Contract Law: Process, Components, Methods

The Importance of Contracts

Everyday, consciously or unconsciously, you enter into a number of contracts. In fact, without contracts our modern world would quickly grind to a halt.

What is a contract? A contract is simply an agreement or promise between two or more parties (people, partnerships, companies or governments) that the law will enforce. As such, you should realize that all contracts are agreements but not all agreements are contracts.

Where does our contract law come from? While there is some statute-based law regulating certain aspects of contracts, most of our law is judge made or common law.

Types of Contracts

Express Contracts exist where the terms and conditions of the agreement are clearly set out either in writing or verbally. A contract to rent a car would be an express contract.

Implied Contracts exist where the contract is only suggested by the parties’ actions. Ordering a meal in a restaurant is an example.

Contracts under Seal are contracts that must be in writing, signed and witnessed under seal. The seal dates back to the time when families had rings or signets that they would impress into sealing wax. Today some provinces require land or mortgage documents to be under seal – that being said, seals are simply little red stickers placed on the document. The idea of sealing a document was to show that the parties had carefully considered the importance of the contract.

Essential Elements of a Legally Binding Contract

Every law student (including you) needs to know when a contract is created.  Every contract must have the following:

• Offer and Acceptance
• Consideration
• Capacity of the parties to enter into the contract
• Consent of the parties to enter into the contract
• Contract must be for a legal purpose

The Offer

All contracts begin with one party making an offer to buy, sell or do something for the other party. This party is called the offeror (the party receiving the offer is, of course, called the offeree). The offer must be serious and definite in its terms. Thus, “I will sell you this 1994 Honda dirt bike for $800” is a valid offer whereas “I’d sell this piece of #!%* car to the next person for a dollar”, is not a valid offer. While the offer needs to be definite, in many cases some terms will be implied (such as when buying a newspaper or riding the bus).

Is a price tag on an item a valid offer? No. The courts have held that price tags and advertisements in general are only “invitations to buy” or “invitations to treat” and are not offers in their own right. As a result, when you see that pair of jeans incorrectly marked for $3.99 instead of $150.00, the store is not required to sell them to you for that price. In reality, when you walk up to the check out, you will be making an offer to the purchase the jeans at $3.99 – the store can then decide whether to accept your offer or not.

Communicating the Offer

An offer is not valid until it is received no matter what means is used to communicate the offer (mail, fax, e-mail or in person). While the foregoing seems obvious, it is an issue in regard to rewards for the return of lost items or for information leading to arrests. As an example, should you find a lost watch and return it to the owner unaware that the owner has placed a reward notice, you are not legally entitled to the reward. This comes from the fact that you could not have accepted an offer you were unaware of.

Terminating the Offer

If an offer is not accepted, no legal rights or obligations result. Offerors often restrict the time period in which a person may accept their offer. If acceptance is not received within the time frame specified, the offer lapses (ends). This is common in real estate transactions. Even if the offerer does not specify a time frame for acceptance, the courts have held that all offers lapse after a reasonable period of time. What is reasonable depends on the nature of the contract (purchase of a stock versus a house purchase).

Revocation of an offer – the offeror may revoke his/her offer at any time up until acceptance by the other party. This is true even if the offeror has given the other side a set amount of time to decide whether or not to accept the offer. In order to prevent this situation, the two parties can enter into a separate contract setting out that the offeror can not withdraw the offer for a set period of time. Just like any other contract this contract must have all the required elements including consideration (this is often referred to as an option).

Verbal offers generally lapse when the two parties leave each other. Additionally offers lapse if one party dies or is declared incapable before acceptance of the offer.

Acceptance

Acceptance can be in writing, spoken or by conduct. Regardless of how the acceptance is made, it must be unconditional for it to be valid. Thus, if I offer to sell you my house for $500,000 and you accept on the condition that I include my exhaustive Led Zeppelin record collection, there has been no acceptance. In this situation you have actually voided my original offer through a counteroffer. It is now up to me to accept or reject your offer. In fact, should I reject your offer and you then decide to accept my original offer you will discover that my original offer is gone – your counteroffer killed it.

