Chapter Six

 The Role of Contract Law

 Contracts are a good example of voluntary legal relationships
 They are not legal obligations forced upon everyone like tort or criminal liability
 Parties choose to make a contract and only then become legally obligated to comply with its
terms
 Contract law empowers parties to create legal obligations that would otherwise not exist
 The Nature of a Contract
 Contracts begin with a promise, but not all promises become contracts
 Although there may be a moral obligation to keep all promises, it does not follow that there is a
legal obligation
 Contract: a set of promises that will enforce
 There are 4 basic requirements to form a legally enforceable contract: offer, acceptance,
consideration, and intention
 Nature of an Offer
 A contract does not come into existence until an offer has been made by one party and
accepted by the other party
 Offer: a description of a promise one party is willing to make, subject to the agreement of the
other party
 Offeror: the person making the offer
 Offeree: the person to whom the offer is made
 When the offeree accepts the offer by agreeing to the description of promises or requests, the
offer is transformed into a contract
 The promise is no longer tentative: both the offeror and offeree are bound to carry out their
promises
 A mere invitation to do business is not an offer capable of forming a contract
 Advertisements to sell goods at a certain price are generally mere invitations to the public to
visit the place of business
 A business is not expected to sell the goods to everyone who reads its advertisement: its supply
is limited
 However, this does not mean that advertisements can never be offers; the courts have
sometimes held them to be offers when their working reasonably favoured this interpretation
 This group of advertisements forms a very small proportion of advertisements – the exception
rather than the rule
 Case 6.1
 The Communication of an Offer
 The form of an offer is not important as long as it is heard and understood
 The offeror could say “I offer to sell you my car for $500” or “I will sell you my car for $500” or
even “Ill take $500 for my car”
 All are equally good offers containing a tentative promise to sell the car if the buyer agrees to
pay the stated price
 An offeree cannot accept an offer until she is aware of it
 Illustration 6.1
 A person for whom work has been done without his request, and without his knowledge, may
well benefit from it; but as he has not accepted any offer to do the work, he has no contractual
obligation to pay for it
 Written Offers
o Standard Form Contracts: Their Risks and Benefits
 A person receiving any one of these documents is neither asked nor expected to read, approve,
or change the terms
 Standard form contract: an offer prepared in advance by the offeror, including terms favourable
to the offeror that cannot be changed by the offeree, but must be accepted as is or rejected in
their entirety, also known as a contract of adhesion
 An offeror business is strongly tempted to disregard the interests of its offerees, the general
public, and give itself every advantage, and it rarely resists this temptation
o Required Notice of Terms
 Without legislative intervention, the courts will normally give effect to the terms of a
commercial contract freely entered into, even a contract of adhesion
 Suppose, however, that an offeree doe not know that the offer contains a certain term
 If she satisfies the court that she did not know of it, then the court will ask what steps the
business took to bring the term to the attention of its customers
 If the court finds that the business did what was reasonably necessary in the circumstances to
bring the term to the notice of its customers, then the ticket holder is bound by the term
whether she knew of it or not
 The best way of proving [that a customer has knowledge of the terms] is by a written document
signed by the party to be bound
- another way is by handing him, before or at the time of the contract, a written notice
- a prominent public notice
o Unusual or Unexpected Terms
 Unexpected or onerous terms need to be brought directly to the attention of the offeree
 Greater effort must be made to give notice of a surprising, shocking, or unusually unfair term
 The Lapse and Revocation of an Offer
o Lapse
 Lapse: the termination of an offer when the offeree fails to accept it within a specified time, or if
no time is specified, then within a reasonable time
 An offer may lapse in any of the following ways:
a. when the offeree fails to accept within a time specified in the offer
b. when the offeree fails to accept within a reasonable time, if the offer has not specified any
time limit
c. when either of the parties dies or becomes insane prior to acceptance
 Predicting what amounts to a “reasonable time” is often difficult
 To say it depends upon the circumstances of each case may not seem helpful
 The “other circumstances” include the manner in which an offer is made and whether its
wording indicates urgency
o Revocation

