Legl 210 Part 5

Contract

A contract is a voluntary exchange of promises that creates legal obligations which can be enforced by the courts.

When people make a contract, they are setting their own rules and obligations, unlike in tort law, where duties are imposed by law.

Freedom of contract

parties can agree to almost any terms they want, as long as the agreement meets legal requirements.

It is limited by common law rules and legislation (e.g., employment, partnerships, real property, consumer protection).

Elements of a legally enforceable contract

1. Consensus

2. Consideration

3. Capacity

4. Legality, and Intention

Consensus

1. The parties must agree on the same terms — there must be an offer and acceptance.

2. Both parties understand and willingly enter the deal.

Consideration

1. There must be a commitment by each party to do something or to abstain from doing something. Each party must give or promise something of value (money, services, goods, or a promise to act or not act).

2. The consideration is the price each is willing to pay to participate in the contract.

Capacity

1. The parties must have the legal ability to enter into a contract.

2. Certain groups may have limited capacity, such as minors, intoxicated or mentally incompetent persons

Legality

The purpose of the contract must be legal and not against public policy

Intention

Both parties must intend the agreement to create legal obligations, not just social or casual promises. (they must be serious when making the contract )

Formal contract

Written, signed under seal

Simple Contract

Written or verbal, but not under seal

Express contract

Terms are clearly stated (written or spoken).

Implied contract

Created by conduct (e.g., using a vending machine implies agreement to pay).

Valid

Legally binding on both parties. It is a tentative promise by one party to enter into a contract on specific terms, contingent on the other party’s acceptance.

1. A Promise

2. On Specified Terms

3. As Soon as Accepted

Void

: Missing an essential element, not a contract at all

Voidable

Valid until one party chooses to cancel it

Unenforceable

Valid but not enforceable (e.g., not in writing when required).

Illegal

Involves unlawful acts — void and not recognized by courts.

Bilateral

Both parties make promises (e.g., buying a car).

Unilateral

One party promises something in return for an act (e.g., reward for finding a lost pet).

A Meeting of the Minds (Consensus)

A valid contract requires this, both parties must agree on the same terms and intend to be bound by them. This shared understanding is called consensus.

As long as both parties had a chance to read and understand it, the agreement is binding.

If the terms are unclear or ambiguous, the court may decide there was no consensus and declare the contract void

A contract is formed when and where the offeror learns of the acceptance

Advertisements

Are not offers, they are invitations to treat. This means they invite customers to make offers, rather than being binding promises themselves.

Purpose of advertisements

start the negotiation process, they invite people to buy or inquire, but the seller can still accept or reject.

When can an advertisement become an offer?

It shows a clear intent to be bound.

It includes specific terms.

Nothing further needs to be negotiated.

End of an offer

The stated time for expiry passes

A reasonable time passes

The offeror dies or becomes insane

The offeror revokes the offer

The offeree rejects the offer or makes a counteroffer

Effective Acceptance

A contract is formed when an offer is fully accepted.

Acceptance must be unconditional — it must agree to all terms of the offer.

If the offeree adds new terms or changes any part of the offer, it becomes a counteroffer, not an acceptance.

Partial acceptance is not valid.

consideration

Consideration is something of value exchanged between parties in a contract that is necessary for a contract to be legally enforceable. It can be a promise, an act, or a forbearance.

Key rules of consideration

Consideration must move both ways (each party gives or promises something).

It must be specific, particularly if money is involved, the parties must agree to a specific consideration or price. Suppose someone agrees to exchange a car for another’s promise to “do some work around the house.” Such a promise would not be enforceable because the work to be done is not specified.

Illegal consideration and impossible consideration are not valid consideration

A one-sided promise or gift (called a gratuitous promise) is not enforceable. Once a gift is given, the giver cannot demand it back.

