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BUS 1044


1. Which of the following is not a source of law?

A. Statutes
B. Common Law
C. Law of Equity
D. Paramountcy

2. Section 91 of the BNA Act 1867 gives the ______________ government

power over __________________?

A. Federal; Education
B. Provincial; Healthcare
C. Federal; Banking and Money issues
D. Provincial; Matters of local commerce

3. A decision from the Supreme Court of Delaware in regards to a decision

reached by a judge is _________________ on Canadian courts in regards to
cases involving a business dispute?

A. Binding
B. Persuasive


4. ____________ is not an example of an equitable remedy.

A. Injunction
B. Specific Performance
C. Accounting
D. Damages

5. A Plaintiff in a civil action must prove his case based on which legal standard?

A. Beyond a Reasonable Doubt

B. Balance of Probabilities
C. Injunction
D. More Likely than Not
Legal Fundamentals
for Canadian Business
Fourth Edition

Chapter 3
Formation of
CHAPTER 3 Learning Objectives
• Contract Formation
• Understand the elements of a Contract
• Be able to describe the process by which consensus is
• Be able to identify a valid offer and acceptance
• Explain “consideration”
• Understand what the concepts of gratuitous promises and
promissory estoppel are
• requirements of capacity, legality, and infancy
• Understand that contracts require “intent”
• Is a written document is required
What is a Contract?

• Quid pro quo – this for that/something for

• Contract – a voluntary exchange of promises or
commitments that are enforceable in our courts
• K = Offer + Acceptance + Consideration +
Consensus + Competence/Capacity + Writing (if
• Contract law mostly developed in the courts
– Some statutory modifications, e.g. consumer protection
and sale of goods legislation
Building Consensus/Mutual Intent

• offer and acceptance

• Parties come to a common understanding
(meeting of the minds)
• Terms must be clear and unambiguous
Reasonable Expectations of the Parties
West End Tree Service Inc. v. Danuta Stabryla

• Courts will give effect to the reasonable expectations of the parties

• Facts: West End Tree (Plaintiff) was approached by Mr. Stabryla (Defendant) to remove
a tree. Plaintiff gave itemized estimate of $950 to remove tree, $400 to dispose of
debris, $400 to dispose of the logs, and $100 for the arborist report. Defendant paid
$214 and the balance of $1,658 to be paid upon completion. The Plaintiff obtained the
arborist’s report and the city permit and then cut down, and removed it. The Defendant
refused payment. The Defendant stated that she just intended for Plaintiff to obtain
report and permit, then she would have her husband cut the tree. Defendant stated she
thought it was two contracts, and she only agreed to the first part.
• Issue: Whether it is reasonable to expect the Plaintiff in this case to enter into an
uneconomical contract?
• Rule: A party may be bound even when they did not intend to be bound when a
reasonable person would believe, based on the contract and words, that she was
assenting to the terms proposed by the other party.
• Analysis: the judge agreed that it would have been uneconomical for Plaintiff to enter in
to the contract, it would be unreasonable to expect that Plaintiff would have agreed to
only obtain the permit and report, it was all in fact one contract
• Conclusion: court ruled in favor of the Plaintiff
What is an Offer?
• Tentative promise that contains the terms of the anticipated contract –
offeror should expect to be bound by his/her own terms if accepted
• An invitation to treat is not an offer that creates a contract if accepted
– Most advertisements, catalogues, displays – if treated as offers
then merchants would be held to potentially limitless contracts
• Offer must contain all important terms
– Essential to clearly stipulate parties, property, and price (“the three
– Must be “Communicated”, “Committed”, and ”Definite in Terms”
– Other terms may also be required
– Other terms may be reasonably inferred by courts or parties
What is an Offer

• May not need to be in writing as an Offer may be

inferred by verbal or communication or conduct
• Exemption clauses must be made known to other
– Clause must be brought to the attention of other party at
the time of entering the contract, not later
– May be on a receipt, sign, or any way that it is brought
to the attention of the other party – in such a fashion as
the party should reasonably notice it
Exemption Clause May Not Be Binding
Brownjohn v. Pillar to Post