While the offeror may set out how acceptance is to be made, generally it is assumed that acceptance will by communicated in the same way the offer was made.  Where no manner is stipulated, any reasonable manner of communication is acceptable and it is generally assumed the method of communicating acceptance should be at least as fast as the manner used by the offeror to make the offer.

Acceptance by Mail

An offer accepted by mail becomes a valid binding contract at the time a properly addressed and stamped letter of acceptance has been mailed – that is, deposited in the mailbox.

Acceptance by other means

Where the acceptance is made by other means (fax, phone, or e-mail), the contract is formed when the acceptance actually reaches the offeror.

Silence and Inaction

Generally, you cannot say “If I don’t hear back from you in 24 hours, I’ll assume you have accepted my offer.”  An exception is negative-option marketing. Under this practice a consumer must take some action not to receive an item or service (book or CD clubs that send out one title each month unless you send in a card saying you don’t want it). In 1995, Rogers Cable announced it would increase the number of TV channels subscribers would receive (and increase your bill accordingly) unless you notified Rogers you did not want the channels. There was great displeasure in BC about this and the BC government changed the law to require specific consent to receive unsolicited (not asked for) services.

Unsolicited Goods and Services

Believe it or not, in the past it was common for credit card companies to send out unsolicited cards. If you used the cards it was held that you had accepted the credit card company’s offer. That practice has been stopped but it is still common to receive unsolicited products (such as Christmas cards from a charity). The rule is that you do not have to pay for any unsolicited product as long as you don’t use it! You do not have to send it back but you could just mark “return to sender” on the package if you wish.

Consideration

After a valid offer and acceptance, the next required element for any contract is consideration. Consideration is simply the exchange of something valuable.

Present Consideration – occurs at the time the contract is formed. Buying clothes for cash, for example.

Future Consideration – occurs when one or both parties agrees to do something in the future – buying clothes on credit.

Past Consideration – occurs when someone agrees to pay someone for a good or service that have already been performed or given for free. For being my friend in high school I’m going to give you $5,000. This is unenforceable in law.

Contracts under seal – as we mentioned in the previous lecture, some contracts are under seal (little red dots!). The courts have held that the seals by themselves constitute consideration and there is no need to examine the contract to determine whether or not consideration was received.

How much consideration? Will courts decide whether the consideration exchanged in a contract is enough to make it a legally binding contract? NO! As long as there is consideration, the court will never decide whether it was sufficient. Thus, you could enter into a contract to sell a million dollar house for a single dollar and it would be a valid contract.

What is not consideration? The courts have held that love, affection, respect and honour to be valuable legal consideration. So if you decide to enter into a contract that requires your son to respect you in exchange for $500 a month, it is an unenforceable contract.

Capacity

After we have determined that a contract has consideration, it is essential to determine whether or not the parties have the capacity to enter into a contract. Generally, all sane, sober adults have the power to enter into any contract. That being said, the law limits the enforceability of contracts entered into by minors or those suffering some sort of impairment.

Minors

The age of majority varies from province to province. In Alberta, Ontario and Quebec it is 18. In BC it is 19. As we will see, contracts between adults and minors may or may not be valid.

Valid Contracts

A minor is required to fulfill any contract she or he enters into for the necessaries of life: food, clothing, shelter, education and medical services. To be considered a necessary, a good or service must reflect that particular minor’s station in life. Thus, for the daughter of a wealthy family in West Vancouver the courts may hold that a $2,000 evening dress is a necessary whereas it would not be for a less wealthy country girl.

Even if the contract is for a necessary the minor is only obligated to pay what is reasonable for the good or service.  Apprenticeship and employment contracts will also be considered necessary if they are beneficial and do not take advantage of the minor.

Void Contracts (never existed)

Where a contract is clearly not in a minor’s best interest, the courts will hold that the contract is void. Usually this occurs where a person has taken unfair advantage of a minor. In such situations the contract has no effect.

