Some of the essential elements of a contract

are:
 the intention to create a legal relationship;
 offer and acceptance of the offer;
 an exchange of something of value, usually
referred to as consideration;
 legality.

Emond Montgomery Publications 1

•All contracts contain promises, but not all promises
become contracts.

•To be a legal contract, the promisor (the person

making the promise) must intend to be bound by the
promise.
 Formation of a Contract: Intention

 How to prove intention to be bound — courts rely on

presumptions of law.
 There are starting presumptions in certain situations:
◦ In an arm’s length transaction, the presumption is
that the promise was binding.
◦ Promises made between family members and in
social situations are not presumed to be binding.
 Once the court makes a presumption, the onus shifts
to the other party to prove that the presumption is
incorrect.
 Proof is based on:
- The conduct of the parties at the time the promise
was made.
- The circumstances surrounding the making of the
promise.
- The statements made by the parties.
- The relationship between the parties.
 The test is, “Would a reasonable person hearing the
promise assume that the promisor intended to be
bound?”

See the case of Higgins v. Lessig in your text where

a farmer, whose $15 harness is stolen, declares he
will pay a $100 reward for information about the
identity of the thief.
 Examples where intention to be bound is lacking:

◦ Jokes — I’ll pay $500 to anyone who will marry

my son.
◦ Social arrangements — “To offer a friend a
meal is not to invite litigation.”
◦ “Mere puff” — exaggerated advertising claims
(Carlill v Carbolic pg. 15).
 Mother agreed to pay allowance if daughter
would leave her current employment and
study for the bar in England
 Daughter quit job and began studies in UK
 Mom paid allowance
 Daughter could not find housing so mom
agreed to also pay for housing
 Mom and daughter had dispute and mom
applied to evict daughter
 Is this a valid contract?
 Court held this was merely a family
arrangement made in good faith and was not
intended as a rigid, binding agreement
 Not enforceable
 One judge dissented: based on objective test,
there was intention
 The element of offer and acceptance goes to the
requirement of agreement.
 How do courts decide whether a contract has been
formed?

◦ They ask — “Would a reasonable observer assume

an agreement to have been concluded on certain
(as opposed to uncertain) terms?”
◦ Formula — Has one party (the offeror) made an
offer which has been accepted by the other party
(the offeree)?
 Offer (different definition from the one in the text):
- A statement of willingness to contract on
specified terms with the intention that, if accepted,
it shall become a binding contract.

- The offer must contain all of the terms of the

contract, either explicitly or implicitly.
 An offer may be addressed to one particular
person, a group of persons, or to the world at large
(for example, offer of a reward).
 The Carlill/Carbolic Smoke Ball case is an example
of an offer to the world at large. (Actions of
company showed that not “mere puff,” it intended
to make offer — deposited 100L with bank.)
 An offer must be distinguished from an invitation
to do business — for example (invitation to treat)
— which is a request for offers.

Examples:

◦ Advertisements of goods for sale (although some

advertisements have been found to be offers —
for example, gate crasher specials
◦ Display of goods in a store with a price is an
invitation to treat.
Communicate an offer. Offers can be made:
- verbally,
- in writing, or
- through gestures (for example, raising hand for a
bid at an auction).

The offer must be communicated by the offeror

to the offeree before it is capable of being
accepted.
 Only the person to whom an offer is made may
accept it.
 Definition of acceptance:
- Acceptance is an unconditional agreement,
communicated by the offeree to the offeror, to all
terms of the offer, with the intention of accepting.
Rules that have evolved regarding acceptance of an
offer.
1. Acceptance must be unconditional:

- There must be no change in the terms of the

offer. If there are any new terms, the result is a
counteroffer.

- The offeree may request information (for

example, as to delivery terms) and it doesn’t
constitute a counteroffer.
2. Acceptance must be communicated by the offeree
to the offeror. Bilateral contract. (performance can
come later). I will pay you $100 to deliver my
goods.

