StudyGuidetoaccompanyCanadianBusinessandtheLaw,5thedition

Chapter5

CHAPTER 5
AN INTRODUCTION TO CONTRACTS
Objectives
After studying this chapter, you should have an understanding of
the general concept of a contract
the legal factors in the contractual relationship
the business factors influencing the formation and performance of contracts

Learning Outcomes

Understand the meaning of a contract (page 101)

Understand when negotiations result in a contract (page 105)
Recognize that the court considers all parties to have equal bargaining power (page 106)
Understand contracts in the context of overall business decisions (page 107)

Chapter Summary
Through an awareness of contract law, business organizations are better able to protect
themselves when forming and enforcing contracts. Contracts generally are not required to be
in a particular form, but clear agreement on all essential terms is necessary. Those involved
in negotiating contracts should be aware of the legal impact of their communication with
each other, and they should realize that they are largely responsible for protecting their own
interests before agreeing to terms. Contract rules are understood best when assessed in the
broader business context, which includes the impact that any given legal decision by a
business may have on its reputation with other businesses, with its customers, and in the
community at large. A business must also assess its legal options in light of the business
relationship at issue, the need to generate a profit, the uncertainty of the marketplace, and the
importance of conducting operations with a sense of commercial morality, honesty, and good
faith.

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Study Outline
Use this outline to prepare a complete set of notes for this chapter.
Introduction to Contract Lawpage 101
______________________________________________________________________
Contract Elements_______________________________________________________
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Resolving Contract Disputes_______________________________________________
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Creating the Contractpage 105
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______________________________________________________________________
Communication_________________________________________________________
Objective standard test to decide if a contract was made ______________________
______________________________________________________________________
Privity of contract ____________________________________________________
______________________________________________________________________
Bargaining Power _______________________________________________________
Equality of bargaining power ___________________________________________
Completeness __________________________________________________________
Incomplete agreement_________________________________________________
Form __________________________________________________________________
Writing not required __________________________________________________
Dispute Resolution ______________________________________________________
Common law and precedent apply to contractual dispute _____________________
______________________________________________________________________
Performing the Contractpage 107
______________________________________________________________________
Business Relationships: Impact of a Lawsuit on Future Transactions _______________
______________________________________________________________________
Economic Reality: Business Decision to Breach Contract ________________________
______________________________________________________________________
Public Relations: Reputation of Breaching Party _______________________________
______________________________________________________________________

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SELF-ASSESSMENT
Key Terms
Briefly define each term in the space provided.
Contractpage 101
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Objective standard testpage 106
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Equal bargaining powerpage 107
______________________________________________________________________
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Matching
Match each term to its definition below by writing the correct letter in the space provided.
A
B
C
D
E
F
G
H
I
J

Common law
Consequences of a breach of contract
Contract
Equal bargaining power
Deliberate
Completeness
Objective standard test
Voluntary
Consideration
Competent

1. ____ Contracts are freely chosen and do not involve coercion.

2. ____ A test based on what a reasonable person would believe, not what the parties
actually believed.
3. ____ Parties are able to protect their own interests when negotiating a contract.
4. ____ An agreement that is not enforceable because of missing terms.
5. ____ Judge-made laws based on precedent.
6. ____ Each party gives something of value and receives something in return.
7. ____ An agreement that the court will enforce.
8. ____ The party has legal capacity to enter into the contract.
9. ____ Court-awarded damages for losses suffered by an injured party.
10. ____ The parties must want to enter into the contract.

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Questions
Write a short, point-form answer for each question in the space provided. To help you
understand the chapter, it is recommended that you also use additional paper to write a full
and complete essay answer for each question.
1. What are the promises contained in a contract known as?
______________________________________________________________________
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______________________________________________________________________
______________________________________________________________________
2. Can people be forced into a contract? Explain.
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
3. Is a promise to do something for someone else enforceable as a contract? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
4. Why should a contract be in writing?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
5. Identify the main features of a contract.
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______________________________________________________________________
______________________________________________________________________
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6. How is the concept of agreement a key part of a contract?