Exceptions to consideration

Creditor and Debtor

Promissory Estoppel

Sealed Documents (Formal Contracts)

Variation of a Contract

Creditor and debtor

Normally, if a debtor owes money, a promise by the creditor to accept less than the full amount is not binding, because the debtor gives no new consideration.However, there are exceptions where the promise may still be enforced

Promissory Estoppel

Normally, gratuitous (one-sided) promises are not enforceable. But under promissory estoppel, if:

- One party makes a promise,

- The other relies on that promise to their detriment,

- And it would be unfair to allow the promisor to go back on it, Then the promise can be used as a defence (not as a cause of action).

Sealed document

makes a promise enforceable without consideration.Traditionally, a seal was a wax mark; now it can just be the word “SEAL” or a printed circle beside a signature.

Key idea:A seal shows serious intent to be bound, so the law treats it as if consideration exists.

Variation of a contract

any change (variation) to an existing contract must be supported by new consideration, something extra of value.However, some courts now allow contract variations without new consideration if:

- Both parties agree voluntarily,

- The change is not made under economic duress, and

- It’s fair and reasonable.

Capacity to Contract

Capacity means a person’s legal ability to enter into a binding contract.

Certain individuals or entities have limited capacity to protect them from unfair obligations.

Lawmakers have always recognized that some people are more vulnerable than others and thus require special protection. Over the years, several categories of people have been identified as needing protection. These categories have been protected by having their freedom to enter into contracts limited or, in some cases, eliminated completely.

Minors in Capacity

whenever a minor enters into a contract with an adult, the adult is bound by the contract, but the minor can choose not to be bound by it. Alberta’s Minors’ Property Act allows a court to confirm a contract entered into by a minor if it believes it is in the best interests of the child to do so.

a.Neither party has performed – Contract is voidable

b.Minor has received a benefit but not performed – Contract is voidable

c.Contract has been fully performed - Contract stands

Mentally incompetent in Capacity

The person could not understand the nature of the act

The other party knew or ought to have known of the incapacity

Intoxicated

The person couldn’t understand the nature of the act

The other party knew or ought to have known of the incapacity

Drunk person repudiated the contract upon achieving sobriety

Corporations

is a legal person created by statute and can enter into contracts, but there are limits. Their power to contract is often limited by that legislation. If they have not been given the capacity to enter into a particular type of contract, any agreement of that type will be void.

It can only contract within its powers (as stated in its incorporating documents or statute).

Ultra vires (beyond power) contracts may be invalid

Illegally formed contract

The contract itself is unlawful from the start (e.g., a contract to sell drugs).→ Void and unenforceable.

Lawful contract performed illegally

The agreement is legal, but something illegal happens during performance (e.g., a lawful insurance contract where the insured dies while committing a crime). → May still be enforceable, depending on circumstances.

Blue Pencil Approach

The court strikes out (removes) the illegal part of the contract and enforces the rest only if the remaining terms still make sense.

However, in this case, removing the “illegal” interest would make it an interest-free loan, which was not the parties’ intention

Notional Severance

The court modifies the illegal term to make it legal, while keeping the agreement as close as possible to what the parties intended.

Here, the court reduced the interest rate to the legal maximum (60%), rather than voiding the contract.

“The part of the agreement that is invalid is the obligation to pay an effective interest rate in excess of 60 percent per annum

Intention

Not all agreements are contracts.

To be legally binding, both parties must intend for legal consequences to follow from their agreement.

Example:

Inviting a friend for dinner is not a contract, there’s no intention to create legal obligations.

The objective Test

Courts ask: Would a reasonable person think that the parties intended to create a legally binding agreement?

It doesn’t matter what one person actually thought (their subjective intention). What matters is what their words and actions would reasonably mean to the other party.

Commercial relationship

Parties do intend legal consequences.

Example: A supplier agrees to sell goods to a retailer.→ The court will assume both sides intended to be legally bound.

How to rebut (disprove): If the written document clearly says “this agreement is not legally binding” or “subject to contract,” the presumption can be rebutted.

Family Relationship

Family members do not intend legal consequences.

Example: A parent promises to pay a child $200 monthly for groceries.

→ The court assumes no intent to be bound, it’s a family arrangement.

How to rebut: If the agreement is formalized in writing (e.g., signed contract or witnessed document), the court may find that the family did intend legal obligations.

