Chapter 6: The Elements of a Contract: Consensus and Consideration Flashcards
The five essential elements of a contract
1) Consensus
2) Consideration
3) Capacity
4) Legality
5) Intention
The Contractual Relationship
LO 6.1 Discuss the fundamentals of the contractual relationship
The Contractual Relationship
LO 6.1 Discuss the fundamentals of the contractual relationship
Contract definition
a voluntary exchange of promises creating obligations that, if defaulted on, can be enforced and remedied in the courts
Note: when agreeing to the terms of a contract, people are creating and defining their own rules and obligations
Important words: Voluntary, exchange of promises, if defaulted
Freedom of contract
the parties to a contract are generally not restricted as to the terms of their contractual agreements
- must meet 5 elements of a contract
- Must meet common law requirements
Elements of a Contract
To qualify as a valid contract, an agreement must contain certain elements:
- Consensus
- Consideration
- Capacity
- Legality
- Intention
Consensus definition
an element of a valid contract; both parties must objectively know and agree to its terms through an offer and an acceptance
Mutual agreement to commit themselves to a contract
From Lecture
- Must have both ‘offer’ and ‘acceptance’ (equal void is not both apparent)
- Terms of the contract must be clear and unambiguous
- Failing to read the contract does not act as excuse
Consideration
an element of a valid contract; the price one is willing to pay for the promise set out in the offer
There must be a commitment by each party to
do something or to abstain from doing something
A commitment by each part to do something (or abstain from doing something
Capacity
an element of a valid contract; the freedom to enter into a contract, which is sometimes limited by law as is the case, for example, with minors, the
insane, the intoxicated, aliens, bankrupts, and Indians
Each party must be legally capable of understanding and entering into the agreement (i.e. infants, intoxication, insanity)
Legality
an element of a valid contract; the object and consideration of the contract must be legal and not against public policy
Must be legal and not against public policy
Intention
an element of a valid contract; the parties must objectively intend for an agreement to be legally
binding
Both parties must intend that legally enforceable obligations will result from it
Formal contract
an agreement under seal
Traditionally, a seal involved making an impression in sealing wax
Simple contract (parol contract)
a contract that may be verbal or written but is not under seal; also called a simple contract
Express contract
a contract in which the parties have expressly stated their agreement, either verbally or in writing
Implied contract
an agreement inferred from the conduct of the parties
Example: When people deposit coins in
vending machines, it can be inferred that they intend to create a contractual relationship, and thus an implied contract is in force
Valid contract
an agreement that is legally binding on both parties
Void contract
an agreement that is not legally binding because an essential element is missing, aka 1/5 of the elements are missing (goods must be returned to the seller)
Voidable contract
an agreement that has legal effect but that one of the parties has the option to end
Seller may keep the goods if title has passed
Distinction between void and voidable
If the original contract is void, the
goods must be returned to the seller. If the original contract is voidable,
the outsider has acquired good title to the goods and can keep them.
Unenforceable contract
an otherwise binding contract that the courts will not enforce, such as a contract that does not satisfy the Statute of Frauds (i.e. must be in writing)
Illegal contract
a contract that is void because it involves the performance of an unlawful act
- If this is considered the court will not assist the parties to return them to their original position.
- Example: Two drug dealers selling drugs will be assisted by the court as selling drugs is illegal which voids the contract
Bilateral Contracts
a contract in which there is an exchange of promises: both parties assume an obligation (both parties have obligations and commitments)
Example: For example, a person may offer a reward for the return of a lost item. It is not until the lost item is returned that the offer is accepted and the contract created
Unilateral Contracts
a contract formed when one party performs what has been requested by the other party; there is a promise followed by an act, but not an exchange of promises
Example: An offer of a reward for a lost item (I will give you a reward (promise) if you find my item)
LO 6.2 Explain consensus and the significance of a “meeting of the minds” PAGE 822
LO 6.2 Explain consensus and the significance of a “meeting of the minds”
The law does not recognize the
excuse that one of the contracting parties did not read the contract or that
he did not understand it.
