requirement of Writing
Always good practice to put contract in
writing
Verbal contract often just as binding in law
Requirement of writing varies by
jurisdiction (i.e., set by statute)
Most jurisdictions have electronic
documents acts
(Continued)
Copyright 2013 Pearson Canada Inc.

3 - 24

Requirement of Writing
(Continued)
Statute of Frauds requires certain transactions be
written
e.g., purchase of land, long-term leases, assuming
responsibility for debt, contracts over one year,
marriage contracts, sales of goods of certain value

When writing is required but absent, contract is

unenforceable
Part performance may satisfy requirement for
writing
Only if consistent with existence of agreement

Copyright 2013 Pearson Canada Inc.

3 - 25