chapter 3: formantion of a contract emond montgomery publications 1

CHAPTER 3: FORMANTION OF A CONTRACT

Emond Montgomery Publications 1

Chapter 3: Formation of a ContractLEARNING OUTCOMES•Explain the “reasonable person” test for determining whether a party intended to be legally bound by his or her promise. •Describe the features of a valid offer, counteroffer, and acceptance and explain how the effective timing of an offer and acceptance is determined. •Understand how an offer can effectively be revoked and how an offer can lapse. •Define “consideration” and describe the qualities of valid consideration.


Chapter 3: Formation of a ContractLEARNING OUTCOMES (CONT’D)•Explain how consideration is treated in debtor–creditor relationships, under circumstances where a party gratuitously promises to make a charitable donation, and where the parties have not explicitly defined the quantum of payment for a service. •Define “estoppel” and explain how the doctrine of estoppel is relevant to contract law. •Understand the current state of the law with respect to e-commerce and the matters that parties engaged in e-commerce may need to consider.


Elements of a Valid Contract• Essential elements of a contract:

1. The intention to create a legal relationship

2. Offer and acceptance of the offer

3. An exchange of something of value (“consideration”)

4. Legality

• If any of the essential elements are missing the contract is considered void


Intention to Create a Legal Relationship

• A contract is the result of a meeting of the parties’ minds

• The promisor must intend to be bound by the promise he or she has made

• The law presumes that promisors intend to the bound by the promises that they make

• Once the presumption has been made the burden of proof shifts to the promisor to prove that the intention did not exist

• Test: “Would a reasonable person hearing the promise assume that the promisor intended to be bound?”


Intention to Create a Legal Relationship (cont’d)

• An arm’s length transaction is generally presumed to be binding

• Example: commercial business dealings

• A non-arm’s length transaction many not be considered binding

• Example: promises made between family members


Offer and Acceptance

NATURE OF THE OFFER

•A valid contract requires that the offeror make and offer which is accepted by the offeree

•The offer must contrail all the terms of the contract

•The initial offer is tentative

•Note: advertisements are generally not considered offers


Offer and Acceptance (cont’d)

COMMUNICATION OF AN OFFER•There is no particular format in which an offer must be made

•The offer must be understood by the offeree

•Offer can be verbal, in writing or non-verbal

•General rules:• The offer must be communicated to the offeree before it is capable of

being accepted

• Only the person to whom the offer is made may accept the offer, even if others are aware of it


Offer and Acceptance (cont’d)

ACCEPTANCE OF AN OFFER

•Acceptance may be verbal, in writing or inferred from the conduct of the parties

•Rules of valid acceptance:

1.Acceptance must be communicated

2.Acceptances must be clear, unequivocal and unconditional


Offer and Acceptance (cont’d)COMMUNICATION OF THE ACCEPTANCE•If the offer states the manner of acceptance then the acceptance must be in the requested manner•If the offer does not state the manner of acceptance the courts will look at variables to determine acceptance

• Examples of variables include: industry practice, the form of the offer or historic dealings between the parties

• In some cases silence or performance of the terms of the contract will be considered acceptance

•Rules for determining communication of acceptance• Verbal acceptance: acceptance occurs when the words are spoke• Written acceptance: “postal acceptance rule” applies


Offer and AcceptanceCOUNTEROFFERS AND INQUIRIES•A counteroffer is a response by the offeree that does not unconditionally accept the terms of the offer but proposes to add or modify the terms

• Note: once a counteroffer is made original offer is rejected

•An inquiry is the questioning by the offeree as to whether the offeror will consider other terms or is willing to modify the offer

• Note: an inquiry is not a counteroffer and not a rejection of the original offer


Offer and Acceptance (cont’d)LAPSE AND REVOCATION OF AN OFFER•Offers that lapse or are revoked are considered a nullity and cannot be accepted

•Four conditions under which an offer may lapse:

1. Either party dies, declares bankruptcy or is declared insane prior to acceptance

2. Rejection or counteroffer made by offeree

3. Failure to accept offer within time period set out in offer

4. Failure to accept the offer within a reasonable time period

•The offeror can revoke the offer anytime prior to acceptance. Revocation must be communicated to the offeree.


Consideration• A contract is a bargain in which each party gets something

in return for his or her promise to perform the obligation in the contract

• Consideration is the price—which must be something of value—paid in return for a promise

• Examples: money, an agreement to refrain from doing something, the exchange of goods or services, etc.

• The consideration in a contract must be legal


Consideration (cont’d)GRATUITOUS PROMISES•A gratuitous promise is a promise made by someone who does not receive consideration for it

•The courts will generally not enforce a gratuitous promise, because they are not contracts

•Examples of gratuitous promises that may be enforced: • Promises to donate to charity

• Gratuitous promise made under seal


Consideration (cont’d)ESTOPPEL BASED ON FACT

•If a person asserts a statement of fact as true and another relies on that statement to his detriment, the maker of the statement will be estopped from denying the truth of the statement in court


Consideration (cont’d)PROMISSORY ESTOPPEL•Promissory estoppel: rule whereby a person is prevented from denying the truth of a statement of fact made by him where another person has relied on that statement and acted accordingly

•Five requisite elements:

1. Existing legal relationship

2. Clear promise or representation

3. Reliance

4. Action resulting in detriment

5. Promisee must have acted equitably


Consideration (cont’d)ADEQUACY OF CONSIDERATION

•Consideration must have some value, however the courts have held that they will not examine the adequacy of consideration

•Only where consideration is grossly inadequate AND the existence of fraud, undue influence or duress can be proven will the courts deem a contract unenforceable


Consideration (cont’d)PAST CONSIDERATION

•Consideration must be something received the instant the promise is made or at a future date

• Example: payment of money at the time the contract is made

•Consideration cannot be something that a person received before the promise was made

• Example: a gift that had be previously given the offeror


Consideration (cont’d)EXISTING LEGAL OBLIGATION•A promise to do something that a party is already obligated to do cannot be consideration

• A promise to do something under one contract cannot also be consideration under a second contract. There must be fresh consideration

• Agreeing to something that a party is legally obligated to do under statute cannot be consideration


Consideration (cont’d)DEBTOR-CREDITOR RELATIONSHIPS

•Requirement for fresh consideration can lead to unfair results in debtor-creditor relationships

•Debtor is obligated to pay creditor a sum of money and this obligation is discharge once full sum of money is paid

•Statutes have been passed to allow debtors and creditors to enter into agreements to allow the debtor to pay less than the total owed


Consideration (cont’d)QUANTUM MERUIT

•Quantum meruit: an equitable doctrine that states that no one should unjustly benefit from the labour and materials of another

• In such circumstances, the law will imply a promise to pay a reasonable amount, even in the absence of a contractual term for a price

•A reasonable amount is determined by looking at the prices charged by similar suppliers


ELECTRONIC COMMERCE• Traditional contract law applies to Internet transactions• New legislation has also been passed to address recent

problems with e-commerce• Common concerns for contracting parties involved in e-

commerce are:1. Authenticity of documents and electronic signatures2. Place to resolve disputes when the parties to a contract are from

different regions3. Laws that apply when contracting parties are from different

countries4. The time the contract was created

5. Access to parties’ personal information


chapter 3: formantion of a contract emond montgomery publications 1

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