NOTICE OF REVOCATION
 An offeror may be able to revoke (that is, withdraw) an offer at any time before acceptance,
even when it has promised to hold the offer open for a specified time
o Options
 An offeree may obligate an offeror to keep its offer open (that is, not to revoke it) for a specified
time in a couple of ways:
1. The offer itself may specify that it is irrevocable
2. A subsequent contract called an option may be made to keep the offer open
 Option: a contract to keep an offer open for a specified time in return for a sum of money
 The offeror agrees:
1. To keep the offer open for a specified time
2. Not to make contracts with other parties that would prevent the offeror from fulfilling its
offer (that is, to give the offeree the exclusive right to accept the offer)
 Exercise an option: accept the offer contained in an option
 Rejection and Counter-Offer by the Offeree
 In business negotiations the parties often make a number of offers and counter-offers, but until
an offer by one side is accepted without alteration, modification, or condition by the other,
there is no contract; the parties have no legal obligation to one another
 When an offeree receives an offer and, though interested, choose to change some of its terms,
he has not accepted; rather, he has made a counter-offer of his own, amounting to rejection to
the offer
 The making of a counter-offer is a rejection of the earlier offer and brings it to an end
 Illustration 6.4
 The Elements of Acceptance
o Positive and Unconditional
 Acceptance must be certain and unconditional, and must be a positive act, whether in words or
in conduct
 If acceptance is by conduct, the conduct must refer unequivocally to the offer made
 Illustration 6.5
 Silence can be a sufficient mode of acceptance only if the parties have habitually used this
method to communicate acceptance in previous transactions, or have agreed between
themselves in advance that silence is sufficient
o Communication to the Offeror
 Generally speaking, an offeree must communicate acceptance to the offeror
 Some types of offers, however, can be accepted without communication because the offeror
asks only that the offeree perform an act, implying that the act will amount to acceptance
 Case 6.4
 The Carlill case also established that an offer may be made to an indefinite number of people
whose individual identities remain unknown to the offeror even after they have accepted
o The Moment of Acceptance
 The moment a contract is formed by acceptance of an offer, each party is bound to its terms
 Analyze business negotiations so that we can identify:
- who made the offer
- when it was communicated, and
- when and by whom the offer was accepted
WAYS IN WHICH AN OFFER COMES TO AN END

