Business law - Chapter 5: Contract law in Canada part 1

Agreement

A mutual understanding or arrangement between two or more parties regarding a specific matter

Agreement (con’t)

It could be a verbal or written agreement, informal or formal, and it does not necessarily need to be enforceable in a court of law

Contract

A legally binding agreement between two or more parties that creates an obligation to fulfill certain terms and conditions.

Contract (con’t)

Typically (but not always) written documents that specify the details of the agreement, including the parties involved, the terms and conditions, the rights and obligations of each party, and the consequences for non-compliance

Elements of a valid contract

• Offer

• Acceptance

• Consideration

• Intention to create legal relations

• Capacity

• Consent

• Legality

An agreement would not be enforceable by a court without these elements

Offer

A party must make a clear and unequivocal offer to enter into a contract.

Acceptance

The other party must accept the offer, either by agreeing to its terms or by performing the actions required in the contract

Consideration

Both parties must exchange something of value, such as money, goods, or services

Intention to Create Legal Relations

Both parties must have an intention to create a legally binding agreement

Capacity

Both parties must have legal capacity to enter into a contract

e.g. Minors and mentally incompetent persons may not have the capacity to enter into contracts

Consent

Both parties must give their free and informed consent to enter into the contract, without being coerced or deceived

Legality

The contract must be for a legal purpose and not violate any laws or public policy.

Offer

A proposal by one party to enter into a contract with another party

Offeror

The party making an offer; for it to be valid, it must be clear and definite, and communicated to the offeree

Offeree

The party getting the offer

Statements that won’t constitute an offer

• Requests for info

• Invitations to treat

• Puffery

Requests for info

Statements that seek information, rather than make an offer

e.g. If a potential buyer asks a seller for information about a product, such as its price or availability, it is not an offer to purchase the product

Invitations to treat

Statements that are not offers, but rather an invitation to negotiate

e.g. Advertisements, catalogs, and price lists

Puffery

Exaggerated, sales language or vague statements made by a seller or advertiser that are not meant to be taken as factual claims

e.g. A store makes a subjective claim saying they have the “best pizza in town”

Bilateral offer

Both parties must make a promise to form a contract, and they’ll be promising something to each other

e.g. An employer may offer a candidate a job and in exchange the employee would be offering back their work

Unilateral offer

An offer that can be accepted by performing a specified act or by refraining from doing something

e.g. A cash reward for returning lost property

Unilateral offer (con’t)

The offeree doesn’t make a promise, but rather, must perform the specified act to accept the offer and form the contract

Revocation

An offer can be revoked or withdrawn by the offeror at any time before it is accepted by the offeree.

e.g. A company receding a job offer

Rejection

When the offeree rejects the offer 

e.g. If a company offers a discount to its customers for a limited period, and the customers do not accept the offer before the deadline, the offer is terminated

Counteroffer

When the offeree makes a new proposal, which terminates the original offer

Death or Incapacity

If the offeror dies or becomes incapacitated before the offer is accepted

Acceptance

The formation of a contract after an offer is accepted

What’s needed for a contract to be accepted?

The offeror must clearly communicate their offer to the other party, and that offeree must show their acceptance through some affirmative action (e.g. signing a document or saying “yes”)

The contract can’t be changed after it’s accepted

Consideration

Something of value that is exchanged between the parties to a contract

e.g. money, goods, services, etc

Consideration (con’t)

Is necessary for a contract to be legally binding, and requires that both parties must receive some benefit or suffer some detriment under the contract

e.g. If one party promises to paint a house in exchange for money, the money is the consideration given by the other party in exchange for the promise to paint the house

Quid Pro Quo

“Something for Something”

Sufficiency of Consideration

The value of the consideration exchanged by each party to the contract is deemed sufficient by the law to create a legally binding agreement

Forbearance as Consideration 

A person’s decision to refrain from pursuing legal action against someone else as consideration for a contract; is prevalent and is used in litigation settlements

e.g. Julian owes Jasdeep $10,000 under a loan agreement, but Julian has failed to make any payments on the loan; instead of suing, Jasdeep gets Julian’s car

Past Consideration

A type of consideration that is not sufficient to form a valid contract, and is rather a promise or act that was completed in the past, and which is being offered as the basis for a present or future promise

Why isn’t past consideration considered valid?

It is not being given in exchange for the promise, but rather appears to be a response to it. In effect, the exchange is “something for something already done”, except when the past act had been initially requested

The two exceptions when consideration isn’t needed

• Seals

• Promissory estoppel

Seal

A physical seal, such as a wax seal, being used as a way to indicate the parties’ agreement to the terms of a contract, and is considered to be a substitute for the receipt of consideration that is enforceable 

Promissory estoppel

A legal argument that is made when a party has relied on a promise made by another party but has suffered a detriment as a result of relying on that promise

Legal Test for Promissory Estoppel

1. A promise must be made by one party to another;

2. The promisor must have intended for the promise to be relied upon by the promisee;

3. The promisee must have relied on the promise to their detriment; and

4. It would be unjust to allow the promisor to go back on their promise.

Express intention

Occurs when the parties specifically state that they are entering into a legally binding agreement through the use of explicit language in the contract (e.g. this is a legally binding contract” or “by signing below, you are entering into a binding agreement”)

Implied intention

Occurs when the parties’ words or conduct indicate that they intend to create a legally binding agreement, even if they have not specifically said so

The reasonable person test

A test to assess whether the parties’ conduct and communications demonstrate an intention to create legal relations, where the court asks whether a reasonable person in the offeree’s position would have believed that they intended to enter into a legally binding agreement

Legal capacity

A person must be legally able to understand the terms of the contract and the consequences of entering into it

Minor

A person who is under the age of majority and therefore, does not have the legal capacity to enter into a contract, and consequently, any contract they enter isn’t legally enforceable

Age of majority throughout Canada

Menta Incapacity

If a contracting party is suffering from a mental illness, disability, disease, aging, or other condition that affects their ability to understand and make decisions about the contract then the contract will not be enforceable

Legal test for incapacity

1. whether the individual can understand the nature of the contract; and

2. whether the individual can understand the contract’s specific effect in the circumstances.

Intoxication

If a person is so intoxicated from drugs or alcohol they lack the capacity to understand the nature and consequences of the contract, they may be able to argue that the contract is unenforceable

Legal test for intoxication

1. The intoxication affected the party’s ability to understand and agree to the terms of the contract; and that

2. The other contracting party was aware that the party was intoxicated

Duress

The use of force, coercion, or threats to induce someone to enter into a contract against their will. If a contract was entered into under duress, it may be considered voidable

Duress (con’t)

Can be in the form of physical threats or where someone is forced to agree to a contract or make a transaction due to economic pressure or threats

Undue Influence

The use of excessive or improper pressure on an individual to enter into a contract

Can come in many forms, including emotional, physical, or psychological manipulation, or a position of power or authority over the individual

Legal Test for Undue Influence

1. There is a relationship of dependency (such as solicitor and client, parent and child and guardian and ward);

2. The contract is unfair in the sense that a party was unduly burdened or disadvantaged; and

3. The party claiming undue influence must show that the other party exercised a pervasive influence through manipulation, coercion, or abuse of power.

Legality

There must be legality of the subject matter; a contract to do something illegal will generally be void and have no legal effect

e.g. A contract to purchase illegal drugs would be illegal because the subject matter of the contract is illegal.