CHAPTER 6 CONTRACTS Overview Acontract is an enforceable voluntary agreement between two or more parties. The terms contract and agree- ment are interchangeable. An enforceable contract is one that a court upholds. Contracts take many forms: they may be written, oral, or partly written and partly oral. Contracts consist of express terms and implied fers, Express terms are words, phrases, or conditions that have been discussed and agreed to by the parties. Implied terms are those terms that have never been discussed or agreed to between the parties but which are taken for granted. While the law requires certain contracts to be in writing in order to be upheld by the courts, such as contracts relating to purchase and sale of land, contracts for construction projects, software develop- ‘ent, or consulting services need not be written. However, written contracts are always much easier to prove. From a theoretical perspective, the purpose of a contract isto set out the rights, responsibilities, and liabil- ites ofthe parties involved. But to the parties involved in a contract, the real purpose is to allocate risk and ‘hlgations between the parties. A party to the contract is said to be privy to the contract; the parties to the con- ‘act are in privity. Only parties to the contract can enforce a contract. Even if the contract had been created for their benefit, parties not privy to the contract may not enforce the contract.! | This chapter explains the basic principles of contract law. Most principles relate to whether a contract is _ thforeeable. Enforceability refers to the likelihood that a court would uphold a contract ora portion of it in the ‘Hent ofa dispute. Some agreements are unenforceable due to a flaw in the contract or in its formation; and ‘become unenforceable due to events that occur subsequent to the creation of the contract. ____ Twokey principles determine whether an enforceable contract exists: contract formation consisting of an “Werand an acceptance; and consideration. In addition, the parties must have legal capacity to contract and an on to create legal obligations, and the contract must have a lawful purpose. ‘tended third party beneficiaries cannot enforce a contract, except in rare circumstances. Until recently they could not enforce them at ase of london Drugs Ld. x Kuehne &= Nagle In Ltd, [1992] 3 SR. 298, nove allows employes to enforce exclusion clauses in contracts iio by thei employer. However, in the United States, intended third party beneficiaries ofa contract may enforce the contract. This is one of significant ferences in contract law between Canada and the United States,a 4g | CHAPTERS Contracts may become voidable due to events such as duress frustration, impossibility, mis- takes, misrepresentation, and unconscionabilty A voidable contract 0 be terminated or ended by a party that is not in breach of the contract but that party Hit also choose to continue with the 2 Part Parties sometimes raise these-events as defences fo claims that arise during or following, the performance of a contract. 61 Contract Formation, Offer, and Acceptance ‘A contract is formed between two or more parties when there's 28 offer capable of being accepted and an acceptance ofthat offer An offer is a proposal By an offeror to an offeree, containing the ¢s- sential terms of a proposed contract. An acceptance is an unequivocal agreement to an offer. Disputes sometimes arise regarding whether a statement constitutes an offer, i.e. whether it is capable of acceptance. A vague statement is not capable of acceptance. In addition, if an offer does define essential terms, such as the contracting parties the price, the time for performance, and the scope of the contract, it probably does not qualify as an offer, A request for offers is called an invitation to treat and is not an offer because it cannot De accepted. However, once in a bidding process, an invitation for bids may be considered an ‘offer? The law relating to bidding, the bid process, and its impact on offer and acceptance principles is discussed in Chapter 10. Many contracts are formed through negotiations. Parties send offers and counter-offers back and forth until the offer or one of the counter-offers is accepted. However if an offeree rejects an aier ot counter-offer, he of she cannot later accept it unless the offeror revives it. In other words, a counteroffer has the same effect asa rejection: it terminates the Pree offer. A rejection is an express or implied refusal to accept an offer; the offeror must communicate the rejection to the offeree to make the rejection effective. Furthermore, obligations of good faith are important to contracts: In Martel Building Ltd. v Canada? the Supreme Court of Canada established that once contac, exists, both parties have an implied good faith obligation in the performance of the contract. The parties also have an Gbligation of good faith during precontractual negotiations if they explicitly agree to negotiate in good faith, or if there isa statutory requirement to do so, as in collective bargaining, Bither party eee walk away from negotiations with impunity if they have not formed a contract or explicitly agreed to negotiate in good faith, since there is no ‘implied obligation of good faith in precontrac: tual negotiations. ‘Generally, a party can sevoke an offer at any time before if has been accepted. In order for a revocation to be effective, the offeror must communicate it fo the offeree. If an offer does not give verte Hit for acceptance, then itis assumed to be open for 2 period of time commercially rea~ sonable under the circumstances. ose an offer has been accepted, a contract has been formed. Only in rare circumstances is the formality of signing or executing the contract necessary: In maby circumstances, the commence- rent of performance by both parties of an unexecuted contract provides proof of an enforceable meta In auch eixcumstances, neither party can later deny the existence of a contract. "The offeror is entitle to specify the mode of acceptance, such a8 fax transmission, email, reg- istered mail or verbal agreement, An offeror who uses regular ‘mail may be presumed to be willing Torn pom Canaan law and American law dif in Canada an ination Or ‘dss legally an offer, whereas in the United states, its not 2000, SCC 60—x&x——"—S ~~ S=&@#H#=a ii iF Contracts | 45 tose the same method for acceptance. However, when regular ail is used, acceptance is deemed to have been communicated when the communication is placed into the mail system: This is known as the Postal Acceptance Rule. | “Acceptance may also be communicated by conduct: For example, if a potential client offers to pay a consultant to perform a site inspestion, the consultant accepts the contract by starting to per- form the inspection. \ewvever one important exception to the general offer and acceptan®® rule exists in the pro- urement context. Procurement isthe purchase of goods and/or services. Large-scale procurement ‘often occurs through a bid process.‘ A bid or tender is an offer made in compliance with a fixed scr of contract terms in a competitive process. An offer in the form of a bid is considered fixed for + set period of time before the bid is accepted. Parties soliciting bids need time to evaluate them snd ray insist that they remain irrevocable until the end of the evaluation period, usually 30 to 60 Gays. Similarly, bidders relying on supplies and subcontractor order to put abid together require teat the supplier and subcontractor prices be irrevocable forthe same period. 6.2 Consideration For an offer to be considered irrevocable, it must contain 28 enforceable promise not to revoke What males the promise enforceable is consideration, Consideration is an old legal concept mean- ing that something of value, however small, has been given or promised by each party to the con- wane In order for a contract to be enforceable, each party 19 the contract must receive consideration (see Figure 6-1). The primary consideration given by the client in a consulting con- vom isthe promise to pay the consultant’ fees and expenses. The primary consideration given by the consultant is the promise to perform the design work. FIGURE 6-1 Contractual Consideration ee na | | | | | Consideration fror Consideration irom B to A eel ee TT ‘See Chapter 10 sac ave way to enforce an irrevocable offer o prove that the promis 8 and has suffered a detriment as a result This it known stpominor eappel For example a general contactor who ssc promis art price would be abe to force the subcontractor 1 old that etjicae te general contactor woud be stuck wth haps compas © The bid, without anyone todo the work at that price. reece a deinton of consideration either ome ight nee Poor benefit accring to the one party, or some forbearance aoe Oy rxponsiy give ured, oF undertaken by the thet" Core ‘Misa (1875), LAR. 10 Bx. 153, a. 162