 Once an offer has been made, it can come to an end in a number of different ways:
- the offer may lapse when the offeree fails to accept within the time stated in the offer, or if no
time limit is stated, within a reasonable time
 The offeror revokes the offer before the offeree has accepted
 The offeror rejects the offer or makes a counter-offer
 The offeree accepts before any of the 3 above has occurred (in which case the offer ends and is
replaced by a contract between the parties)
 Transactions Between Parties at a Distance from Each Other
o Method of Acceptance
 If the offer expressly states how acceptance must be communicated, then it must be completed
in exactly that way
 When the offer is silent and the parties are at a distance, an offeree may communicate
acceptance in any reasonable way given the circumstances and the contemplation of the parties
 “postal rule” is justified in that an offeror who chooses to use the post office to send an offer is
assumed to be willing to have the same means used for acceptance, and to take a chance that
the post office will be efficient in delivering it
 When an offeror invites acceptance by mail, he may change the postal rule by stating that it will
be effective only when received
 Indeed, he may state that acceptance by letter is invalid – it must be made in person
 Terms of the offer will always override the general rules
 When instantaneous means of communication such a telephone are used, the offeror must
receive the acceptance before he is bound
 Faxed acceptance is not effective until received, and one would expect this same rule to apply to
email
 Email is deemed to be received when it is capable of being retrieved by the recipient – that is,
arrives in the mailbox
o Methods of Revocation
 It must reach the offeree
 Revocation by post is effective only when notice is usually received by the offeree, not when it is
dropped in the mailbox
o Determining the Jurisdiction Where a Contract is Made
 Jurisdiction: the province, state, or country whose laws apply to a particular situation
 The general rule is that a contract is formed at the place where the acceptance becomes
effective
 When an instantaneous means of communication such as fax, email, or telephone is used, the
contract is not formed until the offeror receives the acceptance, and that is at the place where
he receives it
 Unilateral and Bilateral Contracts
o The Offer of a Promise for a Promise
 Bilateral contract is most common
 Most offers require a promise or agreement about future performance from the offeree as the
means of acceptance
 Bilateral contract: a contract where offeror and offeree trade promises and both are bound to
perform later
 Each party is both a promisor and a promisee; each has a future obligation to perform as well as
a right to performance by the other
 Promisor: a party who is under obligation to perform a promise according to the terms of the
contract
 Promisee: a party who has the right to performance according to the terms of the contract
o The Offer of a Promise for an Act
 Less often, an offer is accepted by performance
 An offer may invite acceptance simply by the offeree performing its conditions without first
communicating acceptance
 When offers are of a type that can be accepted by performance without prior communication,
the resulting contract is called unilateral contract
 Unilateral contract: a contract in which the offer is accepted by performing an act or series of
acts required by the terms of the offer
 Formation of Internet Contracts
 New statutory provisions may, in fact, alter the traditional rules of offer and acceptance in
internet contracts
 Some etailers specifically design their websites with multiple acceptances before a “submit”
icon is finally clicked
 This would appear to satisfy the legislative “agreements of terms” requirement before the
entire offer to purchase is submitted
 The contract is not formed until the retailer communicates acceptance with a confirmation
number
 Uncertainty in the Wording of an Offer
 A vague offer may prove to be no offer at all, and the intended acceptance of it cannot then
form a contract
 A court may find the agreement too ambiguous and uncertain to be enforced
 A court will not enforce an agreement to agree; there must be certainty about essential terms
 Where the parties have agreed on the quantity, the Sale of Goods Act provides that the price in
a contract of sale of goods “may be left to be fixed in manner thereby agreed, or may be
determined by the course of dealing between the parties” and that “Where the price is not
determined in accordance with the foregoing provisions the buyer must pay a reasonable price”
 Case 6.6