Social relationship in Non-business context.

Friends having social arrangements do not intend to create legal relations.

Example: Two friends agree to meet weekly for a running club.→ Not enforceable, it’s a social understanding.

How to rebut: If money or property is involved

Social Relationship in Business Context

it depends on how “serious” or “commercial” the situation is.

The court uses the reasonable person test.

Example: Two friends start a small business together and agree to split profits.

→ The court asks: Would a reasonable person in their position think they intended legal consequences?If yes → enforceable.If it seems casual → not enforceable

Factors Affecting the Contractual Relationship

1. Misrepresentation

2. Duress

3. mistake

Innocent Misrepresentation

the person honestly believed the statement to be true

The representor alleged a fact to the representee that was untrue. The false/untrue statement was made honestly and without carelessness by the representor who believed it to be true. That induced the representee to enter the contract

Negligent Misrepresentation

the person should have known the statement was false

Misrepresentation + Negligence

• The representor owed a duty of care to the representee

• The representor breached the duty

• The representee suffered damage

• That was caused by the breach of duty

Fraudulent Misrepresentation

the person knew the statement was false or was reckless about its truth.

Misrepresentation + Fraud

• The representor knew the statement was false or was reckless about its truth

• The representee suffered damage

• That was caused by the false statement

Duress

occurs when a person is forced or pressured to enter a contract against their will through illegitimate threats or coercion.

The key idea: no true consent was given.

Legal Effect

Contracts are voidable (not void).

The victim can choose to cancel (rescind) or affirm the contract.

A voidable contract may still transfer rights to innocent third parties

Traditional Duress

threats of violence, imprisonment, or criminal prosecution.

Example: Byle v. Byle (1990): threats of physical harm caused the contract to be voidable.

Economic Duress

illegitimate financial or business pressure that forces someone to agree.

Test for Duress

Courts ask:

1. Was there coercion of the will — did the person truly have a choice?

2. Was the pressure illegitimate — unfair, excessive, or coercive?

The test is objective, would a reasonable person feel forced to agree?

Badges of Duress

- Did the victim protest at the time?

- Did they have a reasonable alternative (like legal action)?

- Did they receive independent legal advice?

- Did they act quickly to avoid the contract after signing?

What is not Duress

- Hard bargaining or market pressure (normal commercial conditions).

- A lawful threat made in good faith (e.g., to sue).

- Court orders or legal rulings

Undue Influence

occurs when pressure from a dominant or trusted person prevents someone from freely agreeing to a contract. The contract is voidable (not automatically void).

Actual Undue Influence

– The person challenging the contract must prove that improper influence was actually used.

Presumed Undue Influence

The law presumes influence exists in certain circumstances

Unconscionability

an equitable doctrine that allows courts to set aside a contract if one party takes unfair advantage of another due to unequal bargaining power, resulting in an unfair or one-sided deal.

In simple terms - the court can say:

“This deal is so unfair that it would be wrong to enforce it.”

Key Elements of Modern Test

1. Inequality of Bargaining Power:One party is at a serious disadvantage — e.g. less educated, less experienced, vulnerable, or facing a take-it-or-leave-it situation (standard form contract).

2. Improvident Bargain

The deal is grossly unfair or gives one side a big advantage — for example, charging extreme fees, forcing arbitration in another country, or creating unreasonable financial barriers.

Both must be proven for a court to find a contract unconscionable.

Mistake

occurs when one or both parties enter into a contract based on an incorrect assumption or misunderstanding.

If it destroys consensus (agreement) → the contract is void (no contract formed).

If it merely affects a party’s understanding but not the agreement → may be voidable in equity.

Courts will not intervene for bad bargains or errors in judgment

Common Mistake

Both parties make the same mistake about an important fact.the mistake is shared by both parties, is fundamental and directly affects the basic definition of what the parties are contracting for). The mistake will render the contract void if it robs it of all substance.

Effect: The contract is void if consensus not objectively found. because there was never a real agreement about something that exists. [Void at common law (no consensus). Voidable or rectifiable in equity.]