Voidable Contracts

A voidable contract is one where one party has the right to make the contract binding or not binding at their sole discretion. In the case of minors, it is at the minor’s option whether or not the contract is binding or not.  It is in the area of non-necessaries that voidable contracts usually arise. Thus, if a minor buys a $2000 digital camera by putting a $500 deposit on it and later decides that she doesn’t want it, the contract is most likely voidable at her choosing. The retailer will have the right to keep the deposit and the camera will have to be returned, but the retailer will not be able to enforce the contract. On the other hand, the retailer cannot cancel the contract because the purchaser is a minor – only the minor has that option.

What about where a minor misrepresents their age?

If a minor lies about his or her age, that does not affect the legal rights of the minor. Thus, void contracts will still be void, voidable contracts will still be voidable at the option of the minor and valid contracts will, of course, still be valid. As a result, retailers deal with minors at their own risk and often will not sell to a minor on credit.

Are parents responsible for the debts of their children?

Generally no. That being said, parents are responsible where a parent cosigns any contract signed by a minor. Additionally, if a child uses the credit card of a parent and the parent pays the account there is an assumption that the parent will continue to do so in the future. Parents are also responsible if they expressly tell a retailer that the child may purchase items for which the parent will pay.

Adults with impairments

Much like minors, the law works to protect adults who suffer a disability (temporary or permanent) in regard to contracts. Of course, like minors, impaired individuals are still responsible for contracts entered into for necessaries. Impaired individuals are only required to pay what is reasonable for a necessary and any non-necessaries contract is voidable by the person impaired if they can prove that they were incapable of understanding what was happening at the time the contract was formed and that the other party knew or should have known of this condition. Even then, the contract must be voided within a reasonable period of time after recovery of the impairment and the goods must be returned.

Consent

It should be obvious to everyone that to have a valid contract each party must understand and freely enter into the contract. Four conditions may prevent consent from occurring:

• misrepresentation
• mistakes
• undue influence
• duress

Misrepresentation

Generally the rule of caveat emptor (buyer beware) applies when you purchase any good. That means the seller is not obligated to disclose negative facts about the product that might stop you from buying. If, however, the seller makes a material misrepresentation (material means that it is a significant misrepresentation or false statement), the contract is voidable (the buyer can cancel the contract).  There are two types of misrepresentation: innocent and fraudulent.

Innocent Misrepresentation

Occurs when a seller makes a false statement that they honestly believe to be true. For example, you are selling cars at the Ford dealership and rely on the manufacturer’s information on gas mileage of the F150 pickup, but it turns out to that the information is untrue, this would be an example of an innocent misrepresentation. In such a case, the buyer is entitled to recission – that is cancel the contract and place each party in the same position they were in before the contract was entered into. The buyer is not, however, entitled to damages.

Fraudulent Misrepresentation

Obviously a fraudulent misrepresentation (where the seller knows the statement to be false) is a much more serious situation. Reflecting the seriousness of such misrepresentations, the buyer can not only rescind the contract, he/she can sue for damages that have resulted from entering into the contract.

Mistake

Once a contract is formed, the law requires that it be carried out whenever possible. Ignorance of the terms of the contract is usually not a ground for the contract to unenforceable. Mistake is an exception.

Common Mistake

When both parties are mistaken about a fundamental aspect of the contract, it may be unenforceable. For example, you agree to sell me your car and I accept. Unfortunately, unbeknownst to either of us, the car burned down an hour earlier. In this case there is no valid contract as the subject matter of the contract does not exist.

Unilateral Mistake

Sometimes only one party is mistaken but the other party is aware of the mistake and does nothing to clarify their erroneous view. For example, you come into my paint store and bring four litres of paint to the cash register to purchase and indicate that the paint is to be used on the outside of your house but I realize that that paint will not work and I say nothing and sell you the paint – the contract becomes void and unenforceable.

Generally, there are two types of unilateral mistake: clerical mistake and non est factum.