Exception = unilateral contracts — If you do

something, I promise to do something (for
example, a reward).
If you find my dog, I will pay you $500. In this
case performance constitutes acceptance.
There is no need to notify the offeror of the
intention to accept.
3. Acceptance must be in the manner stipulated in
the offer.
◦ Example: The offer may state that it must be
accepted in writing or in person.
◦ If no manner is stipulated, acceptance may be
made in any customary manner — must be
reasonable.
◦ The courts will look at the form in which the
offer was made, the usual and ordinary way of
doing business in a particular industry, and the
history of dealings between the parties.
4. Acceptance must be within the time stipulated
in the offer.
If no time is stipulated, acceptance must be
within a reasonable time.
What is reasonable depends on the subject of
the offer — for example, the time for
acceptance of an offer relating to perishable
goods will be short.
5. Acceptance must be given in exchange for the
offer.

◦ If two identical offers cross in the mail, there is

no contract until one party accepts one of the
offers.
 This is an important question because once an
offer is accepted there is a contract and neither the
offer or the acceptance can be revoked.
6. Once an offer is accepted, there is a contract,
and neither the offer nor the acceptance can be
revoked.

7. The general rule is that acceptance is effective

when it is communicated to the offeror.
◦ Oral acceptance — takes place when the words
are spoken, in person or by telephone.
 What about when acceptance is mailed? There is a
rule to answer that question called the postal
acceptance rule. (Post-Box Rule)

 Acceptance becomes effective when it is mailed

even though the offeror is not aware that
acceptance has been made. Applies even if the
letter is delayed, destroyed or lost.
 Example: On September 1, Alex offers to buy
Betty’s computer for $500. Betty accepts by letter
mailed on September 10. The letter is not received
by Alex until September 20. On September 15, Alex
phones Betty to withdraw the offer. Can he do that?
 The offeror may override the postal acceptance rule
in the offer by saying that acceptance by mail is
acceptable but will only be effective when the letter
is actually received.
 Telegrams follow the postal rule, as do recognized
couriers.

 Other forms of communications (for example, fax,

e-mail, or voicemail) acceptances must actually be
received by the offeror to be effective.
Jill has been negotiating the purchase of a
speedboat with Sandi during the past two
weeks. Two days ago, she wrote to Sandi,
saying "I won't go any higher than $8 000. Take
it or leave it, but that's my final offer." By
coincidence, Sandi sent a letter the same day
which said "I won't take less than $8 000, so if
you can't accept that, I'll have to look elsewhere
for a buyer." The letters have both arrived today
at their destinations. There is a contract
between Jill and Sandi.
 An offer may be terminated in any one of the
following ways:

◦ counteroffer
◦ rejection
◦ revocation
◦ lapse
◦ death, bankruptcy, etc. of either party
 Counteroffer — if the offeree makes a counteroffer,
the original offer ends.

 Rejection — if the offeree rejects the offer, the

offer ends.
 Revocation — the offeror can revoke or withdraw
the offer any time until it has been accepted.

 The revocation must be communicated to the

offeree before the offer is accepted.
 Lapse
◦ If an offer is stated to be open for acceptance for
a fixed period of time, at the end of that period
the offer will lapse.
◦ If no period is stated in the offer, the offer will
lapse after a reasonable time.
◦ What is reasonable depends on the circumstances
of the subject matter of the offer.
 An offer also ends if either party dies, declares
bankruptcy, or is declared insane prior to
acceptance of the offer.
 A contract is not enforceable unless it is either
under seal or gives something of value to the other
party.
 That something of value is called consideration.
 Without consideration, all you have is a gratuitous
promise, which the courts will not enforce (unless
C under seal).
Consideration may be:
 money,

 an act,

 forbearance (refraining from doing something or

giving up a right), or
 a promise.
 When the consideration on both sides is a promise,
so that performance by both sides takes place in
the future, the contract is called an executory
contract.
 Example: Carla agrees to deliver 500 pairs of
children’s shoes to The Bay in two weeks’ time, and
The Bay agrees to pay $10,000 on delivery.
1. Consideration must be:
 present consideration = something that is to be
received at the time the contract is made or,
 future consideration = something that is to be
received in the future,
 but it cannot be past consideration = something that
was received before the promise was made .

 Example: A woman does work on a house owned by

her uncle. After the work is completed, the uncle
promises to pay her for her work. The promise is not
enforceable because the consideration is past. The
uncle’s promise is simply a promise to make a gift.
2. Consideration must be valuable, but not
necessarily adequate (p.26).

- Consideration must have some monetary value.

