business law 393 chapter 3

Copyright © 2013 Pearson Canada Inc. 3 - 1

Chapter 3 Formation of Contracts

Legal Fundamentals for Canadian Business

Third Edition


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


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


Consensus

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


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)


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


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


Standard Form Contracts

•  No bargaining power •  Ambiguities interpreted in favour of the

party forced to accept the terms •  May be controlled by statute


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)


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)


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


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)


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)


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


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)


Void/Voidable Contracts (Continued)


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)


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)


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


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)


Legality (Continued)

•  Restrictive covenants permissible only if – Reasonable limit in time – Reasonable limit in area – Public interest is not harmed

•  Courts usually won’t enforce restrictive covenant against employees if it prevents earning a living


Intention

•  Parties must intend legal consequences to result from contract

•  Would a reasonable person have thought he/she was entering into binding contract?

(Continued)


Intention (Continued)

•  Presumptions – Domestic/Social relationships

•  No intention to be bound

– Commercial relationships •  Intention to be bound

– May be rebutted •  Apply reasonable person test


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)


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

business law 393 chapter 3

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