Chapter 3: Formation of a valid contract

Question 1

What is Contract Law?

Answer 1

• Contract: agreement between 2 or more persons/corporations. It creates obligations/rights for each of the parties. If one of the parties to a contract does not meet the obligations, the contract is enforceable by a court.
• Some, but not all contracts must be in writing such as contracts for the purchase of land.

Question 2

What are the elements of a valid contract?

Answer 2

1. Intention to create a legal relationship.
2. Offer.
3. Acceptance.
4. Consideration.
5. Capacity to contract.
6. Legality.

Question 3

Elements to a Valid Contract: 1. Intention to create a legal relationship.
Figure 3-1

Answer 3

• There is a presumption at law that promises in a business contract are intended to be binding, a presumption which does not exist for contracts of social nature.
• Advertisements are not enforceable promises but rather invitations to do business.

Question 4

Elements to a Valid Contract: 2. Offer

Answer 4

• Tentative promise to perform subject to a certain condition, until is accepted an offer is not enforceable. An offer must be communicated by the offeror to a specific offeree (an offer is not valid until received by the offeree).

Question 5

Elements to a Valid Contract: 3. Acceptance

Answer 5

• Acceptance must be unconditional (on exact terms of the offer). And communicated to the offeror in the manner specified/implied at the time which it was made (time of acceptance is when offeror is made aware of acceptance or at the moment when offeree places a letter of acceptance to the offeror into the mailbox).

Question 6

Elements to a Valid Contract: 3. Acceptance - Electronic contracts.

Answer 6

• Offer made over the internet will become an enforceable contract in the jurisdiction where the offeror conduct business at the time he/she receives acceptance (clicking “I agree” means acceptance and instant formation of an enforceable contract).

Question 7

Elements to a Valid Contract: 3. Acceptance - Counter Offer.

Figure 3-2.

Answer 7

• A counter offer ends an offer, anything less than unconditional acceptance of an offer is either a counter offer or inquiry.
• It is a fresh offer from the offeree which offeror may accept/reject. The only way the original offer can come back is if offeror revives it.

Question 8

Elements to a Valid Contract: 3. Acceptance - Silence and form of acceptance.

Answer 8

• Silence cannot be construed as acceptance, there is no obligation on an offeree to refuse/reject an offer unless there is previous arrangement. The form of acceptance may be verbal/written/conduct (handshake, nod, raising numbered card during auction).

Question 9

Elements to a Valid Contract: 3. Acceptance - Unilateral agreements and lapse.
Figure 3-3.

Answer 9

• A unilateral agreements calls for the offer to actually complete/perform his/her part of the contract to signify acceptance of an offer. This performance by the offeree takes place of written/acceptance, an offer will lapse within time if no specified date for acceptance, it will lapse upon the death of either party.

Question 10

Elements to a Valid Contract: 3. Acceptance - Revocation of an offer.

Answer 10

• If an offeror decides to withdraw may do so at any time before the offer is accepted. The offeror must communicate the revocation directly/indirectly to the offeree. An offeree who wishes to ensure an offer remains open must create an option agreement with the offeror.

Question 11

Elements to a Valid Contract: 4. Consideration.

Answer 11

• Exchange of something of value/benefit between a promisor and promisee. Consideration is often (but not necessarily) money; alternatively, a promise not to do something, relinquishment of the right to sue, delivery of goods, seal affixed on a contract.

Question 12

Elements to a Valid Contract: 4. Consideration - Adequacy of Consideration.

Answer 12

• The amount of consideration/fairness doesn’t concern the courts, as long as consideration is something of value/benefit exchanged in return for a promise. To be valid, consideration must arise out of negotiations between promisor/promisee to create a contract not out of a pre exiting obligation, and not after the performance has been completed.

Question 13

Elements to a Valid Contract: 4. Consideration - Tenders.

Answer 13

• A call for tenders by government/company communicates a request for goods/services and is an offer to negotiate a contract.
• Tenders respond to the offer by making bids, and a deposit/bid bond required to underscore the commitment of the tenderer to perform if bid is selected.

Question 14

Elements to a Valid Contract: 4. Consideration - Debtor-Creditor Relationship.

Answer 14

• Accepting less for a debt than what is due is a common business practice. Some provinces address that indebtedness is reduced, prevents a creditor from taking the lesser sum and later suing for the balance.
• Other solutions: agreement under seal, payment before due date, having third party make a settlement.

Question 15

Elements to a Valid Contract: 4. Consideration - Equitable/Promissory Estoppel.

Answer 15

• Gratuitous promise unenforceable due to lack of consideration. But if a fact is asserted and someone relies on it to his/her detriment the person who made the statement cannot lated deny it.
• Estoppel creates a defence against a promisor’s claim for enforcement of a contract against a promisee when the promisee relied to his/her detriment, upon a gratuitous promisee from the promisor.

Question 16

Elements to a Valid Contract: 5. Capacity to Contract.

Answer 16

• Persons: 1. under age, 2. with mental disabilities, 3. impaired by alcohol/drugs may be unable to appreciate the nature of contractual obligations. Contracts they enter may not be enforceable.

Question 17

Elements to a Valid Contract: 5. Capacity to Contract - Restrictions upon capacity.

Answer 17

• Corporations, labour unions, bankrupt persons may have restrictions to contract.
• Company’s incorporating documents may limit the subject matter/monetary limit of contracts its employees may enter on its behalf.
• Unions may be restricting to entering collective agreements on behalf of employees.
• An undischarged bankrupt person may only be allowed to purchase necessaries.

Question 18

Elements to a Valid Contract: 6. The requirement of Legality.

Answer 18

• A contract with an illegal purpose/against public policy are unenforceable by a court.
• Similarly, tradesperson/professional who is required by law to be licenced but who is not licenced cannot ask a court to enforce a contract against a client who does not pay.

Question 19

Elements to a Valid Contract: 6. The requirement of Legality - Contracts in restraint of trade

Answer 19

• A restrictive agreement concerning the sale of a business attempting to protect goodwill must not be too broad (geographically) or too long (duration); otherwise, a court may sever the restrictive clause from the contract.
• Restrictive covenants in employment contracts will not be enforced unless the employer can demonstrate the likelihood of significant harm. Public policy favours the economic freedom of the employee over the employer’s interest.

Question 20

Elements to a Valid Contract: 6. The requirement of Legality - Confidentiality Requirements

Answer 20

• Is expected that employees will demonstrate loyalty towards employer with respect to confidential business information.
• A breach of non disclosure clause is a breach of employment contract, not a restraint of trade.

Question 21

Elements to a Valid Contract: 6. The requirement of Legality - Privacy Legislation

Answer 21

• Personal Information Protection and Electronic Documents Act, and provincial/territorial statutes (sometimes) govern the protection of information gathered from customers.
• The purpose of gathering information must first be specified, and approved by clients/patients, use/disclosure of any personal information by businesses/health care.