ESSENTIALS OF A CONTRACT
Our whole economy is based on the freedom of individuals to
contract and a system of laws that enforces contracts freely entered into. But a lot of
people may not be aware of what are the essential elements required to make an enforceable
contract. Recently I was asked if a contract not in writing is binding. We are so
accustomed to seeing contracts in writing that many people assume that a contract must be
in writing (and lengthy) before it is enforceable.
Agreement is essential to any contract. Before there can be a contract,
there must be a consensus ad idem: that is, there must be a meeting of the minds.
The two sides to a contract, whether for the construction of the liner Queen Elizabeth
or for having your lawn cut, must agree on the fundamental terms of the contract. There
must be an intention to enter into a legally binding contract. Whether the parties have
reached an agreement is determined by an objective standard. What each party believes the
other to be agreeing to will not be the determining factor. Rather, would an objective
bystander, acting reasonably, looking at all of the facts relevant to the question
conclude that the parties had come to an agreement on the essential terms of the contract
with the intent to form a legally binding relationship? If so, there is a contract between
the parties.
An agreement can be found in the simplest of words or conduct. The
contract for the construction of the Queen Elizabeth, one of the largest liners in
its days, was contained in a letter from the builder containing words to the effect
"We agree to build the Queen Elizabeth for 5 million pounds".
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To form a contract, there are no particular words that must be used by
the parties. However, there must be an offer by one side and an acceptance of the offer by
the person to whom the offer was made. Without both an offer and an acceptance, there can
be no consensus ad idem or a meeting of the minds which is essential to form a
contract.
An offer is simply a statement or other indication that the individual
is prepared to enter into a contract with another on certain terms. The offer must be
expressed in a manner capable of acceptance without anything further required of the
person receiving the offer other than to indicate acceptance. It must also be clear that
the person making the offer is prepared to be bound by the terms if the offer is accepted.
If I make the statement to you "I will cut your lawn for $5.00", this is an
offer which on acceptance will form a contract.
The offer must be more than just an "invitation to treat";
that is, not merely expressing a general intent to enter into a contract and inviting an
offer in keeping with the general intent. A good illustration is the display of
merchandize at a store with a price tag. The display of the merchandize does not
constitute an offer waiting for a customer to walk in and accept the offer. Rather, it is
an invitation to treat by the store owner. The offer is made when the customer presents
the merchandize to the cashier and tenders the amount of the price. At that point, the
merchant is free to accept the offer and sell the item. To illustrate this, lets assume a
mischief maker has switched price tags so that the latest cd by the hottest jazz sensation
is priced at $5.00. When you take this to the check-out counter, the store is not bound to
sell the cd to you for this price. The store owner is perfectly entitled, in law, to say
that the item is mislabelled and will not be sold for that price.
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Acceptance is simply some indication by the person receiving the offer
that the offer is accepted. The acceptance must be clear and absolute and without
conditions attached. The objective bystander must be able to determine that the offer has
been accepted. In response to my offer to cut the lawn, your response "That sounds
like a good deal" is not acceptance. If I proceed to cut the lawn as a result, there
is no contract. However, if you say words to the effect "we have a deal" or more
precisely, "I accept", then there is a binding contract. If I then cut the lawn,
I have an enforceable contract under which I could collect the $5.00.
The acceptance must be made before the offer has expired. Most offers
contain a time limit within which the offer can be accepted. Once the offer has expired,
it can not be accepted unless the person making the offer has renewed it. If there is no
time limit by which the offer must be accepted, then the law requires the offer be left
open for acceptance for a reasonable period of time. What exactly is a reasonable period
of time will depend upon the particular circumstances of each case. The offer must be
accepted before it is withdrawn. An offer can be withdrawn before acceptance unless one of
the terms of the offer is that it will remain open for acceptance until a specified time.
On occasion, the circumstances of the dealings between the parties may be such that the
law would impose a term on the parties to keep the offer open for acceptance for a
reasonable period of time.
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No conditions can be attached to the acceptance and the terms of the
offer can not be changed. If conditions are attached or terms are changed, the parties are
merely negotiating and may ultimately reach agreement on the terms of the contract. For
example, if your response is that you will pay me $5.00 to cut the lawn but I must cut
again next month for the same price, there is no contract. You have made a counter offer
which I am free to accept or reject. Likewise, the acceptance can not be conditional on
some other events.
The contract constitutes a bargain. The acceptance of the offer is the
bargain the parties have struck: - an exchange of a promise for a promise or act has been
made. It is this consideration that makes the contract binding. Consideration is some
benefit or advantage to the person making the offer and a corresponding cost or prejudice
to the person accepting the offer.
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It is left to the parties to determine whether or not the consideration
is adequate; only the parties can judge whether or not it is a good bargain. The law only
requires that there be sufficient consideration; something of value must be given. The
consideration can not be something given or promised in the past. To be valid, the
consideration must be a new promise or some fresh benefit exchanged for the offer. This is
subject to the courts refusing to enforce an alleged contract where the consideration is
so inadequate as to raise suspicions of fraud or to make the contract unconscionable.
In general then, as long as the basic elements of an offer and
acceptance with consideration are present, the parties have a valid and binding contract.
There is no requirement that the contract be in writing except in certain special
situations such as the sale of land. The problem is that if the verbal exchanges of the
parties are to be relied upon, it may prove difficult and in some cases impossible to
determine precisely the terms of the contract if there in fact is a contract. If the court
can not with reasonable certainty determine the terms that the parties have agreed to, the
court can not enforce the alleged contract. It is for this reason that it is wiser to have
a contract in writing although writing itself is no assurance that the alleged contract is
clear and precise.
If you have any questions on the issues discussed
above, or on any legal issues in general, please contact
Sucha S. Ollek at: info@e-law.bc.ca.
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