 Chapter 7

 The Meaning of Consideration

 An accepted offer is not an enforceable contract unless it has consideration
 The accepted offer must form a bargain – where each party pays a price or gives value for the
promise obtained from the other party
 Bargain: each party pays a price for the promise of the other
 In a unilateral contract, the price paid for each party’s promise is the promise of the other
 This price is called consideration
 In short, consideration is “the price for which the promise [or the act] of the other is bought”
 Consideration: the price for which the promise of the other is bought
 Illustration 7.1
 Gratuitous Promises
 Consideration is necessary to make a contract legally binding
 A promise made in the absence of a bargain is called a gratuitous promise
 Gratuitous promise: a promise made without bargaining for or accepting anything in return
 A promise to make a gift and a promise to perform services without remuneration are common
examples of gratuitous promises
 Such arrangements are not legal contracts
 The law does not prevent performance of a gratuitous promise
 It simply does nothing to help if the promisor does not perform; the promise has no legal
remedy
 Adequacy of Consideration
 Something of value – even a peppercorn
 While the consideration given in return for a promise must have some value, the court does not
make sure the parties have made a fair bargain
 If a party agreed to a grossly inadequate consideration for his promise, then that was up to him
 It is not the task of the courts to assess the adequacy of the consideration; relative value is too
subjective a concept
 If there is some allegation of wrongdoing by one party, a court might look at adequacy of
consideration because it might point to fraud, duress, or undue influence exerted on the
promisor
 There would need to be other evidence of fraud before the court would hold that the promise is
voidable at the promisor’s option
 Courts have become increasingly concerned with protecting the interests of weak parties such
as consumers form unconscionable conduct
 Motive Contrasted with Consideration: Past Consideration (is no consideration)
 Case 7.2
 If one person promises to reward another who has previously done an act gratuitously or given
something of value, the promise is not binding
 Past consideration: a gratuitous benefit previously conferred upon a promisor
 “past consideration” is no consideration at all
 Relation Between Existing Legal Duty and Consideration
 Where A has an existing contractual duty to B, a later promise by B to pay A something extra to
perform that obligation is not binding
 Performance by A is not good consideration for the later promise because A was already
contractually bound to perform
 Indeed, A’s failure to do so would have been a breach of contract
 The situation sometimes arises where one party threatens to default on its obligation to
perform and leave the other party to sue for breach
 A common example occurs in construction projects
 Illustration 7.2
 Canadian courts take the view that this conduct is a form of economic blackmail by the party
threatening to abandon the contract, and so they hold that there is no consideration for the
promise to pay an extra sum
 However, a supplier intent on economic blackmail can still exact a legally enforceable promise
from its customer to pay an increased price by delivering a paperclip (or any other item of
negligible value) to her in return for the promise, or by insisting that the customer make her
promise under seal
 Illustration 7.3
 Gratuitous Reduction of a Debt
 The rule in Foakes v. Beer can be avoided in several ways
1. Early payment before the due date is sufficient new consideration to make an agreed
reduction in the debt binding on the creditor
2. Second, the rule in Foakes v. Beer applies only to payments of money. It does not apply to the
transfer of goods or to the provision of services.
3. Third, the rule in Foakes v. Beer applies only to agreements between a creditor and debtor.
4. The rule in Foakes v Beer is avoided if the creditor agrees in writing and under seal to reduce
the debt (no consideration)
5. The rule in Foakes v Beer has been restricted by statute. Under these acts, when a creditor
accepts part performance (that is, a lesser sum of money) in settlement of a debt and the debtor
actually pays the reduced amount, the entire debt is extinguished
 Equitable Estoppel
o Estoppel Based on Fact
 When one person asserts as true a certain statement of fact and another relies on that
statement to his detriment, the maker of the statement will be estopped (prevented) from
denying the truth of his original statement in a court of law, even if it turns out to have been
untrue
 The Effect of a Request for Goods or Services
 When one person requests the services of another and the other performs those services, the
law implies a promise to pay
 Such a promise is implied between strangers or even between friends, if the services are
rendered in a customary business transaction
 Even though neither party mentions price, the implied promise is for payment of what the
services are reasonably worth – that is, for payment quantum meruit
 See page 288 and example on 162
 The Use of a Seal
 Covenantor: one who makes a covenant
 Document under seal: a covenant recorded in a document containing a wax seal, showing that
the covenantor adopted the document as his act and deed
 A seal must be affixed (or the word “seal” written) on the document at the time the party signs
it
 **a promise made properly under the seal of the promisor does not require consideration to
make it binding
 Any offer may be made under seal and so becomes irrevocable
 When a business firm or public body invites tenders and requires them to be submitted under
the seal of the tenderer, the legal effect is much the same as when an option is given: the
tenderer cannot withdraw without being liable in damages
 Intention to Create Legal Relations
 Even when an apparently valid offer has been accepted and consideration is present, there is no
contract formed unless both sides intended to create a legally enforceable agreement
 There must be agreement on all the essential terms of the deal and a mutual intention to create
a legally binding contract
 Since parties do not ordinarily think about the legal effects of their bargains, the law presumes
that the necessary intention is present in almost all instances where an agreement appears to
be seriously made
 A presumption in favour of an intention to contract also arises where parties have signed a
commercial document
 A defendant may rebut (overcome) the presumption by using the external or objective test of
the reasonable bystander: if to such a person the outward conduct of the parties lacked a
serious intention to make an agreement, then no binding contract results
 It is easier to rebut the presumption in arrangements between friends or members of a family
 Read page 156