CHAPTER

3 The Formation of a Valid Contract

PowerPoint Presentation Prepared By Susan McManus, Mount Royal College

2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

CH 3

LEARNING OBJECTIVES
Examine the role of contracts in business Understand the elements of a valid contract Determine how contracts are formed Outline the rules relating to the creation of a valid contract

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3.2

Elements of a Valid Contract

Contract an agreement enforceable at law A valid contract consists of six elements:
1. 2. 3. 4. 5. 6. Intention to create a legal relationship Offer Acceptance Consideration Capacity to contract Legality

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3.3

Intention To Create A Legal Relationship

Presumption at law: parties in any commercial transaction make promises with the intention to become legally obligated to fulfill them Intention is not presumed by family members, and if contested the court will review the statements from a reasonable person point of view

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Figure 3-1

Intention of the Parties

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3.3

Intention To Create A Legal Relationship (Contd)

Advertisements and goods on display are not normally enforceable promises as advertisers usually only attempt to describe or present their goods
Courts will review all facts and did in fact find there was a valid contract in Carlill v. Carbolic Smoke Ball Co. @ page 65

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3.3

Intention To Create A Legal Relationship (Contd)

Invitation to do business Invites the public (offeror) to make offers, which the seller (offeree) can accept or reject Advertisements and displays of goods, even with prices

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Figure 3-2

Offer and Acceptance

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3.4

Offer and Acceptance

Offer and Acceptance: Offeror makes a tentative promise subject to a condition, which is not binding until accepted Offeree receives the offer and may accept, reject or counter-offer Communication of an Offer 1. Must be communicated to the offeree 2. Only the specific offeree may accept

Essentials of Canadian Business Law, 1st Canadian Edition

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Figure 3-3

Forms of Acceptance

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3.4

Offer and Acceptance (Contd)

Acceptance of an Offer 1. Acceptance must be communicated to the offeror in the manner requested or implied in the offer, and will be complete when the offeror is made aware
Mail acceptance occurs when placed in the postbox All other modes of communication acceptance occurs when the offeror is aware, usually receipt of acceptance

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3.4

Offer and Acceptance (Contd)

Acceptance of an Offer 2. Acceptance must be unconditional
Any change is a counter-offer

3. Silence cannot be considered acceptance unless there is a pre-existing agreement

Consumer legislation protects against this type of stipulation
What could happen if silence could be deemed acceptance of an offer?

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3.4

Offer and Acceptance (Contd)

Acceptance of an Offer 4. Unilateral agreements
Acceptance is by performance of an act
What examples are there of unilateral contracts?

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3.4

Offer and Acceptance (Contd)

Lapse of an Offer Death, insanity or bankruptcy of either party before acceptance Rejection Counter-offer: any changes to the offer by the offeree No acceptance within a reasonable time (dependent upon facts or within a set time-limit)

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3.4

Offer and Acceptance (Contd)

Revocation of an Offer Offeror may actively revoke (withdraw) the offer any time before acceptance
Agreement by the offeror to keep the offer open for a specified time is gratuitous and not binding

An option (by payment or under seal) is used to ensure the offer will not be revoked

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3.4

Offer and Acceptance (Contd)

Revocation of an Offer Offeree must be aware of the revocation before acceptance
Receive revocation notice, including a letter of revocation Indirect notice
From a reliable source Offeror must prove the offeree would know of the revocation

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3.5

Consideration
Essential element of contract: Both parties must receive something in return No consideration - promise is gratuitous, and not legally binding (a gift)

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3.5

Consideration (Contd)
Seal gives a contract consideration when affixed at the time of signing
Forms may include gummed wafer to corporate seals

Tenders offers made in response to a call for tenders, usually required to be irrevocable under seal

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3.5

Consideration (Contd)
Adequacy Must be of value, but courts will not look into fairness of the price Must be present or future promise Past consideration: promise based on something already received - gratuitous promise and not binding Promise based on entitlement by law or contract gratuitous promise

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3.5

Consideration (Contd)
Adequacy Goods or services received or provided with no set price may have the court determine a reasonable price
How could parties deliver goods or provide services without settling on a price or other consideration?

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3.5

Consideration (Contd)
Debtor-Creditor Agreement to take less is gratuitous promise Binding if:
Written & sealed Payment before the due date Third party pays

Legislation binds creditors to lesser amounts

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3.6

The Debtor-Credit Relationship

Debtor Creditor Relationship & Consideration Consolidation schemes have consideration, as the promise by all creditors to take less is the exchange of promises Equitable or Promissory Estoppel
Defence by the debtor against a claim to enforce the contract Promisee must prove reliance on the truth of the gratuitous promise to his or her detriment

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3.8

Capacity to Contract
Law offers protection for classes of persons

1. Minors: under age set out in legislation (18 or

19 years)

Not liable under most contracts Necessaries: liable for a reasonable price Non-necessaries
If not fully performed, may repudiate Long term and continuing nature must be repudiated upon reaching majority Not of continuing nature must be ratified

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3.8

Capacity to Contract (Contd)

2. Drunken and Mentally Impaired Persons Necessaries: bound if reasonable price Non-necessaries: may be avoided as soon as the contract is brought to the persons attention
Incapable of knowing his or her actions when entering the contract Other party knew of the condition

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3.8

Capacity to Contract (Contd)

3. Corporations Created by statute and may have limitations on ability to contract by legislation or incorporating documents 4. Labour Unions Created by statute and have specific abilities to contract 5. Bankrupt Persons Created under statute and have limitations to enter contracts (necessaries only and must reveal bankrupt status)

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3.9

Legality
Contracts that offend public policy are unenforceable (void and have no rights enforced) are prohibited by statute may also be illegal, as well as unenforceable, and subject to fines and penalties
What types of contracts are unenforceable, illegal or both?

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3.9

Legality
Contracts in restraint of trade Void & unenforceable if Undue and unreasonable restraints contrary to the Competition Act

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3.10

Contracts in Restraint of Trade

Restrictive Agreements

1. Sale of a Business: restriction of

competition is used to give value to goodwill

Courts may sever parts of the agreement, but will NOT rewrite the terms Restrictions must be reasonable as to
Geographical and time restraints Public interest not adversely affected

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3.10

Contracts in Restraint of Trade (Contd)

Restrictive Covenants

2. Employment: not to compete protection of business practices and business secrets

generally void unless
serious harm to employer reasonable restraints not limiting employees opportunities or their use of skill and knowledge

Restrictions during employment are usually valid as employee should devote energy to employment

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CH 3

SUMMARY
Six essential elements to form an enforceable contract 1. Intention: presumed unless otherwise demonstrated 2. & 3. Valid offer with complete acceptance 4. Consideration: exchange of promises 5. Capacity: protection of specific classes minors, drunken persons, and persons with mental impairment 6. Legality: must not offend statutes or public policy, which includes contracts in restraint of trade

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