Law & Business

Module 8

Dr. John Allen

Chapter 7 - The Nature and Creation of Contracts
• A contract is a legally enforceable agreement
• All contracts are agreements, but not all agreements are
contracts enforceable by a court.

• Elements of a contract:

• (1) intention to create legal relations

• (2) meeting of the minds (offer and acceptance)
• (3) promise to exchange some value (consideration)
Is this a contract?
● Tom has agreed to purchase your bike.
● The two of you have agreed to a price ($800) and to a delivery date (next
Wednesday.)
● You have handshake deal. You never wrote it down.
● Tom later denies that there was an enforceable contract and refuses to
pay and take delivery of the bike.
● Can you sue?

Did you have an enforceable contract?

Oral contracts are contracts
● Generally, a contract does NOT need to be in writing to be legally
enforceable.
● There are a few exceptions which we will later discuss (eg. land contracts,
some consumer contracts, and a few other exceptions.)
● Generally, if the essential elements are present, you have an enforceable
contract.

● Evidence can be the oral testimony of a witness (you), and if the Judge
believes that you are a reliable witness, you have proved the contract.
(Balance of probabilities.)
1) Intention to Create Legal Relations
• Parties must intend to create an enforceable contract
• Intentions can be shown by words or actions
• What would a reasonable bystander think was intended?
• Objective test:
• commercial context -> presume intent
• social and family context -> presume no intent

• Can “rebut” (i.e., disprove) the presumption on a balance of

probabilities
You Be the Judge 7.1
Eddie had season’s tickets for the Toronto Blue Jays – excellent seats.

For ten years, Eddie sold four of his tickets to a company owned by his friend and
business associate, David. David shared these tickets with his customers for
promotion. This continued for ten years.

Then Eddie decided to stop selling David tickets.

David sued for breach of an ongoing contract.

Is this a contract, possibly with reasonable notice to cancel the arrangement?

Court ruling
● The judge held - it was a social arrangement, not a contract
● No evidence that Eddie intended to transfer season’s tickets to David, either
permanently or for a number of years
● Even if a contract is recognized, there is no evidence that they agreed to it for
more than one season.

● Fobasco Ltd. v. Cogan [1990] link

Discussion
82 year-old widow Lucy, 54 year-old son Max, 52 year-old son Jamie, and 17
year-old granddaughter Sara are all sitting around the dinner table.

Lucy says: “I promise to update my will and leave everything equally among all
three of you, except that if any of you regularly visits me while I am in the nursing
home, then I will give that person an extra 5% of my estate.

Max, Jamie and Sara all say they will visit Lucy. Ten years later, Lucy dies after
having spent many years in the nursing home. Sara visited Lucy once a week
every year until the last year, when she had to stop because she moved to another
Province. Max and Jamie visited twice a year. Result?
2) Meeting of the Minds
● Must be a “meeting of the minds” or “ad idem” (Latin) - a shared decision to
enter into an enforceable contract on terms and conditions.
● How does a “meeting of minds” happen?

● When an OFFER is ACCEPTED

● Once the offeror communicates the offer, a contract comes into existence as
soon as reasonable notification of acceptance is given to the offeror.
● Must be an agreement on the essential terms - will discuss later
Offer
● Offer = Indication of a willingness to enter into a contract on certain terms

● Offer must be communicated:

○ Written document (including email or text)
○ Oral statement
○ Conduct

● Offeror: Person who makes the offer

● Offeree: Person who receives the offer
Communication and Life of Offer
● Can be written offer, oral offer, or by conduct
● Objective test - offer must be communicated as an offer

● An offer ends if:

○ Revoked
○ Time for offer lapses (expires)
○ Death or incapacity of person who made offer, before being accepted
○ Rejection of offer
○ Counter-offer
Revocation
• revocation = withdraw offer
• offeror generally free to revoke at any time
• revocation must be communicated to offeree
• Set expiry date, or it will be open for a “reasonable time” - not forever
• “firm offer”
• gratuitous promise to not revoke -> unenforceable
• contractual promise to not revoke: is enforceable
• Option - Pay me $1 - and I will keep the offer open until Friday
3) Mutual exchange of value
• contract = bargain supported by consideration
• promise is (generally) not enforceable if gratuitous (i.e. it
is a gift or free)
• promise is enforceable if purchased for some value
• value for value for any contract to be enforceable

• Will discuss further in this lecture

An offer carries risk
● What if you change your mind, but the offeree has already accepted?

● What if you make an offer and more than one person accepts?
● I offer to sell my watch to the class and 10 students accept the offer - I
don’t have 10 watches! Do I have 10 contracts?

● Are things like shelf displays, advertisements, and catalogs were

considered OFFERS?
The Bike question
● Suppose you post the following advertisement on Kijiji:

“For Sale: one Super Ride bike. Excellent condition. $800.”

● Three people text you to accept, at exactly the same time.