Mutual Mistake

Parties mistaken in different ways, the parties misunderstand each other and are “not on the same page or are “operating at cross purposes.- They think they agree, but they are really talking about two different subjects.

Effect: Contract is void if the mistake is fundamental, because there would be no true meeting of the minds.

Unilateral Mistake

Only one party is mistaken, and the other knows or should know about the mistake.

Effect: No remedy, unless mistake caused by wrongful behaviour, or the other party knew or ought to have known of the mistake.

It means: the court might cancel the contract if the other side knew (or should have known) about the mistake, or if they acted unfairly.

The end of a contractual relationship

1. performance

2. breach

3. agreement

4. frustration.

Discharge by Performance

A contract is usually ended when both parties fully perform their obligations. However, sometimes a minor deviation from exact performance doesn’t cancel the contract if the party has substantially performed their obligations.

A party is discharged by performance when that party substantially performs the root of the contract – substantially meets all conditions

Discharge by breach

Involves the failure of the breaching party to properly perform its contractual obligations. Such a breach can take place in two ways: (1) by improper or incomplete performance of the obligations set out in the contract, or (2) by refusal to perform.

Severity of Breach:

“Minor Breach” – breach of warranty or trivial breach of condition

“Major Breach” – non-trivial breach of a condition

Effects of Breach:

Minor Breach – contract remains in force

Major Breach – Option to end or enforce contract

Discharge by Agreement

Just as the parties to a contract can agree to create contractual obligations, they can also agree to end or modify those obligations.

4 outcomes of Discharge by Agreement

1. A new contract

2. Modifications to the existing contract

3. Termination of the contractual relationship

4. Substituting a party

Discharge by Frustration

An unexpected event (out of the control of the parties) may make performance of the contract impossible. For example, when a construction firm agrees to repair a bridge but the bridge is washed away in a storm before the repair work begins, performance has become impossible. In such circumstances the contract is considered discharged through frustration

Frustration occurs when some unforeseen, outside event (out of the control of either party) interferes with the performance of the contract, making the basic object of the contract unobtainable.

Factors of Discharge by Frustration

1. A radical change in the contractual obligation

2. Arising from unforeseen circumstances in respect of which no prior agreement has been reached that aren’t caused by either party

3. Both parties are discharged from further obligations at the moment of frustration.

Damages

The most common remedy for a breach of contract is an order that the breaching party pay damages.

Damages are amounts of money assessed by the court and designed to compensate victims for their losses.

The object is to put the victim in the position they should have been if the contract performed

Equitable Remedies

The following are examples of remedies that have been developed by the Court of Chancery to deal with special situations in which the ordinary remedy of damages would not be adequate. Note that these remedies are discretionary. They will be granted only when the judge thinks it right and fair to do so.

1. Rescission

2. Rectification

3. Specific Performance

4. Injunction

5. Accounting

6. Quantum Meruit

Recession

The contract is cancelled, and both parties go back to their original positions.

Example: You buy a car that the seller lied about (they said it was never in an accident, but it was). → The judge can cancel the contract and make each side return what they got.

Rectification

The judge fixes the written contract so it matches what the parties actually agreed to.

Example: You agreed to buy 500 items, but the written contract mistakenly says 5,000→ The judge can correct the mistake in the document.

specific performance

The judge orders the person to do exactly what they promised.

Example: You buy a rare painting that cannot be replaced.The seller tries to sell it to someone else.→ Court can force them to give you the painting, because money can’t replace it.

Injunction

The judge orders someone to stop doing something or not to do something.

Example: A singer signs an exclusive contract with one venue but tries to perform at a competitor’s venue.→ Court can order them not to perform elsewhere.

Accounting

The court orders someone to hand over financial records or pay profits they wrongfully earned.

Example: A partner in a business secretly takes money from the partnership.→ The judge can order an accounting to calculate the money owed.

Quantum Merit

A person is paid a reasonable amount for work done, even if no final contract exists or the contract is incomplete.

Example: You start renovating someone’s kitchen, but the contract is cancelled halfway.→ You can be paid for the value of the work you already completed.