Legal Fundamentals

for Canadian Business

Fourth Edition

Chapter 3
Formation of
Contracts

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 Learning Objectives
• List the essential elements of a contract
• Describe the process by which consensus is reached
• What is a valid offer and effective acceptance
• Explain the principle of consideration
• Consider gratuitous promises and promissory
estoppel
• Recall the requirements of capacity and legality
• Define the element of intention
• Determine whether a written document is required
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 Contract
• Contract – a voluntary exchange of promises or
commitments that are enforceable in our courts
• Contract law mostly developed in the courts
– Some statutory modifications, e.g. consumer protection
and sale of goods legislation

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 Consensus
• Process of offer and acceptance
• Parties come to a common understanding
• Terms must be clear and unambiguous

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 Offer
• Tentative promise that contains the terms of the
anticipated contract
• Invitations to treat are not offers
– Most advertisements, catalogues, displays
• Offer must contain all important terms
– Essential to clearly stipulate parties, property, and price
(“the three P’s”)
– Other terms may also be required
(Continued)

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 Offer
(Continued)

• Need not be in writing

– May be verbal or implied by conduct
• Exemption clauses must be communicated
– Must be communicated at the time of entering the
contract, not later
– May be on receipt, sign, or any way that it is brought to
the attention of the other party

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 End of Offer
• End of specific time
• End of reasonable time
• Death or insanity of offeror
• Revocation (if communicated)
• Rejection
• Counter-offer (acts as rejection)
• Option agreement – keeps offer open for a
specified time

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 Standard Form Contracts
• No bargaining power
• Ambiguities interpreted in favour of the party
forced to accept the terms
• May be controlled by statute

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 Acceptance
• Acceptance – commitment by offeree to be bound
by terms of offer
• Must be complete and unconditional
– Addition of any terms = counter-offer
• Must be communicated
– Contract effective when and where communicated

(Continued)

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 Acceptance
(Continued)

• If specific form of acceptance required, must

comply or acceptance ineffective
• Unilateral contract
– Acceptance is performance of contract
– Example: reward posters
• Silence is not usually acceptance
– May be implied by conduct

(Continued)

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 Acceptance
(Continued)

• Post-box rule
– Exception to rule that acceptance must be
communicated
– Where use of mail is a reasonable form of acceptance,
acceptance is effective when and where posted
– Also applies to telegrams and possibly couriers
– Does not apply to facsimile or email

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 Consideration
• An exchange of benefits is required
• May be money, services, goods, promises
• One-sided promises (gratuitous promises) are not
enforceable
• Need not be reasonable, but benefit must be
specific

(Continued)

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 Consideration
(Continued)

• Must be possible, legal, and of some value

• Exception for services – quantum meruit –must
pay a reasonable amount for services requested
and received
• If consideration has already been given, it cannot
support a new contract (i.e. “past consideration is
no consideration”)

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 Consideration
(Continued)

• Parties can change contract obligations, but all

parties must receive “new” consideration
• Gratuitous promises not binding on promisor with
some exceptions:
– Taking less in full satisfaction of debt is binding by
statute
– Promissory Estoppel – reliance on gratuitous promise
may be used as a defence only
– With a seal, no need to establish consideration

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 Void/Voidable Contracts
• Void
– There never was a contract
– Both parties are free from obligations
• Voidable
– One party has the right to escape the contract (called
rescission); contract valid until this is done

(Continued)

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 Void/Voidable Contracts
(Continued)

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 Capacity
• Infants – voidable contract
– Anyone under the age of majority
– Contract is binding on the adult, but not on the infant
– Exceptions in many provinces for necessities and
beneficial contracts of service (but not in B.C.)
– If infant ratifies contract (in writing or by implication)
after becoming an adult, he/she is bound
– Infants liable for their own torts

(Continued)

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 Capacity
(Continued)

• Insanity or intoxication - To escape a contract for

non-necessities
– You must show you were so insane/intoxicated that you
did not understand transaction and
– Other party to contract knew or should have known of
the insanity/intoxication and
– You must repudiate contract as soon as possible when
sanity/sobriety is regained

(Continued)

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 Capacity
(Continued)

• Statutory bodies may have limited capacity

– e.g., Crown corporations, municipalities, universities
• Foreign governments and representatives
– Diplomatic immunity
• Status Indians under the current Indian Act
– Capacity is limited to some extent to protect from
exploitation

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 Legality
• Contracts that have unlawful objective or illegal
consideration are void
• Legality may be set out in statutes
• Insurance contracts must be intended to cover a
loss
• Competition Act states agreements that unduly
limit competition are prohibited

(Continued)

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 Legality
(Continued)

• Restrictive covenants permissible only if

– Reasonable limit in time
– Reasonable limit in area
– Public interest is not harmed
• Courts usually won’t enforce restrictive covenant
against employees if it prevents earning a living

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 Intention
• Parties must intend legal consequences to result
from contract
• Would a reasonable person have thought he/she
was entering into binding contract?

(Continued)

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 Intention
(Continued)

• Presumptions
– Domestic/Social relationships
• No intention to be bound
– Commercial relationships
• Intention to be bound
– May be rebutted
• Apply reasonable person test

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 Requirement of Writing
• Always good practice to put contract in writing
• Verbal contract often just as binding in law
• Requirement of writing varies by jurisdiction (i.e.,
set by statute)
• Most jurisdictions have electronic documents acts

(Continued)

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 Requirement of Writing
(Continued)

• Statute of Frauds requires certain transactions be

written
– e.g., purchase of land, long-term leases, assuming
responsibility for debt, contracts over one year,
marriage contracts, sales of goods of certain value
• When writing is required but absent, contract is
unenforceable
• Part performance may satisfy requirement for
writing
– Only if consistent with existence of agreement
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