CHAPTER 3: FORMANTION OF A CONTRACT Emond Montgomery Publications 1

Chapter 3: Formation of a Contract LEARNING OUTCOMES Explain the “reasonable person” test for determining whether a party intended to be legally bound by his or her promise. Describe the features of a valid offer, counteroffer, and acceptance and explain how the effective timing of an offer and acceptance is determined. Understand how an offer can effectively be revoked and how an offer can lapse. Define “consideration” and describe the qualities of valid consideration. Emond Montgomery Publications 2

Chapter 3: Formation of a Contract LEARNING OUTCOMES (CONT’D) Explain how consideration is treated in debtor–creditor relationships, under circumstances where a party gratuitously promises to make a charitable donation, and where the parties have not explicitly defined the quantum of payment for a service. Define “estoppel” and explain how the doctrine of estoppel is relevant to contract law. Understand the current state of the law with respect to e-commerce and the matters that parties engaged in e-commerce may need to consider. Emond Montgomery Publications 3

Elements of a Valid Contract Essential elements of a contract: 1. The intention to create a legal relationship 2. Offer and acceptance of the offer 3. An exchange of something of value (“consideration”) 4. Legality If any of the essential elements are missing the contract is considered void Emond Montgomery Publications 4

Intention to Create a Legal Relationship A contract is the result of a meeting of the parties’ minds The promisor must intend to be bound by the promise he or she has made The law presumes that promisors intend to the bound by the promises that they make Once the presumption has been made the burden of proof shifts to the promisor to prove that the intention did not exist Test: “Would a reasonable person hearing the promise assume that the promisor intended to be bound?” Emond Montgomery Publications 5

Intention to Create a Legal Relationship (cont’d) An arm’s length transaction is generally presumed to be binding Example: commercial business dealings A non-arm’s length transaction many not be considered binding Example: promises made between family members Emond Montgomery Publications 6

Offer and Acceptance NATURE OF THE OFFER A valid contract requires that the offeror make and offer which is accepted by the offeree The offer must contrail all the terms of the contract The initial offer is tentative Note: advertisements are generally not considered offers Emond Montgomery Publications 7

Offer and Acceptance (cont’d) COMMUNICATION OF AN OFFER There is no particular format in which an offer must be made The offer must be understood by the offeree Offer can be verbal, in writing or non-verbal General rules: The offer must be communicated to the offeree before it is capable of being accepted Only the person to whom the offer is made may accept the offer, even if others are aware of it Emond Montgomery Publications 8

Offer and Acceptance (cont’d) ACCEPTANCE OF AN OFFER Acceptance may be verbal, in writing or inferred from the conduct of the parties Rules of valid acceptance: 1. Acceptance must be communicated 2. Acceptances must be clear, unequivocal and unconditional Emond Montgomery Publications 9

Offer and Acceptance (cont’d) COMMUNICATION OF THE ACCEPTANCE If the offer states the manner of acceptance then the acceptance must be in the requested manner If the offer does not state the manner of acceptance the courts will look at variables to determine acceptance Examples of variables include: industry practice, the form of the offer or historic dealings between the parties In some cases silence or performance of the terms of the contract will be considered acceptance Rules for determining communication of acceptance Verbal acceptance: acceptance occurs when the words are spoke Written acceptance: “postal acceptance rule” applies Emond Montgomery Publications 10

Offer and Acceptance COUNTEROFFERS AND INQUIRIES A counteroffer is a response by the offeree that does not unconditionally accept the terms of the offer but proposes to add or modify the terms Note: once a counteroffer is made original offer is rejected An inquiry is the questioning by the offeree as to whether the offeror will consider other terms or is willing to modify the offer Note: an inquiry is not a counteroffer and not a rejection of the original offer Emond Montgomery Publications 11

Offer and Acceptance (cont’d) LAPSE AND REVOCATION OF AN OFFER Offers that lapse or are revoked are considered a nullity and cannot be accepted Four conditions under which an offer may lapse: 1. Either party dies, declares bankruptcy or is declared insane prior to acceptance 2. Rejection or counteroffer made by offeree 3. Failure to accept offer within time period set out in offer 4. Failure to accept the offer within a reasonable time period The offeror can revoke the offer anytime prior to acceptance. Revocation must be communicated to the offeree. Emond Montgomery Publications 12

Consideration A contract is a bargain in which each party gets something in return for his or her promise to perform the obligation in the contract Consideration is the price—which must be something of value—paid in return for a promise Examples: money, an agreement to refrain from doing something, the exchange of goods or services, etc. The consideration in a contract must be legal Emond Montgomery Publications 13

Consideration (cont’d) GRATUITOUS PROMISES A gratuitous promise is a promise made by someone who does not receive consideration for it The courts will generally not enforce a gratuitous promise, because they are not contracts Examples of gratuitous promises that may be enforced: Promises to donate to charity Gratuitous promise made under seal Emond Montgomery Publications 14

Consideration (cont’d) ESTOPPEL BASED ON FACT If a person asserts a statement of fact as true and another relies on that statement to his detriment, the maker of the statement will be estopped from denying the truth of the statement in court Emond Montgomery Publications 15

Consideration (cont’d) PROMISSORY ESTOPPEL Promissory estoppel: rule whereby a person is prevented from denying the truth of a statement of fact made by him where another person has relied on that statement and acted accordingly Five requisite elements: 1. Existing legal relationship 2. Clear promise or representation 3. Reliance 4. Action resulting in detriment 5. Promisee must have acted equitably Emond Montgomery Publications 16

Consideration (cont’d) ADEQUACY OF CONSIDERATION Consideration must have some value, however the courts have held that they will not examine the adequacy of consideration Only where consideration is grossly inadequate AND the existence of fraud, undue influence or duress can be proven will the courts deem a contract unenforceable Emond Montgomery Publications 17

Consideration (cont’d) PAST CONSIDERATION Consideration must be something received the instant the promise is made or at a future date Example: payment of money at the time the contract is made Consideration cannot be something that a person received before the promise was made Example: a gift that had be previously given the offeror Emond Montgomery Publications 18

Consideration (cont’d) EXISTING LEGAL OBLIGATION A promise to do something that a party is already obligated to do cannot be consideration A promise to do something under one contract cannot also be consideration under a second contract. There must be fresh consideration Agreeing to something that a party is legally obligated to do under statute cannot be consideration Emond Montgomery Publications 19

Consideration (cont’d) DEBTOR-CREDITOR RELATIONSHIPS Requirement for fresh consideration can lead to unfair results in debtor-creditor relationships Debtor is obligated to pay creditor a sum of money and this obligation is discharge once full sum of money is paid Statutes have been passed to allow debtors and creditors to enter into agreements to allow the debtor to pay less than the total owed Emond Montgomery Publications 20

Consideration (cont’d) QUANTUM MERUIT Quantum meruit: an equitable doctrine that states that no one should unjustly benefit from the labour and materials of another In such circumstances, the law will imply a promise to pay a reasonable amount, even in the absence of a contractual term for a price A reasonable amount is determined by looking at the prices charged by similar suppliers Emond Montgomery Publications 21

ELECTRONIC COMMERCE Traditional contract law applies to Internet transactions New legislation has also been passed to address recent problems with e-commerce Common concerns for contracting parties involved in e- commerce are: 1. Authenticity of documents and electronic signatures 2. Place to resolve disputes when the parties to a contract are from different regions 3. Laws that apply when contracting parties are from different countries 4. The time the contract was created 5. Access to parties’ personal information Emond Montgomery Publications 22