Contracts
Last Verified:
2005-07-08
Summary
What is a contract?
A contract is a legally enforceable agreement between two or more parties. In order to be valid, a contract must have three elements:
an offer:
- The offer may take various forms (buy / sell / exchange, goods / services).
- It doesn't need to be in writing to be legally effective (it can be made verbally or otherwise) as long as the person making the offer communicates the offer to the person to whom its being made.
an acceptance:
- Once the offer is made, the offeree (the person to whom the offer is made) can either accept it or reject it.
- If he/she chooses to accept, and if he/she meets any other condition the offeror (the person making the offer) requires, the acceptance must be communicated to the offeror (again, that acceptance can be communicated in many different ways unless the offer itself requires a specific type of communication).
- Once the offer has been accepted, it cannot be revoked. And once the acceptance has been communicated, it cannot be revoked; they both stand unless both parties agree otherwise.
- If the offeree refuses the offer, he/she can communicate rejection or remain silent. Note, however, that taking actions that indicate acceptance (selling the goods delivered by the offeror for example) may amount to acceptance regardless of what you do or do not say.
- Remember that as an offeree, you can change the terms of the offer by making a counteroffer. If you choose to do so, remember that the original offer is no longer open for acceptance by you: you cannot accept it if the offeror rejects the counteroffer.
a consideration:
- The consideration is something you give in exchange for something you get.
- In most contracts, consideration must flow both ways, and the offeror and offeree must each receive something in return for what they obligate themselves to do. That's why the Law enforces only bargains or exchanges and not simply agreements and gratuitous promises.
- Canadian courts will not evaluate the adequacy of consideration (if the exchange was a fair one); that is left to the parties to determine.
- It is important to indicate "sufficiency of consideration" in the contract (consideration has to be real and must be sufficient for a contract to be binding).
What does a contract do?
The contract does three important things:
- determines your rights and obligations.
A contract can revoke the rights and obligations that you have under the common law or statute. Therefore, make sure you read it carefully to ensure that you get what you asked for and the other party isn't entitled to take what you did not intend to give.
- allocates risks.
Try to anticipate what can go wrong and address these potential problems in advance. This implies knowing who is responsible if something goes wrong.
- provides a legal basis for restitution.
Every contract has the weight of the law behind it. If a party breaches an obligation mentioned in the contract, that breach can give rise to a legal claim for restitution.
Who may enter into a contract?
- an individual, provided that this person is not a minor. The name of each person who is a party should be mentioned in the agreement, and you should ensure that you are dealing with the right person by checking their identity.
- a business entity . Any type of business (sole proprietorship, partnership, or corporation) can be party to a contract. No matter what type of business entity you are dealing with, remember to obtain some evidence as to its precise legal name and the name of the person entitled to sign the agreement on behalf of the business.
Whom does a contract bind?
A contract only binds the parties to it, and no one else. According to the doctrine of privity, anyone who is not a party to the contract is considered a third party and cannot be obligated to do anything required under the contract. If you want to add another person to the contract, this person should be added as a party and you should obtain a signature to prove consent.
When are you exempt of contractual obligations?
If you or another party breaches a contractual obligation, any party who has suffered a loss as a result is allowed to bring a legal claim against you for restitution. However, the law recognizes a few circumstances under which a party will not be required to perform its obligations under a legally binding contract:
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frustration
Frustration means that circumstances make it impossible for the contract to be performed. These circumstances can be natural disasters, death of a party to the contract, or if something that should have occurred didn't (you were supposed to provide your catering service for the Queen's planned visit to your hometown and she cancels). To determine whether a contract has been frustrated, a court looks at what is reasonable in the circumstances and if requiring the performance will radically change the agreement.
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agreement or termination
This circumstance occurs when a party agrees to release another party from its obligation, or agree to allow another way to satisfy an obligation that was not provided in the contract (payment by certified cheque instead of cash). Both parties might also agree to alter their respective obligations under the contract by amending or modifying the terms (change of the delivery date and acceptance of the goods being delivered), or they might agree to terminate their obligations under the contract. Note that an agreement should be amended or terminated in writing.
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as a result of a breach
A party will not be required to perform its contractual obligations if another party has breached the contract. This can happen in two ways: before the party is actually responsible to perform the obligation (a supplier who agreed to deliver a quantity of goods and sold them to someone else without providing you with replacements) or at the time it is to be performed (another party was supposed to pay you on a certain date and does not do so). However, not every breach is sufficient to end the contract. It must be a breach of an essential term and must go to the very heart of the contract (delivery of 99 items instead of 100 is not sufficient to treat the contract as at an end).
What remedies are available to you if another party breaches the contract?
A breach of contract gives you the right to sue. But what can you get from suing?