• Facts: Pillar to Post (Defendant) provided home inspection services to

Brownjohn (Plaintiff). Defendant sent a junior/inexperienced inspector to
provide services on the home inspection for Plaintiff. The Defendant failed to
identify pertinent home issues relating to old furnace and termites. Plaintiff
suffered damages as a result. Defendant countered by pointing to an
exclusionary clause in the contract limiting their liability to $240 (the
inspection fee).
• Issue: Whether the limitation clause in the contract was binding on Plaintiff?
• Rule: any term must be brought to the attention of the parties to be part of the
agreement at the time of contract. Important terms may need to be made in a
way to stand out.
• Analysis: judge found that this was such an all encompassing limitation clause
that it had to be brought to the attention of the client at the time of contract
• Conclusion: court ruled in favor of the plaintiff
When an Offer Ends

• Not normally a good idea to leave an offer open

without terminating time/event.
• Offer may expire at end of specified time by
• Offer may expire at end of reasonable time
(example perishable goods going bad)
• Death or insanity of offeror
• Revocation (if communicated before acceptance)
• Rejection/Counter-offer (Mirror Image Rule)
• Option agreement – keeps offer open for a
specified time
A Rejection of an Offer Before Acceptance Ends That Offer
Roma Construction (Niagara) Ltd. v. Dykstra Bros. Roofing (1992)

• Facts: Dykstra (Defendant) did several roofing jobs for Roma

(Plaintiff), which ended in litigation. Several attempts to resolve were
made. Just prior to trial, Plaintiff made an offer to settle for $96,000.
The Defendant orally rejected the offer to settle. Defendant then
learned of several issues with their case. The Defendant sought to
make a formal acceptance of the offer of $96,000. Plaintiff refused.
• Issue: whether the offer to settle was still open when the acceptance
was given?
• Rule: a rejection or counter-offer after an offer ends that offer.
• Analysis: since there were no technical court rules involved the
Plaintiff’s offer was a common law offer. Since it was rejected, that
ended the offer and it was no longer open for acceptance.
• Conclusion: finding in favor of the Plaintiff
Standard Form Contracts

• Accepting party usually does not have any power

to alter the contract
• Ambiguities interpreted in favour of the party
forced to accept the terms – uncertain terms
• May be controlled by statute
• For example cell phone agreements
What is an Acceptance?

• Acceptance – commitment by offeree to be bound

by terms of offer
• Must be complete and unconditional
– The Acceptance must mirror the terms of the Offer –
Mirror Image Rule
– Addition of any terms = counter-offer
• Must be communicated
– Contract effective when and where communicated
What is an Acceptance

• form of acceptance must answer manner required

by offer – for ex. Acceptance must be made by
writing no later than 2pm the next day.
• Unilateral contract – one side acts
– Acceptance is performance of contract
• Silence is not usually acceptance
– May be implied by conduct (i.e. if Offeree starts
performing per the terms of the offer)
What is an Acceptance?

• Post-box rule
– Exception to rule that acceptance must be
– Where use of mail is a reasonable form of acceptance,
acceptance is effective when and where posted
– Also applies to telegrams and possibly couriers
– Does not apply to facsimile or email

• Quid pro quo

• An exchange of value is required
• May be money, services, goods, promises
• One-sided promises (gratuitous promises) are not
• Need not be reasonable, but benefit must be
specific – people are free to enter unreasonable

• Consideration must be of value and possible

• Exception for services – quantum meruit –must
pay a reasonable amount for services requested
and received
• If consideration has already been given, it cannot
support a new contract (i.e. “past consideration is
no consideration”)
Past Consideration is No Consideration
Mackenzie v. Mackenzie

• Facts: Linda Mackenzie (Plaintiff) and her husband build a house on land
given to her husband by her mother. Her father in law (Defendant) assisted in
the construction. The Defendant loaned his son considerable money before
completion of the house. Plaintiff and Defendant signed a mortgage in favor of
Defendant for $25,000 at 10% interest. No money changed hands and the
Defendant claimed he had already advanced the $25,000 to his son. The
mortgage was not registered until three months after the son died which was
14 years later. Defendant now wishes to claim on the mortgage which he
claims is worth $112,000.
• Issue: whether there was any consideration to support the mortgage?
• Rule: Past consideration is no consideration.
• Analysis: judge found that any money that had been given to the son prior to
the building of the house was a gift given out of love and affection and any
monies had ben given to the son prior to when the mortgage was signed.
• Conclusion: finding in favor of Plaintiff