______________________________________________________________________
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______________________________________________________________________
7. Explain the genius of contract law.
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
8. Can a contract be accidentally created? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
9. Can anybody sue on a contract? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
10. How does a contract ensure that each party gets what it bargained for?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
11. What does a judge rely on to guide deliberations and resolve a contractual conflict?
______________________________________________________________________
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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12. What determines whether legislation or common law must be followed to resolve a
contractual dispute before the court?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
13. In what way is contract law considered to be facilitative?
______________________________________________________________________
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______________________________________________________________________
14. Is ignorance of the law an excuse in contract law?
______________________________________________________________________
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15. What is the danger of relying on casual understanding in business relationships?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
16. Why is it important for a businessperson to know the point at which simple business
communication turns into a legal obligation?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
17. Briefly outline Albert Carrs claims regarding the morality of businesspeople.
______________________________________________________________________
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18. What is the first and foremost concern of contract law?

______________________________________________________________________
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______________________________________________________________________
19. Discuss the objective standard test.
______________________________________________________________________
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
20. How is the position taken by courts in relation to equal bargaining power affected by
standard form contracts?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
21. What is the business reality regarding equality of bargaining power between negotiating
parties?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
22. What is the rationale behind the laws approach to equal bargaining power?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
23. Is the general approach to equal bargaining power ever ignored by courts?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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24. Why should a businessperson take business relationships into account when deciding
whether to sue for breach of contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
25. Is there any downside to strictly observing legal rights? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
26. Even with a contract in place, can problems arise? Explain.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
27. How can a manager approach the problem of a customer who wants to restrict a
contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
28. Are there criminal consequences to breaching a contract?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
29. What options are available if a party receives a better offer for limited goods it has
already contracted to supply to another party?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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30. What should a business be prepared for if it decides to ignore its contractual obligations?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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ANSWERS
Key Terms
Contractpage 101
An agreement between two parties that is enforceable in a court of law.
Objective standard testpage 106
The test based on how a reasonable person would view the matter.
Equal bargaining powerpage 107
The legal assumption that parties to a contract are able to look out for their own interests.

Matching
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Hpage 101
Gpage 106
Dpage 107
Fpage 101
Apage 102
Ipage 102
Cpage 101
Jpage 102
Bpage 107
Epage 101

Questions
1. What are the promises contained in a contract known as?
Page 101: The promises contained in a contract are known as terms.
2. Can people be forced into a contract? Explain.
Page 101: No, an agreement must be freely chosen and must not involve coercion or other
forms of serious unfairness.
3. Is a promise to do something for someone else enforceable as a contract? Explain.
Page 102: A promise to do something for someone else is contractually enforceable if it is
supported by mutual consideration. A legally binding contract involves a bargain or an
exchange between the parties. It means that each party must give something of value in
exchange for receiving something of value. It must be supported by mutual consideration.
4. Why should a contract be in writing?
Page 102: As a general rule, even oral contracts are enforceable, though it is preferable for
negotiators to put the contract in writing. In most Canadian jurisdictions, certain kinds of
contractssuch as those involving an interest in landmust be in writing to be enforceable.
5. Identify the main features of a contract.
Page 101: A contract is a deliberate, complete voluntary agreement between two or more
competent persons, supported by mutual consideration. It is not necessarily in writing.

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6. How is the concept of agreement a key part of a contract?

Page 101: An agreement is composed of an offer to enter into a contract and an acceptance
of that offer. The informing idea behind a contract is that there has been a meeting of the
minds and that the parties have agreed on their essential obligations to each other.
7. Explain the genius of contract law.
Page 102: The genius of contract law is that once a contract is created, it permits both
parties to rely on the terms they have negotiated and to plan their business affairs
accordingly. Contract law ensures that each party gets what it bargained for, namely,
performance of the promises made to it or monetary compensation in its place.
8. Can a contract be accidentally created? Explain.
Page 101: No, it cannot. A contract is deliberate; that is, both parties must want to enter into
a contractual relationship. They must intend to create legal relations.
9. Can anybody sue on a contract? Explain.
Page 102: No. Generally, only the parties to a contract can sue or be sued on it.
10. How does a contract ensure that each party gets what it bargained for?
Page 102: A contract provides evidence of the terms of the agreement between the parties.
In the event of breach, the offending party will be required to provide monetary
compensation to the innocent party.
11. What does a judge rely on to guide deliberations and resolve a contractual conflict?
Page 102: A judge resolving a contractual conflict usually relies on precedents and
applicable common law rules of contract, rather than on statute law, to guide deliberations.
12. What determines whether legislation or common law must be followed to resolve a
contractual dispute before the court?
Page 102: The nature of the contract determines whether common law or legislation, such as
the Sale of Goods Act, is relevant to resolving a contractual dispute before the court.
13. In what way is contract law considered to be facilitative?
Page 103: Contract law allows contracting parties to create their own rights and duties
within a framework of rules that a judge will enforce, if called on to do so.
14. Is ignorance of the law an excuse in contract law?
Page 103: No. Contract laws are applied by judges to resolve contractual disputes between
the parties, whether the parties were aware of those principles or not.
15. What is the danger of relying on casual understanding in business relationships?
Page 103: The danger is that cooperation and goodwill between parties can quickly
evaporate when a problem arises. Personnel can change; memories may be become selective
and self-serving; and genuine differences of opinion may arise. Although informal business
relationships can work, if something goes wrong, there is no remedy in contract law.

