Copyright © 2005 Pearson Education Canada Inc. Business Law in Canada, 7/e, Chapter 5 Business Law in Canada, 7/e Chapter 5 Formation of Contracts 5-1

Copyright © 2005 Pearson Education Canada Inc.

Business Law in Canada, 7/e, Chapter 5

Business Law in Canada, 7/e

Chapter 5Formation of Contracts

5-1



Contract Law

A contract is a voluntary exchange of promises, creating obligations which, if defaulted on, can be enforced and remedied by the courts.

Primary concern of the courts is to enforce the reasonable expectations of the parties

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Ingredients of a Contract

1. Consensus 2. Consideration 3. Capacity

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4. Legality 5. Intention 6. Writing (Note that writing is not

required for a contract to exist.)

To be enforceable in court an agreement must meet the following qualifications.



Consensus

A meeting of the minds of contracting parties• share an understanding of the bargain struck• be willing to commit themselves to terms• terms must be unambiguous• failure to read a contract is no excuse

Comprised of Offer and Acceptance

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Offer

Offer must contain:• terms of the contract• a communication of willingness

to be bound• terms of offer must be clear• terms can be implied

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Invitation to Treat

An invitation to the general public to engage in the bargaining process • advertisements or sales promotions are not

binding offers• articles displayed for sale are not

offers but merely invitations for customers to offer to pay the price of the item

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Communication of an Offer

An offer must be communicated Disclaimers of responsibility must be posted

in plain sight or printed on back of tickets Only the person or group to whom offer is

made can accept it.

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End of an Offer

Offer ends at a specified time or after a reasonable time if not specified At the death or insanity of offeror When it is revoked before acceptance and

the revocation is communicated to offeree When offer is rejected or counteroffer is put

forward

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Question for Discussion

The possibility of revoking an offer should not be available in some situations.• For example the requesting of tenders

Is it reasonable to deny the seller in such a circumstance the right to withdraw the offer? How are such problems overcome?

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Question for Discussion/2

The law assumes that parties to a contract are in equal bargaining positions.

This is not always the case especially when individuals contract with large businesses like department stores and banks.

How does the law remedy the inequities that can occur in such contractual relationships?

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Case Summary

Dickinson v. Dodds• Dodds offered to sell Dickinson his land with the offer

open to a specified time. He sold the property to someone else before that time.

• Dickinson learned that he had sold it but accepted the offer before the deadline and then sued for compensation.

• Had Dickinson not known of Dodds’ revocation, Dodds would have been liable for the breach

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Acceptance

Must be unconditional• must not specify any new terms • court will interpret any ambiguities in the offer

to give effect to the intentions of the parties• will not overcome the defect of an incomplete

or defective offer

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Communication of Acceptance

Usually by communication to the offeror• effective at time acceptance is communicated

Sometimes by conduct By performance of the act stipulated in offer Silence is not acceptance unless part of on-

going business relationship Note negative-option schemes

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Post Box Rule

When acceptance is mailed, it is effective when and where it is posted

Rule applies only when response by mail is appropriate

New methods of communicationmakes the expansion of the postbox rule unnecessary

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Consider the problems that new methods of communication bring to determining the presence of consensus in a contract.

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Continued on 5-16



Question for Discussion/2

Electronic mail, for example, might make it difficult to distinguish between an offer and an invitation to treat, or when it has been revoked. How might these difficulties be resolved by the courts?

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Consideration

The price one is willing to pay for a promise. All parties must derive some benefit from the deal. Consideration must be:

Continued on 5-18

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Consideration/2

• specific - not necessarily money• legal• in the present• one-sided promises not enforceable• exception - promissory estoppel.

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Adequacy of Consideration

Need not be fair but unfair consideration may indicate insanity or fraud

Must be specific - the price for the product or service must be stated or in some limited situations a reasonable price will be implied.

Existing Duty - a change in the contract requires new consideration

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Exceptions

Paying less to satisfy a debt

Settlement out of court

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Request for services

Promissory estoppel

Sealed documents




Invoking the principle of promissory estoppel or placing a legal seal on a document that is evidence of a contract eliminates the need to have consideration.

Are these reasonable exceptions to the rule or should consideration even be considered a necessary element to a binding contract?

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Case for Discussion

The owner of a marina promised to give a friend a boat whichwould be delivered to him 6 months later.

Continued on 5-23

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Case Summary/2

In the meantime the owner recommended that his friend reserve moorage at his marina in order to ensure a spot when he took possession of the boat.

The friend did so and then the owner reneged on his promise to give him the boat but wanted payment for the reserved moorage.

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Documents

Copyright © 2005 Pearson Education Canada Inc. Business Law in Canada, 7/e, Chapter 5 Business Law in Canada, 7/e Chapter 5 Formation of Contracts 5-1