Meaning if you do not understand the contract, tough shit
It should be stressed that a valid offer and an acceptance are not always obvious and
yet, from the conduct of the parties or other factors, it is clear that the parties have a mutual understanding.
In such circumstances, the courts
are willing to imply the existence of a contract, and no evidence of a
specific identifiable offer and acceptance is required.
Offer
LO 6.3 Describe a valid offer
Offer
LO 6.3 Describe a valid offer
Offer definition
a tentative promise to do something if another party consents to do what
the first party requests
A valid offer contains
all of the terms to be included in the contract; all
that is required of the other party is to give its consent or denial
Example: The
parties, the subject matter of the contract, any price to be paid, as well as any other important terms should all be stated in the offer.
Interim agreement
a binding contract that will subsequently be put into a more formal
document; usually referred to as an agreement of purchase and sale in a real
estate transaction
A _________ will also be binding if
all significant terms are included in it.
letter of intent (LOI)
Subject-to clauses
Subject to
a term making a contract conditional on future events
The condition which must occur prior to the contract completing (i.e. real-estate offers subject-to financing, or the ability for me to sell my house)
Quasi-contracts
a contractual relationship involving a request for goods and services
where there is no agreement on price before the service is performed;
courts impose an obligation to pay a reasonable price (quantum meruit) in
these situations
Invitation to Treat definition
an invitation to engage in the bargaining process
An offer to the world to start negotiations, not binding
Example: Most newspaper, radio, television, and internet advertisements
The typical process to create a contract
Figure 6.1
Basically goes: Invitation, negotiations, offer, counteroffer, acceptance (if no more counter offers)
Offer by Conduct
Example: A customer in a self-serve store takes the goods to be purchased to a
cashier and places the goods and money on the counter
Example: A person hails a
cab by the gesture of raising a hand and calling, “Taxi!”
However, an auctioneer’s
comment “Do I hear $50?” is merely an invitation to the people in the
audience to make an offer
Communication of an Offer
You can accept only an offer that has been communicated to you as an individual, to you as a member of a group, or to the world at large.
- You cannot accept an offer made to someone else or ne that you did not know about
- Offer crossing paths in the mail that have the same terms cannot be considered a contract
- Cannot accept an offer that you know is no longer available
- All important terms must be disclosed, so if a business wants to include disclaimer terms they must be reasonably brought to the attention of the customers at the time it is made
It should be noted that, for a contract to be _______, all important terms
must have been disclosed to the offeree
binding
The End of an Offer
There are several ways for an offer to come to
an end before acceptance.
- End of a specified time.
- Expiration of a reasonable time
- Death or insanity of offeror
- Revocation
- Rejection and counteroffer
- Illegal activity - if the activity contemplated by the contract becomes illegal before acceptance, the offer is terminated
- Good destroyed - if the goods being contracted for are destroyed prior to the acceptance of the offer, then the offer is terminated
- End of a specified time.
The offer will end at the time stated in the
offer. Note that the offeror is still free to revoke the offer before
this time expires, unless an option has been purchased.
- Expiration of a reasonable time
If no time is specified in the offer,
it will expire at the end of a reasonable time. What is reasonable
depends on the circumstances.
- Death or insanity
The offer will end even if the
offeree is unaware of the death or insanity.
Insanity
when a person cannot understand the nature or consequences of his acts
- Revocation
The offeror may revoke an offer any time
before acceptance, but the revocation must be communicated to
the offeree to be effective. (When letters are used, the revocation
is effective only when received by the offeree.)`
- Rejection and counteroffer
During the bargaining process,
several different proposals may be put forward, rejected, and then
followed by counterproposals. Each counteroffer or rejection ends
the offer before it.