● Do you have one contract? Three contracts? How much trouble are you in?
You did not make an offer, but invited them to offer
Your Kijiji ad is an “invitation to treat”.

1. An offer: “I am willing to enter into a contract with you on these terms”

2. An invitation to treat: “I invite you to me make me an offer on these
terms.”

You are saying - make me an offer for $800. Then, you can accept one of the
offers. It is advertising, not an offer.
Offer or “Invitation to Treat”?
Objective test:

- Tag on items in a store is generally an invitation to treat

- The contract is made at the checkout counter.

What if:

- “Dolls for sale. $25 each. Limited supply”?

- “Dolls for sale – $25 each to the first ten customers”?
Textbook Case: Dickinson v. Dodds (1876)
● George was interested in buying a piece of land from John.
● On Wednesday, John wrote to George, offering to sell the property and
promising to hold that offer open until Friday morning.
● On Thursday, George learned that John was negotiating with another
potential buyer. George immediately tried to find John to accept the offer. In
the meantime, John texted George and said that he had revoked his offer.
● George sued John for failing to fulfill his promise to keep the offer open.
Court ruling
● The court held that John’s promise to keep the offer open was unenforceable
because it was entirely gratuitous.
● John had not received anything of value in exchange for his promise to hold
his offer open until Friday.
Recall -
● An offer ends if:
○ Revoked
○ Time for offer lapses (expires)
○ Death or incapacity of person who made offer, before being accepted
○ Rejection of offer
○ Counter-offer
Rejection and Counter Offer
• rejection terminates offer
• offeree cannot revive a rejected offer
• counter offer
• rejects offer and creates new counter offer
Bike question 2
● Suppose you tell Angelique that you will sell her your bike for $800.
● Angelique replies, “No thanks! That’s too much money!”
● But overnight, Angelique changes her mind. So she calls you the very next
day and says, “Hey, great news. I’ve changed my mind! I’ll take that bike!”

Do you have a contract?

Bike question 2
● Suppose that you offer to sell your bike to Ralph for $800. Ralph thinks about
it and then says, “Ok. I’ll buy your bike for $800. Of course, at that price, I
expect you to throw in your bike pump.”

● Do you have a contract for the bike and pump?

Strategy
Thank you for your offer for the bike for $800. I appreciate it.

Would you be willing to amend your offer to include the bike pump?

Answer - No.

Okay, after some thought I will buy your bike for $800 without the pump.

(You didn’t reject the offer or make a counter-offer. You simply inquired if the offer
would be amended.)
Types of Acceptance
● Acceptance may occur in a number of ways:
● Words (written or spoken)
● Conduct may signify acceptance (e.g. handshake)
● Must conform to any conditions imposed by offeror
● If no rules are set: It must be reasonable
● It must usually be communicated
Acceptance of offer
• acceptance by promise = bilateral contract
• promise exchanged for promise
• obligations on both sides to do something in the future
• Accept by words or conduct
• Silence alone is not acceptance
• Acceptance at a Distance - where is contract located?
Acceptance by performance
• acceptance by performance = unilateral contract
• act exchanged for promise
• obligations exist on one side when contract created
• “I’ll pay $100 to anyone who finds my lost cat”
• nature of unilateral contract
• contract created once requested act performed
• performance must be in response to offer
When Acceptance Arises At a Distance
● Postal Rule: In the case of non-instantaneous communications (substantial
delay) the acceptance is effective where and when the offeree sends it, even
if not received.
● Practical advice: Always avoid setting up a situation where the postal rule
would apply
● An offer and a revocation of an offer are only effective when and where they
are received.

● By contrast, an acceptance generally is effective when and where it is sent.

Has a contract been created?
● On October 15, Max mails a letter in Toronto offering to sell widgets to Amy.
The next day, before Amy receives Max’s letter, he sends another letter from
revoking his offer.
● Amy receives Max’s letter on October 21 and immediately sends a letter of
acceptance. The next day, she receives Max’s revocation letter.

● Do they have a contract?

Chapter 8 - Consideration and Privity
● Consideration

Is there a mutual exchange of value?

● Privity

Who can sue and be sued under a contract?

1) Consideration

• Each party must, at the same time, promise consideration in exchange for the
other party’s consideration (a promise for a promise)

• “Consideration” means some value

• This “mutuality” must occur at the time of the contract or at the time of the
amendment

• Must move from each party - but not necessarily to the other party - eg. I’ll pay
your brother $5,000 if you sell me your car.
Case Brief 8.3, simplified
● Gilbert and Construction had a contract in which Construction would buy steel
from Gilbert at a $100 per unit for five years.
● After two years of the contract, the supplier to Gilbert increased its price for
steel, so Gilbert approached Construction and said - would you be willing to
pay more for the steel because my costs have increased?
● Gilbert and Construction agreed to amend the contract so that Construction
would buy the same steel, but at $125 per unit for the balance of the contract.
● When it came time to pay, Construction said - the amendment is not
enforceable and I will only pay $100 per unit.
No, the amendment is not enforceable
● At the time of the amendment, there was no “mutual exchange of value”
● Construction had an enforceable contract to buy the steel at $100
● There was no value going to Construction for paying more for what it was
already legally entitled to

● How would you write the amendment to make it enforceable?