Clerical Mistake – occurs when the contract simply incorrectly records the actual agreement of the parties. Thus, I agree to sell you my car for $15,000 but you write up the contract and incorrectly write the sale price as $1,500. You will not be able to enforce the sale at $1,500.  The contract is void and unenforceable.

Non est factum (“It is not of my deed”). Used to occur when people were illiterate and signed written contracts (“X”) and did not understand the terms of the contract. Often there was misrepresentation as to what they were even signing.

Lawful Purpose

The final element of a legally valid contract is that it must be for a lawful purpose. Any contract that amounts to a crime under the Criminal Code (hiring a hit man or attempting to bride a government official) is void. Additionally, a contract that breaks either federal or provincial laws (non-criminal in nature) is also void.

While the foregoing is self-evident, the courts will also refuse to enforce contracts that are against public policy (the interest of society as a whole). Some examples are:

Restraint of Trade – often contracts will limit the ability of one party to do business. While such contracts are valid, they are not unlimited. Thus, if you are Rob Feenie and sell your world-famous restaurant “Lumiere”, the buyer may want to make sure you don’t open a new restaurant across the street. Thus, in the sales contract you may stipulate that Rob cannot open a restaurant within 5km for a period of five years. That being said, the court would not enforce a contract preventing Rob from opening a restaurant anywhere in Western Canada for a period of 20 years.

Restraint of Employment – much like restraint of trade above, employers may wish to restrict for a period of time an employee’s right to work for a competitor for a set period of time. Like trade restrictions, such clauses are valid but must be limited in their duration (you can’t prevent someone from earning a living).

Restraint of Competition

Often a supplier or manufacturer may want to limit the ability of competitors from competing. As such, a contract to sell to one store may require that they not carry their competitor’s products. Such contracts that limit competition will be both against the federal Competition Act (the Act restricts such practises as price fixing and limits on production) and be unenforceable as a result of being against public policy.

Bets

A final word, while gambling in many forms is legal and even sanctioned by the government, courts will not help winners collect on private bets (not sanctioned by the government).

Carrying out the Contract (How do contracts end?)

Once there is a valid contract, the question becomes one as to how the contract comes to an end and what happens if one party fails to live up to their obligations under the contract.

–          Discharging the Contract

–          Mutual Agreement

–          Impossibility of Performance

–          Breach of Contract

Discharging the Contract

Discharging, or carrying out the contract, means that the terms of the contract are fulfilled (each party does what they said they would do).  This is also known as performance.

What if one party offers to perform and the other party refuses to accept? According to the law, the first party is no longer required to attempt to perform their part of the contract and may now take action against the other side for breach of contract.

Mutual Agreement

It should be obvious that the parties may agree to cancel any existing contract. Often this is done as a result of a change in circumstances that negates the purpose of the contract or the parties decide to enter into a completely new contract.

Impossibility of Performance (Frustration)

Under old common law, parties were responsible for carrying out the contract even if situations arose that made this impossible (the courts held that these situations should or could have been contemplated by each party at the time the contract was entered into). The current law is somewhat different: courts will sometimes excuse a party from fulfilling the contract because events after the agreement make it impossible to fulfill. Thus, where the subject matter of the contract has been destroyed, courts will say the contract is frustrated – impossible to perform.

Breach of Contract

Sometimes contracts end because one party does not fulfill their obligations under the contract. In order to understand the other party’s options, we must first distinguish between two different types of breaches.

• Breach of Condition – if one party fails to perform a fundamental part of the contract, a breach of condition has occurred.  For example, you contract with a local band to play at the school’s dance and they don’t show – that is a breach of condition. As a result, you can terminate the contract and sue for damages.
• Breach of Warranty – if the breach of the contract is minor, the other party cannot terminate the contract and can only sue for damages. Thus, if you contract with a landscaper to do extensive work on your home and discover that they have used white daffodils instead of yellow, you can’t terminate the contract but you could sue for damages.  The damages, of course, will be based on your financial losses (the cost of having someone else replant the daffodils).