Counteroffer
a new offer, the proposal of which rejects and terminates the offer
available until then
Option agreement
a subsidiary contract creating an obligation to hold an offer open for
acceptance until the expiration of a specified time
Standard form contract
a contract with fixed terms prepared by a business
Acceptance LO 6.4 Describe an effective acceptance
Acceptance LO 6.4 Describe an effective acceptance
Acceptance definition
an agreement by one party to the terms of the offer made by another
All or nothing proposition
Communication of an acceptance
Acceptance of an agreement is usually accomplished by communicating it to the offeror. It is possible, however, for an offer to be accepted by conduct.
- Sign the dotted line
- Or say “I accept”
- Or through action (ill sell you this car if you put a deposit down, and you put it down, thats acceptance through action)
- Silence is not usually accepted unless it is ongoing business (for the last 4 weeks, every week, i have bought coffee beans)
The Postbox Rule
a principle that a mailed acceptance is effective when and where it is dropped into a mailbox
-Affects date of acceptance and jurisdiction of the contract (Example, If I fly to Ontario, accept a contract, sign my name and send it off, under Ontario law the contract is set up there, unless the location if explicitly stated)
Electronic Transactions
LO 6.5 Examine electronic transactions and the formation of contracts
Electronic Transactions
LO 6.5 Examine electronic transactions and the formation of contracts
E-commerce
commercial activity using electronic communication
E-commerce legislation (in common law provinces)
specifies how the time and place of the formation of electronic contracts, including contracts negotiated via email, are to be determined
Consideration
LO 6.6 Define “consideration” and the significance of “the price you are willing to pay”
The Price You Are Willing to Pay
LO 6.6 Define “consideration” and the significance of “the price you are willing to pay”
Consideration definition
The price one commits to pay for the promise of another.
Occurs at the time the exchange of promises are made (not necessarily the time they are delivered)
Gratuitous promise definition (aka gift)
a one-sided agreement that the courts will not enforce
-Still an obligation to do a good job
Adequacy of Consideration
LO 6.7 Discuss the irrelevance of the adequacy of consideration
LO 6.7 Discuss the irrelevance of the adequacy of consideration
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
Gratuitous Promises Are Not Consideration
LO 6.8 Consider why gratuitous promises are not consideration
Gratuitous Promises Are Not
Consideration
LO 6.8 Consider why gratuitous promises are not consideration
Past consideration
something completed before an agreement is made; it is not valid consideration
Example: Verbal contract or employment contract where employees add additional tasks or duties not addressed when hired
Illegal Consideration
a promise to commit an unlawful act or to do something against public policy, which is not valid consideration and will not be enforced by a court
Example: Can you pay me in drugs
Examples of Valid Consideration
LO 6.9 Present some examples of valid consideration
Examples of Valid Consideration
LO 6.9 Present some examples of valid consideration
Quantum meruit (aka quasi-contract)
“as much as is deserved” - Latin
Court obligation for a reasonable price paid for requested services
Quasi-contract
a contractual relationship involving a request for goods and services
where there is no agreement on price before the service is performed;
courts impose an obligation to pay a reasonable price (quantum meruit) in
these situations
Exceptions to the General Rule
LO 6.10 Outline two exceptions to the general rule that
consideration is required if a promise is to be enforceable
Exceptions to the General Rule
LO 6.10 Outline two exceptions to the general rule that
consideration is required if a promise is to be enforceable
Promissory estoppel (also known as equitable estoppel)
the principle that when a gratuitous promise to do something in the future causes a person who relies on that promise to incur an expense, the promisor will not be allowed to enforce other contractual rights that
are inconstant with that promise; the promise can only be used as a defence by the promisee;
Equitable estoppel
the principle that when a gratuitous promise to do something in the future causes a person who relies on that promise to incur an expense, the promisor will not be allowed to enforce other contractual rights that
are inconstant with that promise; the promise can only be used as a defence by the promisee; also known as promissory estoppel
When a contract is sealed, _______________
consideration is not necessary
