The Law and Business Administration in Canada, 14e Smyth, Soberman, Easson, & McGill

CHAPTER 7

Formation of a
Contract:
Consideration
and Intention

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Objectives

To examine such questions as:

What other essential elements must be
present for a contract to exist?
What is the nature of consideration?
What is the difference between consideration
and a gratuitous promise?
What are the presumptions regarding the
intention to create a legal relationship?

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Requirements of a Valid Contract

Consensus (offer and acceptance)

Consideration
Intention
Capacity
Legality
Writing (if required by statute)

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Consideration & Intention to

Create Legal Relations

The acceptance of an offer leads to an

agreement. Before an agreement is binding in
law, it must have two primary elements
Consideration
Mutual intention to create legal relations

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The Meaning of Consideration

Consideration is the price that one party pays

for the promise of another (something for
something or a bargain)
A gratuitous promise is one without
consideration
For example, a charitable pledge
Gratuitous promises are not legally binding under contract
law
A promise of forbearance may be sufficient
consideration

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Adequacy of Consideration

Valid consideration must be

Specific but not necessarily adequate
With reference to present/future promises
Not past consideration
A promise to pay additional money for a
pre-existing obligation is not enforceable

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Motive Contrasted with

Consideration: Past Consideration

Motive cannot change a gratuitous promise into a

binding contract, nor can it reduce a binding promise
into a merely voluntary obligation.
If one person promises to reward another who has
previously done an act gratuitously or given
something of value, the promise is not binding. That
promise is gratuitousfor past consideration is no
consideration at all.

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Relation Between Existing Legal

Duty and Consideration

Where A has an existing contractual duty to B, a later promise

by B to pay A something extra to perform that obligation is not
binding.
Performance by A is not good consideration for the later
promise because A was already contractually bound to perform
Possible to exact a legally enforceable promise from its
customer to pay an increased price by delivering a peppercorn
(or any other item of negligible value) to her in return for the
promise, or by insisting that the customer make her promise
under seal

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Gratuitous Reduction of a Debt

Agreement to accept less than the amount

owning is a gratuitous promise
Binding if
Before the due date
Under seal
Made by a third party
Five provinces have legislation binding the
creditor who accepts lesser payment
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Equitable or Promissory Estoppel

Loss suffered by reasonable reliance on a

gratuitous promise
Promissory estoppel prevents a promisor from
denying his promise
In Canada, promissory estoppel can be used as a
defence to an action where the promisee can
prove injurious reliance
Use as shield not as sword

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Request for Goods or Services

A request for goods or services creates an

obligation to pay a reasonable price
Quantum meruit

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The Use of a Seal

The use of a seal eliminates the requirement

of consideration
The seal must be placed on the document at
the time of signing
Business tender offer under seal becomes
irrevocable like an option

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Intent to Create Legal Relations

Intention is presumed in commercial

situations
The presumption may be rebutted
Reasonable bystander test
Parties may agree to not have their
agreement enforced by the courts

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Smyth, Soberman, Easson, & McGill The Law and Business Administration in Canada, 14e

Strategies to
Manage the Legal Risks

Parties must be clear about their intentions to contract.

Standard form contracts may be used to acknowledge the
existence of consideration.
Out of an abundance of caution, the signature line will have the
symbol of a seal beside it and be prefaced with the phrase
signed, sealed and delivered.
Businesses managers should be aware of exemption clauses
as a means of limiting liability, and choice-of-forum clauses
redirecting the dispute away from the courts.

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