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16. Why is it important for a businessperson to know the point at which simple business
communication turns into a legal obligation?
Page 105: All business communication during contractual negotiations is automatically
laden with legal meaning.
17. Briefly outline Albert Carrs claims regarding the morality of businesspeople.
Page 106: Albert Carrs believes that the morality of the businessperson who conceals,
exaggerates, or misstates information is simply not in question. Mr. Carr suggests that short
of fraud or actionable misrepresentations, bending the truth is simply playing the business
game.
18. What is the first and foremost concern of contract law?
Page 106: First and foremost, contract law concerns itself with what the negotiators say and
do.
19. Discuss the objective standard test.
Page 106: The objective standard test asks whether a reasonable person, observing the
communication that has occurred between the negotiators, would conclude that an offer and
acceptance has occurred. Assuming that all the other elements are in place, if it appears that
one side has made an offer, the other side is entitled to accept the offer and the parties are
completely bound.
20. How is the position taken by courts in relation to equal bargaining power affected by
standard form contracts?
Page 107: Even in situations involving standard form contracts, the law expects people to
take care of themselves. While provincial consumer legislation may help in certain
consumer transactions, people should read and understand standard form contracts before
signing them.
21. What is the business reality regarding equality of bargaining power between negotiating
parties?
Page 106: The business reality is that negotiating parties rarely have equal bargaining
power. It is almost inevitably the case that one side will have more experience, knowledge,
market leverage, or other advantages. The greater a partys bargaining power, of course, the
more favourable the terms that party will be able to secure.
22. What is the rationale behind the laws approach to equal bargaining power?
Page 107: The rationale is that parties should be able to rely on contract commitments. As a
result, people are simply expected to take care of themselves.
23. Is the general approach to equal bargaining power ever ignored by courts?
Page 107: Occasionally, circumstances will favour one party over another to such an extent
that a court will come to the assistance of the weaker party and set the contract aside. Such
judicial assistance is very much the exception and not the rule.

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24. Why should a businessperson take business relationships into account when deciding
whether to sue for breach of contract?
Page 107: Contract law is concerned only with a specific transaction, not with the longerterm business relationship. Even if one party suffers a financial loss because of a breach of
contract, it may be a better business decision not to sue because of the negative impact that a
lawsuit will have on the ongoing business relationship with the other party.
25. Is there any downside to strictly observing legal rights? Explain.
Page 107: Yes, there can be a downside. Strict observance of its legal rights (including
launching/defending lawsuits) can damage a businesss reputation in the marketplace,
especially when consumers are involved.
26. Even with a contract in place, can problems arise? Explain.
Page 108: Yes, even with a contract in place that defines the obligations and relationship
between the parties, problems can arise because contracts can never be entirely black and
white. There is inevitably a grey area.
27. How can a manager approach the problem of a customer who wants to restrict a
contract?
Page 108: A manager can approach the problem with several objectives in mind:
maintaining the projects profitability, treating the customer with respect while seeking a
standard of reasonableness in return, ensuring that the work is completed on a safe and
timely basis without incident, not approaching matters legalistically, and understanding that
business relationships are long term and so is reputation.
28. Are there criminal consequences to breaching a contract?
Page 108: Contract law provides compensation for breach, rather than punishment. There
are no criminal consequences to breach of contract, and the law has traditionally refrained
from making moral judgments about business activities.
29. What options are available if a party receives a better offer for limited goods it has
already contracted to supply to another party?
Page 108: The party can complete delivery to the original party and decline the offer (abide
by the original contract) or abandon the original contract and supply the new request (breach
the original contract), with the expectation of compensating the original contracting party
either voluntarily or as a result of judicial judgment.
30. What should a business be prepared for if it decides to ignore its contractual obligations?
Page 109: It should be prepared to negotiate to pay compensation to the other contracting
party or be prepared to pay contractual damages for breaching the contract should the other
party sue and the lawsuit proceed to trial.

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