However, subject to fraud or misrepresentation,
the court will not examine the adequacy of the
consideration.
- It is up to the parties to negotiate their deal,
not the courts.
3. Performance (or the promise to perform) an
existing duty is not good consideration.

◦ Example of an existing public duty — A police

officer can’t charge a citizen money to protect
him. The officer already has a duty to do so.
◦ Example of an existing contractual duty — An
employer promises an employee extra pay if she
does a good job. The employee is already obliged
by the contract of employment to do a good job.
4. Agreements for the part payment of a debt.

 At common law, agreements for the part payment

of a debt are not enforceable because there is no
consideration for accepting less than the full
amount.
◦ Related to the issue of performance of an
existing duty.

- If you owe me $10,000 and can’t afford to pay

me, you might approach me and try to settle
the debt for a lesser amount. If I agree to
accept $5,000 in full payment of the debt, is
that agreement enforceable?
What consideration are you giving me?
You are already obliged to pay me the $5,000.
 The position at common law is that my agreement
to accept the $5,000 can’t be enforced because of
a lack of consideration from you, and I could
therefore accept the $5,000 and then sue you for
the balance. BUT a statute in Ontario, the
Mercantile Law Amendment Act, has changed the
common law.
 Under that statute, my acceptance of the lesser
sum would act as a full discharge of the debt.
 Another way to hold that my promise (to accept a
lesser amount than $5,000) is enforceable is
through the principle of promisory estoppel.
 Promisory estoppel is an equitable principle that in
some circumstances allows a defendant to use a
gratuitous promise as a defence against a lawsuit
that contradicts the promise.
 This principle applies when a promisee relies in
good faith on a gratuitous promise only to find
later that the promisor has changed his/her mind.
 The principle can be applied to the situation of a
settlement of a debt by part payment.
 For example, in the situation above, you tell me
that you have no money, but that you will borrow
the $5,000 to pay me back. I agree to accept the
$5,000, and you go ahead and borrow the money
in reliance on my promise not to sue you. If I turn
around later and try to sue you, I will be estopped
from suing you for the balance.
 Five elements must be present to find promisory
estoppel:
1. There must be an existing legal relationship between
the parties.
2. One of the parties promises to release the other from
some or all of the other’s legal duties to him/her.
3. The other party acts in reliance on that promise to
his/her detriment.
4. The promisee must have acted in good faith and it
must be inequitable for the promisor to go back on
his/her word.
5. Promisory estoppel is used as a defence only; it is
not the basis for a cause of action. “Estoppel is a
shield, not a sword.”
1. Documents under seal)

