Forming Contractual Relationships

Basic elements of a contract:

an agreement (comprised of an offer and an acceptance)

complete (i.e. certain as to all essential terms) deliberate (i.e. parties must intend to create legal

relations) mutual consideration

1. Offer

Definition: An offer is a promise to enter into a contract, on specific terms, as soon as the offer is accepted.

Only a complete offer can form the basis of a contract; that is, all of the essential terms (price, delivery date, quantity, method of payment, etc.) must be clearly specified.

Offer distinguished from Invitation to Treat

Advertisements generally are

not classified as offers. (except: Carbolic Smoke Ball ad)

Product displays are

not offers

The key factor in deciding whether an offer has been made:

If the purported offer is sufficiently comprehensive (i.e. complete as to essential terms) that it can be accepted without further elaboration or clarification, it is an offer in law.

Five ways an offer may be terminated:

i. revocation

ii. lapse

iii. rejection

iv. counteroffer

v. death or insanity

Revocation

Rule: The offeror can revoke his offer at any time simply by notifying the offeree of its withdrawal.

Revocation in the context of a firm offer (i.e. an offer stated to be open for a fixed period of time)

Revocation in the context of a tendering contract

Revocation in the context of a firm offer

Rule in Dickinson vs. Dodds – firm offers can be revoked prior to their deadlines, even through a reliable third party source.

Such a promise is enforceable only if:

a. the other party has purchased it; or

b. otherwise has given the offeror something in return for the commitment.

Avoiding the rule in Dickinson vs. Dodds

One way to avoid the rule in Dickinson vs. Dodds is through the use of an option agreement.

Three principle features of an option:

i)     exclusivity and irrevocability of the offer to sell within the time period specified in the option;

ii)    specification of how the contract of sale may be created by the option holder; and

iii)   an obligation of the parties to enter into a contract of the sale if the option is exercised.

2. Acceptance

To be legally effective, an acceptance must:

 

a. demonstrate an unqualified and complete willingness to enter into the contract on the precise terms contained in the offer; otherwise it is a counteroffer.

b. be communicated to the offeror.

rule: acceptance is effective only when communicated

exception: the ‘postal rule’

 

When will the ‘postal rule’ be applied? Factors considered: parties’ intentions sound business practice who should bear the risk

3. Consideration

Defined: Something of value that represents the ‘price’ paid for the other party’s promise. Consideration is the key ingredient that distinguishes a legally enforceable promise from one which is not enforceable.

Important points: A promise not supported by consideration can be broken

with impunity in law.

A pre-existing duty is no consideration; accordingly, all variations of a contract must be supported by fresh consideration.

Variation of Contracts

Traditional Rule: All variations of a contract must be supported by fresh consideration.

Recently, however, the New Brunswick Court of Appeal ruled that a contractual variation unsupported by consideration – provided it is not procured by economic duress.

Rule: a promise not supported by consideration can be broken with impunity.

Three Exceptions:

1. promise under seal (e.g. personal guarantee)

2. promissory estoppel

3. part payment of debt

Promise under seal

If a document containing the promise is signed and sealed, the fact that there may not be consideration for the promise is irrelevant.

Contracts of guarantee are one of the most common examples of promises under seal.

Example: a shareholder of a corporation will be required to execute a personal guarantee as collateral for a bank loan direct to the corporation.

Promissory Estoppel

Without a seal, a gratuitous promise, traditionally, was unenforceable at common law, even if made with great deliberation and regardless of adverse consequences.

In response to the harshness of this rule courts of equity developed the doctrine of promissory estoppel.

A party seeking the aid of this doctrine (i.e. the promisee) must prove:

i. The promissor, by words or conduct, made a promise or an asurance that was intended to affect the parties’ legal relationship and to be acted upon;

ii. The promisee relied on the representation to his detriment;

iii. The promisee’s own conduct is beyond reproach, making him eligible for equitable treatment.