Amendment requires “fresh” consideration
• If there is an amendment to a contract, it needs fresh consideration
– Original contract was $5,000 to build the garage by 1st the month
– Amended contract the fee is now $6,500.
– Past consideration is no consideration.Extra $1500 not enforceable
• However, if there is “fresh” consideration, then it is enforceable:
amended fee is $6,500 to build the garage 12 days earlier (extra $1,500
in exchange for a promise to deliver earlier) is enforceable
Promise to exchange some value (consideration)
• contract = bargain supported by consideration
• promise is (generally) not enforceable if gratuitous (i.e. it
is a gift or free)
• promise is enforceable if purchased for some value
• value for value for any contract to be enforceable

• Need a mutual exchange for the new promise - past

consideration does not count
• Should not pay twice for the same benefit
Sufficient and Adequate Consideration
• consideration must be sufficient
• sufficient = any value from a legal perspective
• money, goods, land, or services
• not “love and affection” within family, but are regular visits to a nursing
home something more?
• consideration need not be adequate
• adequate = exchange of equal value - not required
• $1.00 or a peppercorn can be used
Ethical Perspective 8.1
● While strolling on a beach, you discover Heena unconscious and face down in
the water. You pull her ashore, administer first aid, and save her.
● Shaken, but grateful, she promises to pay you $500 every year for the
remainder of your life. Heena is very wealthy.
● However, when you attempt to collect the first payment, Heena stated that
she has changed her mind and refuses to pay anything.

● Can you enforce payment?

Past consideration does not count
● At the time that Heena made the promise, you had already saved her
● It would have been a gift, not a contract

● Past consideration is something done before the contract

● No mutuality and therefore no consideration
Pre-existing obligations
● If the pre-existing obligation is owed to the same party, then that is not
consideration for an amendment - Gilbert Steel case

● If the pre-existing obligation is a public duty, then that is not good consideration:
Firefighters and police officers cannot sell their services while already on the job
because they have a public duty to serve the public.

● Pre-existing obligation to a third party could be valuable consideration.

● Singer to advertising agency - I will perform my contract with the concert hall to
sing, if you pay me more money outside that contract - because you can get more
advertising for your products.
Promise to forgive a debt? Case #7, Chap. 8
● Christine owed a debt of $25,000 to BCMI. She genuinely could not pay the
full amount, so she asked BCMI if it would accept $15,000 as full payment.
● BCMI agreed to her proposal, on the condition that she pay $15,000 within
one week.
● Three days later, however, BCMI had a change of heart and told Christine that
it expected to receive the full sum of $25,000.
● BCMI took her payment of $15,000 but told her that it was still owed the
remaining $10,000.
Answer to debt question
No, this is like the Gilbert Steel case.

There was no consideration given for the reduction of the debt. Creditor can insist
on full payment
Completion of Gift
● Promise to do something for nothing in return - no
consideration - a “gratuitous promise”
● However, once the gift is completed, it can’t be undone.
● Once I give my daughter an X-box for her birthday, I
cannot take the gift back - I have “delivered” the gift
● Once the gratuitous promise is performed or delivered,
cannot be undone. Eg. a signed waiver of the right to
enforce is a completed promise to forgive. Cannot undo a
waiver which has been delivered.
Exceptions - to enforce gratuitous promise
• Seal = special mark on document - applied when contract signed
• Promissory estoppel
• Existing legal relationship
• Clear promise or representation
• Reliance
• Action resulting in detriment
• Promisee must have acted equitably
Privity of Contract
• only party to contract can sue or be sued under
contract (it’s a private matter - privity)
• Third party who has promised no consideration
cannot sue
• I’ll pay $5,000 to your sister if you transfer me your car
• Not enforceable by sister? – she gave no consideration
Exceptions - enforcement by stranger
• Auto or life insurance purchased by insured, intended to protect
beneficiary
– General privity rule unfairly denies enforcement
– Legislation therefore allows enforcement
– So beneficiaries of a life insurance policy can sue the insurance
company to collect even though not privy (beneficiaries didn’t
contract with insurance company; the insured did)
Assignments and Privity of Contract
• assignment = process of transferring rights
• parties to assignment
• assignor = party transferring rights
• assignee = party receiving rights
• debtor = party owing obligation
Assignments continued
• “Subject to the Equities”
• The rights from assignor to assignee cannot be increased
- can only assign what legal rights you have
• Some contracts cannot be assigned - if personal skills