- damages
Damages (money) are awarded for any loss that a party has suffered as a result of a breach of contract. The amount of damages awarded to the innocent party are such as to place that party in the position it would have been if the contract had not been breached. This can include loss of profits, reliance and cost of replacement. Note that you will not always be able to recover all such losses when suing for damages: much depends on the particular facts of the case and what you can prove to be a loss attributable to the breach and not something else. Moreover, you have the obligation to reduce the extent of damages by taking any reasonable step available to you to reduce the extent of the damage caused by the other party's breach. Damages are not intended to punish the breaching party. Although punitive damages exist in Canada, they are awarded only when the breaching party has behaved in a truly reprehensible manner.
- specific performance
An award of specific performance means that the breaching party will be ordered to do what the contract says that party is obligated to do. Because of the problem associated with an order of specific performance (loss of profits already suffered, item out of stock, obsolete or already replaced, having to deal with the same person again), this remedy is awarded only when damages would not provide adequate restitution (item is by definition unique, original and irreplaceable).
In what circumstances might you not be able to obtain remedy for a breach of contract?
Not every breach of contract will automatically lead to an award of damages or specific performance. In the following circumstances, the court decides that a contract is invalidated (no legal effect) and refuses to enforce it:
- misrepresentation
A misrepresentation is a statement which is false, concerns a matter of fact (not an opinion), is addressed to the party misled by the statement, and induces the party to whom it was addressed to enter the contract. There is different type of misrepresentation: pre-contractual misrepresentation (during negotiation), negligent misrepresentation (the accuracy of the statement was not verified), fraudulent misrepresentation (done intentionally), innocent misrepresentation (neither fraud or negligence are present).
- mistake
Mistakes can occur due to a failure to accurately set out the intentions of the parties (delivery on "September 31 , 2007"), due to overpayment (the person who receives the cheque is not entitled to the overpayment except if it would be unfair to require this person to refund the overpayment), if both the parties are unaware of a change in regulations affecting the contract. Again, a mistake must affect a fundamental term of the agreement for a court to set aside a contract.
- unconscionable conduct
A contract is unfair or unconscionable in situations where a stronger party exercises its bargaining power in an unscrupulous manner to take advantage of a weaker party. The contract has to be clearly unfair (with a view to what parties bargaining freely on equal term might have done) to be set aside.
What do you need to know about reading a contract?
- Read ALL the contract, including the fine print and the back: every word counts.
- Does the contract accurately say what you agreed would be the arrangement between you and the other party?
- What are each parties' obligations under the contract? When is the payment due? If you have to pay, do you have enough money?
- Does the contract cover everything? Is there anything else that should be said?
- When does the contract come into effect and when does it end?
- As you read and answer these questions, make notations on the contract itself, it should be the basis of any changes you wish to propose.
- Sign only when the changes have been made and the contract says what you want it to say.
What do you need to know about writing a contract?
Your contract can be either a standard contract form or a letter form. Although they appear to be different, they both do the same: they express the intentions of the parties and represent a legally enforceable document.
Key elements
Date: Adding the date at the top of the agreement is important because it establishes when the contract was entered into by the parties, and unless there is something in the agreement to the contrary, when the contract takes effect.
Parties: The contract must contain the names of all the parties to it for the sake of clarity and privity.
Background: Most agreements begin with a statement about the background of the agreement. This establishes the context within which to read the agreement. The background does not have any legal effect, its purpose is purely informative.
Terms: The terms are often considered the most important part of the contract: they set out the rights and obligations of parties and explain what the agreement is about. The term should be organized in logical sequence:
- what the first party is going to do
- what the second party is going to do
- terms of payment
- matters relating to the termination of the agreement
- warranties of the parties (if false will allow the other party to sue for damages)
- conditions precedent to the agreement
- indemnities (protection from unforeseeable contingencies)
- general matters relating to the rights and obligations of the parties
Signature lines: By signing the contract, each party indicates that it agrees to be bound by the agreement's terms. For individual parties, the individual name should be written out under a solid line. The individual will then sign on that line. A witness should then sign after the individual signed. If a business entity is signing the contract, the business entity's name should be set out above a blank line on which the entity's representative would then sign his/her name. No witness signature is required. If it's a corporation, the company's seal should be applied next to the representative's signature.
Guidelines
- maintain a logical sequence of events
- use the active voice
- define the key terms
- follow the rule of one idea for one sentence
- avoid undefined adjectives and adverbs
- use plain language
- be consistent in the use of terms
- avoid ambiguity even if it makes you redundant
- say only what you have to say
- avoid legalese (archaic language sometimes used by lawyers).
Sample contracts
Web sites offering sample contracts on the Internet are listed on the hotlinks section of our web site under "Legal resources" at http://www.cbsc.org/servlet/ContentServer?pagename=CBSC_AB/CBSC_WebPage/AB_WebPage_Template&cid=1104766632008&c=CBSC_WebPage .
However, remember that these sample contracts and agreements are merely starting points for the preparation of such documents. We recommend that you seek professional legal counseling before using any of these documents or entering into any contract or agreement.
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