Copyright © 2008 Pearson Education Canada6-1 Chapter 6: Formation of Contracts

Copyright © 2008 Pearson Education Canada6-2 Contract Law  A contract is a voluntary exchange of promises, creating obligations which, if defaulted on, can be enforced and remedied by the courts.  Primary concern of the courts is to enforce the reasonable expectations of the parties

Copyright © 2008 Pearson Education Canada6-3 Ingredients of a Contract  1. Consensus  2. Consideration  3. Capacity  4. Legality  5. Intention  6. Writing  (Note that writing is not required for a contract to exist.)

Copyright © 2008 Pearson Education Canada6-4 Consensus  A meeting of the minds of contracting parties  Share an understanding of the bargain struck  Be willing to commit themselves to terms  Terms must be unambiguous  Failure to read a contract is no excuse  Comprised of Offer and Acceptance

Copyright © 2008 Pearson Education Canada6-5 Offer  Offer must contain: terms of the contract terms of the contract a communication of willingness to be bound a communication of willingness to be bound terms of offer must be clear terms of offer must be clear terms can be implied terms can be implied

Copyright © 2008 Pearson Education Canada6-6 Invitation to Treat  An invitation to the general public to engage in the bargaining process advertisements or sales promotions are not binding offers advertisements or sales promotions are not binding offers articles displayed for sale are not offers but merely invitations for customers to offer to pay the price of the item articles displayed for sale are not offers but merely invitations for customers to offer to pay the price of the item

Copyright © 2008 Pearson Education Canada6-7 Communication of an Offer  An offer must be communicated  Disclaimers of responsibility must be posted in plain sight or printed on back of tickets  Only the person or group to whom offer is made can accept it.

Copyright © 2008 Pearson Education Canada6-8 End of an Offer  Offer ends at a specified time or  After a reasonable time if not specified  At the death or insanity of offeror  When it is revoked before acceptance and the revocation is communicated to offeree  When offer is rejected or counteroffer is put forward  When the subject matter becomes illegal or is destroyed

Copyright © 2008 Pearson Education Canada6-9 Question for Discussion  The possibility of revoking an offer should not be available in some situations. For example the requesting of tenders For example the requesting of tenders  Is it reasonable to deny the seller in such a circumstance the right to withdraw the offer? How are such problems overcome?

Copyright © 2008 Pearson Education Canada6-10 Question for Discussion/2  The law assumes that parties to a contract are in equal bargaining positions.  This is not always the case especially when individuals contract with large businesses like department stores and banks.  How does the law remedy the inequities that can occur in such contractual relationships?

Copyright © 2008 Pearson Education Canada6-11 Case Summary  Dickinson v. Dodds Dodds offered to sell Dickinson his land with the offer open to a specified time. He sold the property to someone else before that time. Dodds offered to sell Dickinson his land with the offer open to a specified time. He sold the property to someone else before that time. Dickinson learned that he had sold it but accepted the offer before the deadline and then sued for compensation. Dickinson learned that he had sold it but accepted the offer before the deadline and then sued for compensation. Had Dickinson not known of Dodds’ revocation, Dodds would have been liable for the breach Had Dickinson not known of Dodds’ revocation, Dodds would have been liable for the breach

Copyright © 2008 Pearson Education Canada6-12 Acceptance  Must be unconditional  Must not specify any new terms  Court will interpret any ambiguities in the offer to give effect to the intentions of the parties  Will not overcome the defect of an incomplete or defective offer

Copyright © 2008 Pearson Education Canada6-13 Communication of Acceptance  Usually by communication to the offeror  Effective at time acceptance is communicated  Sometimes by conduct  By performance of the act stipulated in offer  Silence is not acceptance unless part of on-going business relationship  Note negative-option schemes

Copyright © 2008 Pearson Education Canada6-14 Post Box Rule  When acceptance is mailed, it is effective when and where it is posted  Rule applies only when response by mail is appropriate  New methods of communication makes the expansion of the post box rule unnecessary

Copyright © 2008 Pearson Education Canada6-15 Question for Discussion  Consider the problems that new methods of communication bring to determining the presence of consensus in a contract

Copyright © 2008 Pearson Education Canada6-16 Question for Discussion/2  Electronic mail, for example, might make it difficult to distinguish between an offer and an invitation to treat, or when it has been revoked. How might these difficulties be resolved by the courts?

Copyright © 2008 Pearson Education Canada6-17 Consideration  The price one is willing to pay for a promise. All parties must derive some benefit from the deal. Consideration must be:

Copyright © 2008 Pearson Education Canada6-18 Consideration/2  specific - not necessarily money  legal  in the present  one-sided promises not enforceable  exception - promissory estoppel.

Copyright © 2008 Pearson Education Canada6-19 Adequacy of Consideration  Need not be fair but unfair consideration may indicate insanity or fraud  Must be specific - the price for the product or service must be stated or in some limited situations a reasonable price will be implied.  Existing Duty - a change in the contract requires new consideration

Copyright © 2008 Pearson Education Canada6-20 Exceptions  Paying less to satisfy a debt  Settlement out of court  Request for services  - quantum meruit

Copyright © 2008 Pearson Education Canada6-21 Exceptions/2  Promissory estoppel rely on gratuitous promise rely on gratuitous promise can only be used as a defence can only be used as a defence  Sealed documents Courts will not address the issue of consideration if contract is sealed Courts will not address the issue of consideration if contract is sealed

Copyright © 2008 Pearson Education Canada6-22 Question for Discussion  Invoking the principle of promissory estoppel or placing a legal seal on a document that is evidence of a contract eliminates the need to have consideration.  Are these reasonable exceptions to the rule or should consideration even be considered a necessary element to a binding contract?

Copyright © 2008 Pearson Education Canada6-23 Case for Discussion  The owner of a marina promised to give a friend a boat which would be delivered to him 6 months later.  In the meantime the owner recommended that his friend reserve moorage at his marina in order to ensure a spot when he took possession of the boat.  The friend did so and then the owner reneged on his promise to give him the boat but wanted payment for the reserved moorage