 A gratuitous promise made under seal will be

enforced.
◦ Originally, a seal was used on a document to
prove its authenticity and to substitute for a
signature, when few people could read or
write. The seal was usually made of wax and a
signet ring was pressed into the wax.
◦ Over time, gummed wafers were substituted.
Some documents have a seal drawn onto the
page. Even the word “seal” can constitute a
seal.
◦ A document under seal is called a deed.
2. Promise of a gift to charity)
◦ A gratuitous promise to donate money to a
charity (a pledge) will be enforced if the charity
has made legal commitments based on the
pledge (for example, hiring a contractor or
purchasing materials) and the pledge constitutes
a substantial portion of the funds needed.
 Equitable doctrine — no one should unjustly
benefit from the labour or materials of another.
 Law implies a promise to pay a reasonable amount
for work completed if no contractual price
mentioned in contract
OR
 if contract substantially performed but not
completed.
 Quantum meruit is not really damages,
 it is a method that allows a party to receive
compensation/payment for the work
completed on a contract that has been
breached by the other party.
◦ An order for quantum meruit does not come out
of the contract but is based on an implied
agreement that it is just and right for a party to
be paid reasonable compensation for what they
have done.
◦ The claim for quantum meruit cannot be made by
the party who has breached the contract.
 Legality, or legal purpose, is one of the five
elements of a contract.
 The object or purpose of a contract must be legal.
 It must not violate any statute and it must not
offend public policy. The courts will not enforce
contracts whose purpose is unlawful.
 If the purpose of a contract is unlawful for either
cause — violation of statute, or contrary to public
policy — it may be void or illegal.
 The distinction between a void contract and an
illegal contract is important, because it affects the
extent to which the courts will help one or both
parties to the contract.
 Contracts may be illegal by statute, or illegal at
common law (because they are contrary to public
policy).
A contract may be expressly forbidden by a statutory
provision, or the prohibition may be implied.
Express — The Competition Act states that contracts entered
into to engage in practices that are prohibited under the
Act (for example, fixing prices or eliminating competition)
are illegal.
Implied — When there is a statute or bylaw requiring a
tradesperson or professional to be licensed, a contract by
an unlicensed person is void (illegal as performed).
◦ Contracts to commit a crime, tort, or fraud.
◦ Contracts promoting sexual immorality.
◦ Contracts prejudicial to public safety.
◦ Contracts designed to interfere with the
administration of justice.
◦ Contracts tending to promote corruption in
public life (bribes).
 The effects of illegality depend on whether the
contract was:
◦ illegal as formed or,
◦ illegal as performed.
◦ A contract is illegal as formed if the very creation of the
contract is forbidden (for example, a contract to
commit a murder or a contract that contravenes the
Competition Act).
◦ Effect — Neither party will be able to sue or acquire
rights under the contract.
◦ Money paid or property transferred under the contract
is not recoverable, with the following exceptions:
 This principle does not prevent recovery if a party can base
the claim on another cause of action.
 If one party is less “guilty,” that party may be allowed to
recover.
◦ A contract is illegal as performed if the contract
is lawful but is performed in an unlawful manner
(for example, a contract for work that is then
performed by an unlicensed tradesperson).
◦ Effect:
 The guilty party cannot sue on the contract
for damages.
 The guilty party cannot recover money paid or
property transferred under the contract
(although he/she can rely on another cause of
action to do so).
 The innocent party has full contractual
remedies.
 Some statutes expressly state that certain contracts
are void, for example:
◦ Workplace Safety and Insurance Act — a provision
in an employment contract that attempts to
deprive the employee of the protection of the Act
is void.
◦ Residential Tenancy Act— A provision in a
tenancy agreement that is inconsistent with the
Act or the regulations is void.
 Some contracts are void at common law — for example,
contracts that diminish competition (non-competition
clauses) are considered contrary to public policy and
therefore void unless they are reasonable as between the
parties and as regards to the public interest, for example:
A non-competition clause in an employment contract:
◦ Reasonable only if the employee has knowledge of trade
secrets or secret processes, or if the employee is in a
position of influence to entice away customers.
◦ The restraint must be no wider than reasonably necessary
and the restriction must be reasonable as to geographic
area and duration.
 Money paid or property transferred under the
contract is recoverable.
 The void term of a contract may be severed and the
remainder of the contract enforced.
 A void term won’t be severed if the effect would be
to eliminate the whole, or substantially the whole, of
the consideration or if it would alter the meaning of
the contract.
 Example: Contract for the sale of a business
containing a non-competition clause. If the clause
is unreasonable, it will be void, and could be
severed from the contract, but the contract for the
sale of the business would stand.
 Simple contract is an agreement creating an obligation in law when
one party promises to do, or refrain from doing, something in
consideration of something to be done by the other party.
◦ Can be verbal or in writing without seal.
◦ If there is no evidence in writing, there may be problems proving
the conditions or terms and having it enforced by the courts.

 Formal contract is a contract under seal.

– It is printed or typed, sealed. and delivered.
– Consideration does not have to be mentioned in a contract under
seal.