• Parties can change contract obligations, but all parties must receive
“new” consideration - Past Consideration is not new consideration
• Gratuitous promises not binding on promisor with some exceptions:
– Taking less in full satisfaction of debt is binding by statute
– Promissory Estoppel – reliance on gratuitous promise may be used
as a defence only
– With a seal, no need to establish consideration
Promise to Pay Higher Price Not Supported by Consideration
Gilbert Steel Ltd. v. University Construction Ltd.

• Facts: Gilbert Steel (Plaintiff/Appellant) agreed to supply steel at a specific

price to University Construction (Defendant/Respondent) for the construction
of buildings. The cost of steel went up and upon request Defendant agreed to
pay Plaintiff a higher price for steel than previously agreed. Defendant made
regular payments but not enough to cover increased price. When the job was
finished the Plaintiff sued the Defendant for the shortfall. Defendant claimed
they were not obligated to pay the agreed upon increase because of lack of
consideration supporting the change.
• Issue: whether sufficient consideration was present to support the promise to
pay the extra cost?
• Rule: Past consideration is not new consideration
• Analysis: Plaintiff had not agreed to do anything in return for the change in
• Conclusion: Court agreed with Defendant.
Void vs. Voidable Contracts

• Void
– There never was a contract
– Both parties are free from obligations
• Voidable
– One party has the right to escape the contract (called
rescission); contract valid until this is done
• The Parties to a K must intend legal consequences
to flow from contract for any breach
• Would the reasonable person thought he/she was
entering into a legally enforceable contract? This
is an objective standard.
• One must have the capacity to for the intent to K
see Infants, Intoxication, and Insanity.
• Presumption that that business and commercial
contracts are legally binding, and to get out of one
you would have to produce evidence that indicated
an opposite intention.

• Infants – voidable contract

– Anyone under the age of majority
– A Contract is binding on the adult, but not on the infant
– the K is voidable at the Infants option, to an extent
– The rule is K are voidable by infants, except when
dealing with necessities and beneficial contracts (for ex.
Car is not a necessity thus K is voidable)
– When infant reaches age of majority, infant can ratify
contract through language or conduct, thus binding.
Insanity or Intoxication

• Insanity or intoxication - To escape a contract for

– You must show you were so insane/intoxicated that you
did not understand transaction and
– Other party to contract knew or should have known of
the insanity/intoxication and
– You must repudiate contract as soon as possible when
sanity/sobriety is regained
Contracts must have Legal Consideration

• Contracts that have unlawful objective or illegal

consideration are void
• Legality may be set out in the common law or
• Contracts to commit a crime are void
• Insurance contracts must be intended to cover a
loss – must have insurable interest
• Price fixing violates the Competition Act which
states that agreements that unduly limit
competition are prohibited
Restrictive Covenants

• Most important situation in which this arises is in the context of

restrictive covenants
• For example: If Joe sells Sam a barbershop and a term is included that
prohibits Joe from carrying on the trade of a barber, this would be
void. It goes too far. The rationale is that if Joe were to immediately
start up a new business near the old one it would defeat the goodwill of
the one sold because he would attract all of his old customers.
However, if Joe opened up a barbershop in another province or five
years later, this would pose no danger.
• Restrictive covenants permissible only if
– Reasonable limit in time
– Reasonable limit in area
– Public interest is not harmed
• Courts usually won’t enforce restrictive covenant against employees if
it prevents earning a living
Contract Writing Requirements

• It is ALWAYS a good practice to put a contract in

• An oral contract is often just as binding in law –
difficult to prove
• Requirement of writing varies by jurisdiction (i.e.,
set by statute)
Requirements of Writing

• Statute of Frauds requires certain transactions be

written (MY LEGS)
– e.g., purchase of land, long-term leases, assuming
responsibility for debt, contracts over one year,
marriage contracts, sales of goods of certain value
• General rule, if an agreement is required to be
reduced to a writing – it must or may be
• Exception to writing requirement: Part
performance may satisfy requirement for writing
– Only if consistent with existence of agreement