Contract Law -- Legal Advice for Small and Medium Sized Businesses

The Essential Elements of a Contract

A contract is a promise or promises, made by at least two parties, which is legally actionable if the promise is not kept. Everyday without realizing it we enter into numerous contracts.

In business it is essential that you recognize when you are entering a legally binding contract by knowing and identifying its 3 legal essentials: an offer, acceptance and consideration.

a.         Offer and Acceptance

To reach a contract there is a type of negotiation process during which an offer is made, and accepted.

An offer is defined as:

“An intimation, by words or conduct, of a willingness to enter into a legally binding contract, and which in its terms expressly or impliedly indicates that it is to become binding on the offeree or as soon as it has been accepted by an act, forbearance or return promise on the part of the person whom it is addressed.”

An acceptance is defined as:

“The expression, by words or conduct, of assent to the terms of the offer in the manner prescribed or indicated by the offeror.”

Often the offer and acceptance process is a very simple and informal one, for example you drive your car to a gas pump where the proprietor has offered impliedly to sell gas at $1.00 per litre, you accept this offer by the act of filing your gas tank.

 There are occasions where the offer and acceptance process is very complicated, involving many pages of terms constituting an offer, with the offer itself being revised many times through the negotiation process. For example, a lease agreement may be 50 pages long, and have taken months of offers, counter-offers, and negotiation to finally gain an acceptance, and finally becoming a legally binding agreement.

b.         Consideration

To be a legally enforceable promise a contract must involve consideration. Consideration has been defined in the following manner:

“A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other”

A gratuitous promise, being a promise without consideration, is not enforceable in Canadian Law. By way of an example if Tom promises to give Brian $1,000.00, but doesn’t, Brian cannot sue Tom to enforce a contract, as Tom only gave a gratuitous promise. If Tom promises to give Brian $1,000.00 if he cuts Tom’s lawn, and Brian cuts the lawn, then consideration has occurred, and Tom has a legally enforceable obligation to pay $1,000.00.

 Many times in business one comes across the following language:

“Now Therefore in consideration of the payment by X to Y of $1.00 and other good and valuable consideration, the payment of which is acknowledged by Y…”

This phrase in many contracts is meant to ensure that the legal requirement of consideration having been paid for a promise to be legally enforceable has been met. The token amount of $1.00 will be sufficient consideration for the promises made by Y, no matter how valuable those promises may be.

For more information contact Courtney Aarbo Barristers and Solicitors at www.courtneyaarbo.ca or info@courtneyaarbo.ca or phone 403 571-5120 .