 Bilateral contract exists when both parties promise something before

performance takes place.
 Unilateral contract is a special type of arrangement when
there is no exchange of promises.
◦ One party only makes an offer and the contract offer is
accepted simply by the performance of its conditions and
without a separate communication of that acceptance (for
example, an offer of reward).
 Valid contract — the law accepts the contract as binding on
both parties. The contract contains all the elements or
requirements of a contract
 Unenforceable — the contract is one which is good
in substance; though, by reason of some technical
defect, one or both of the parties cannot be sued
on it.
◦ a contract may be good, but incapable of
enforcement because it is not evidenced by
writing as required by statute.
 Express term — a term that is clear and
unambiguous and may only be interpreted in one
way.
 Implied term — a term which is not expressed in
the contract but would likely have been included if
the parties had thought about it.
 Illegal — the contract never existed.
◦ It is void and is tainted with illegality.
◦ A contract which involves one or more of the
parties performing an unlawful act.
 Void — the law will not give effect to the contract as
there is an element or requirement missing.
◦ The contract never existed.
◦ The law will attempt to remedy the situation by
returning the parties to their original status before
the "contract.”
 Voidable — the contract does exist.
◦ It can be rescinded (revoked) or affirmed by one of
the parties at their option.
The Statute of Frauds
 A contract need not be written to be valid, it may
also be entirely oral, or partly oral and partly in
writing.
 The Statute of Frauds requires that certain
contracts should be evidenced in writing to be valid
and enforceable.
 If they are not evidenced in writing, they are
unenforceable.
 The Act, enacted in 1677 in England, became law in
Canada.
 Some provinces have repealed and/or amended the
Act (Ontario amended it).
Typical contracts covered by the Act are:

1. Contracts for the sale or other disposition of land

or an interest in it (except for leases of less than
three years):
◦ Any contract affecting the ownership of land
must be evidenced in writing (except lease less
than three years).
◦ Includes the subdivision of land, creation of
easements, and rights of way.
2. Contracts of guarantee
◦ The guarantor agrees to accept responsibility for
a loan should the person receiving the loan (that
is, the debtor) not repay the loan.
◦ A contract of guarantee has to be in writing.
◦ The guarantor’s liability arises only if the
principal debtor defaults. It is a secondary, not a
primary liability.
◦ If a person agrees to be pay whether or not the
other debtor defaults (for example, a co-signor
on a loan), that is a primary liability called an
indemnity. An indemnity does not have to be in
writing.
3. Promise of an executor
 An executor of an estate may promise to settle any
debts from his/her own resources.
 Any such promise must be evidenced in writing to be
enforceable.

4. Ratification of minors’ contracts

Requirements:
 The contract itself may be in writing or the
requirement is also satisfied if some memorandum
or note of the contract is in writing.
 Any written document or collection of documents
will suffice (for example, letters, receipts,
telegrams, or even notes) provided the
documents(s) contain(s) all of the essential terms of
the agreement.
 The document does not have to be signed by both
parties. It is only the party being sued who must
have signed. A plaintiff who has not signed a
contract can sue a defendant who has.
 This is an equitable doctrine.
 Only applicable to contracts for the transfer of
land.
 The Statute of Frauds, if strictly applied, could be
used to allow a party to escape performance and
thus perpetrate a fraud.
 A contract that involves the transfer of land may be
enforceable through the equitable remedy of part
performance even if the contract is not in writing.
 The doctrine of part performance states “that an
oral contract involving the transfer of land may be
enforced, if the promisee has performed some acts
in reliance on the promisor’s oral promise.”
 In essence the court accepts the part performance
as evidence of the existence of the contract in
place of a written memorandum.
Four criteria must be met before the doctrine will
be applied in Canada.
1. The plaintiff must prove that the agreement
involves the transfer of a specific interest in land
for which there existed specific part performance.
2. The plaintiff must show that enforcing the Statute
of Frauds would defraud the P and cause hardship
to the P.
3. Plaintiff must show that agreement involves a
legal interest in land.

4. The plaintiff must show that, except for the

requirement of writing, the contract is otherwise
valid and enforceable. There must be persuasive
oral evidence to support the existence of the
agreement.
Example: A statement in a letter or oral remarks to
a third party — for example, Thompson v. Guaranty
Trust of Canada [1974] SCR. The plaintiff worked
the deceased’s farm for 40 years for practically no
pay, based on the deceased’s promise that he
would get the farm when the deceased died. The
deceased stated to third persons that everything
would go to the plaintiff if he remained with the
deceased.
◦ The courts will try to find a written memo or part
performance to avoid the application of the
Statute of Frauds.
 There are statutes in addition to the Statute of
Frauds that require contracts to be in writing, for
example:
◦ The Consumer Protection Act states that an
executory contract for goods or services must be
in writing and is not binding on the buyer unless
the contract is signed by the parties and each
party has a duplicate copy of the original
contract.
◦ The Family Law Act requires domestic contracts
— cohabitation agreements, marriage contracts,
separation agreements — to be in writing, signed
by the parties and witnessed.