Substantial Performance

Related to the notion of a breach of warranty, is the idea of substantial performance. A person is unable to get out of their obligations under a contract because the other party has missed minor details on their side. Thus, if you have substantially performed your obligations under the contract (though not all of your obligations), the other side must also perform theirs.

Remedies for Breach of Contract – what can you do (or get) when the other party breaks the agreement?

• Damages – any party that that suffers a financial loss at the result of a breach of contract by the other party may sue for damages. It is important to remember that damages are to compensate one party for their actual financial losses not to punish the other party for breaching the contract.

Mitigation of Loss – it is important to understand that when one party breaches the contract that the other party must try and limit their losses. This is known as mitigating your loss. For example, if I rent a building to you for a year but you move out after only two months, you have breached the contract and are liable to me for damages. That being said, I must try and rent the building to someone else. If I am unsuccessful I can recover the full 10 months’ of lost revenue.  If I don’t even try, the court will not award me damages for the entire period.

Liquidated Damages – some contracts specifically acknowledge the risk of breach by one or both parties. To avoid the cost of going to court, the contract itself may specify monetary damages for any breach. The amount specified must be somewhat representative of the actual harm the other party may suffer and not be meant as a penalty or it will not be binding. Construction contracts often have clauses for late completion – if on a $150,000 renovation contract the contract stated that for every date beyond the agreed completion date the builder shall pay $100,000 in liquidated damages, the courts would likely hold that this is a penalty and unenforceable.

Case

Wilson v. Sooter Studios Ltd. (1988)  BC Court of Appeal

Thelma Battaglia and Chris Wilson booked Sooter to photograph their wedding. The contract included 102 photographs to be taken at two different locations, wedding albums, and thank-you cards. The couple paid $280 of the $390 contract as a deposit.

On the day of their wedding, the photographer arrived late, and only after Chris Wilson had telephoned him. The photographer was also inappropriately dressed, took photos at only one location instead of two and seemed indifferent about the composition of the photos. When the Wilsons finally received their photos, there were only 47 instead of 102 and only 10 were in focus. The other shots were actually double-exposures over shots from another wedding.

The couple brought a civil suit for breach of contract and sought costs of reassembling the wedding party and shooting new photos and for mental distress. Many of the wedding party had flown in for the wedding and it was estimated that it would cost at least $7 000 to fly them back for new photos.

Question: Is this a breach of condition or warranty?

Question: What should the court do?

Question: Are damages for mental distress appropriate?

Specific Performance – In most contractual disputes, monetary damages are sufficient to compensate the party that suffered as a result of the other party’s breach. That being said, there are some cases where money will not do – for unique items, the only way to put the other party in the same position as they would have been if the contract was fulfilled is to order that the other party perform their obligations – this is called specific performance.  For courts, however, will not order specific performance if doing so would require the ongoing supervision of the court to ensure the order was carried out (the court will not, therefore, order specific performance in relation to a personal service contract and employees cannot be forced to work for a particular employer – the employer can only get damages).

Injunctions – are the opposite of specific performance, as they require the defendant not to do something. Usually they arise in regard to contracts that restrict trade, employment or competition. If the plaintiff can show that monetary damages are not sufficient, the court may order an injunction stopping the defendant – an injunction, however is a discretionary remedy that the court may or may not impose.

Privity of Contract – In order to sue for breach of contract, the plaintiff must prove that they are a party to the contract. While this seems obvious, there are many situations where a person suffers from the breach of a contract between two other parties – in such a case there is no privity of contract and the plaintiff cannot sue for breach of contract.  There are exceptions (there always are!) – the beneficiary of a life insurance policy can sue the insurance company for breach of contract if it fails to pay out the benefit as required even though the beneficiary was not a party to the original contract.

Rescission – where the breach of contract involves a major condition, the plaintiff may ask for rescission of the contract – that is, being put in the same position as she was before the contract was formed. Always consider why you may want rescission over damages and vice versa.