1. CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 3 The Formation of a Valid Contract

2. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-1 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 CH 3

3. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-2 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Elements of a Valid Contract Contract – an agreement enforceable at law A valid contract consists of six elements: 1.Intention to create a legal relationship 2.Offer 3.Acceptance 4.Consideration 5.Capacity to contract 6.Legality 3.2

4. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 3.3

5. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-4 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Intention of the Parties Figure 3-1

6. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-5 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Intention To Create A Legal Relationship (Cont’d) 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 3.3

7. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-6 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Intention To Create A Legal Relationship (Cont’d) 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 3.3

8. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-7 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance Figure 3-2

9. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-8 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 3.4

10. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-9 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Acceptance Figure 3-3

11. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-10 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) 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 3.4

12. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-11 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) 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? 3.4

13. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-12 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) Acceptance of an Offer 4. Unilateral agreements  Acceptance is by performance of an act What examples are there of unilateral contracts? 3.4

14. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-13 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) 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) 3.4

15. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-14 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) 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 3.4

16. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-15 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Offer and Acceptance (Cont’d) 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 3.4

17. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-16 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Consideration Essential element of contract: Both parties must receive something in return No consideration - promise is gratuitous, and not legally binding (a gift) 3.5

18. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-17 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Consideration (Cont’d) 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 3.5

19. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-18 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Consideration (Cont’d) 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 3.5

20. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-19 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Consideration (Cont’d) 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? 3.5

21. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Consideration (Cont’d) 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 3.5

22. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-21 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 3.6

23. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-22 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 3.8

24. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-23 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Capacity to Contract (Cont’d) 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 person’s attention  Incapable of knowing his or her actions when entering the contract  Other party knew of the condition 3.8

25. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-24 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Capacity to Contract (Cont’d) 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) 3.8

26. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-25 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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? 3.9

27. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-26 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Legality Contracts in restraint of trade Void & unenforceable if Undue and unreasonable restraints contrary to the Competition Act 3.9

28. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-27 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 3.10

29. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-28 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Contracts in Restraint of Trade (Cont’d) 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 employee’s opportunities or their use of skill and knowledge  Restrictions during employment are usually valid as employee should devote energy to employment 3.10

30. Essentials of Canadian Business Law, 1st Canadian EditionSlide 3-29 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 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 CH 3