CH 06

StudyGuidetoaccompanyCanadianBusinessandtheLaw,5thedition
Chapter6
CHAPTER 6
FORMING CONTRACTUAL RELATIONSHIPS
Objectives
After studying this chapter, you should have an understanding of
how negotiations lead to a contractual relationship
how negotiations can be terminated
the legal ingredients of a contract
how contracts can be amended or changed
Learning Outcomes
Understand how business negotiations can result in the formation of a contract or

terminate without legal consequences (pages 114116)
Understand the essential elements of a contract (pages 114116)
Recognize when contracts can be amended and when they cannot (page 130)
Chapter Summary
A contract comprises four essential elements: an offer, an acceptance, consideration, and an
intention to contract. Before a contract can be formed, one party must make an offer on a
complete set of certain terms. An offer can be terminated in a number of ways, including by
revocation, lapse, rejection, counteroffer, death, or insanity. Assuming that an offer is on the
table, the other party must unconditionally accept all the terms of the offer for the offer to be
considered accepted. Each party must give something (called consideration) in exchange for
the promise or performance of the other. The parties must intend their bargain to be a
contractual one. If any one of these elements is missing, the relationship is non-contractual
by definition. There are occasions, however, when the law will enforce a promise that is not
supported by consideration. In short, if the promise is under seal, meets the requirements of
promissory estoppel, or is subject to a specialized statutory scheme, such as the partial
payment of debt, it will be enforceable. As well, the New Brunswick Court of Appeal is
willing to enforce gratuitous contractual variations provided there is no economic duress.
Aside from these exceptions, a gratuitous promise is not binding, no matter how seriously it
was intended and no matter how much the other party may have relied on it. This legal reality
is particularly important when varying a term in an existing contract. While the conditions
for creating a legal agreement may seem stringent, they serve an important purpose. Contract
law is about creating voluntary agreements and is therefore facilitative. In sum, it helps those
in the marketplace to determinein advance of litigationthe legal enforceability of
commitments they have received and thereby lets them do business more effectively.
2014NelsonEducationLimited
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Study Outline
Use this outline to prepare a complete set of notes for this chapter.
The Contractpage 114
______________________________________________________________________
______________________________________________________________________
Agreement ____________________________________________________________
Complete _____________________________________________________________
Deliberate _____________________________________________________________
Consideration __________________________________________________________
Offerpage 114
______________________________________________________________________
Certainty of Offer _______________________________________________________
______________________________________________________________________
Invitation to Treat _______________________________________________________
______________________________________________________________________
Standard Form Contract __________________________________________________
______________________________________________________________________
Offeror _______________________________________________________________
______________________________________________________________________
Offeree _______________________________________________________________
______________________________________________________________________
Termination of Offer_____________________________________________________
Revocation _________________________________________________________
______________________________________________________________________
Firm offer _______________________________________________________
Option agreement _________________________________________________
Lapse _____________________________________________________________
______________________________________________________________________
Rejection __________________________________________________________
______________________________________________________________________
Counteroffer ________________________________________________________
______________________________________________________________________
Death or insanity_____________________________________________________
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Acceptancepage 122
______________________________________________________________________
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Definition of Acceptance _________________________________________________
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Communication of Acceptance_____________________________________________
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Electronic Contracting: Certainty of Offer and Acceptance_______________________
______________________________________________________________________
Formalization __________________________________________________________
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Considerationpage 128
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The Nature of Consideration_______________________________________________
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Gratuitous promise ___________________________________________________
Pre-Existing Legal Duty __________________________________________________
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Variation of Contracts____________________________________________________
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Promises Enforceable without Considerationpage 131
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Promise under Seal ______________________________________________________
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Promissory Estoppel _____________________________________________________
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Partial Payment of a Debt _________________________________________________
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Intention to Contractpage 135
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Business agreements _____________________________________________________
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Family agreements ______________________________________________________
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SELF-ASSESSMENT
Key Terms
Briefly define each term in the space provided.
Offerpage 114
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Invitation to treatpage 115
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Standard form contractpage 116
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Offerorpage 118
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Offereepage 118
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Revocationpage 118
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Option agreementpage 120
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Lapsepage 121
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Rejectionpage 122
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Counterofferpage 122
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Acceptancepage 122
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Gratuitous promisepage 128
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Pre-existing legal dutypage 130
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Promissory estoppelpage 132
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Matching
Match each term to its definition below by writing the correct letter in the space provided.
A
B
C
D
E
F
G
H
I
J
Contract
Offer
Counteroffer
Invitation to treat
Revocation
Acceptance
Electronic business
Promissory estoppel
Consideration
Gratuitous promise
1. ____
2. ____
3. ____
4. ____
5. ____
6. ____
7. ____
8. ____
9. ____
Commercial transactions conducted over the Internet.

The rejection of one offer and proposal of a new one.
An agreement between two or more parties that is enforceable in a court of law.
An expression of willingness to do business that carries no legal repercussions.
An unqualified willingness to enter into a contract on the terms in the offer.
The withdrawal of an offer.
The price paid for a promise.
A promise to perform specified acts on certain terms.
A promise for which no consideration is given and that can be broken without
legal repercussions.
10. ____ A doctrine whereby someone who relies on a gratuitous promise may be able to
enforce it.
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Questions
Write a short, point-form answer for each question in the space provided. To help you
understand the chapter, it is recommended that you also use additional paper to write a full
and complete essay answer based on your points for each question.
1. What are the basic elements of a contract?
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2. What role does certainty play in an offer to enter into an agreement?
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3. For what practical reason are advertisements not classified in law as offers?
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4. Discuss the standard form contract.
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5. What is the rationale for suggesting standard form contracts are not inherently
objectionable?
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6. What is the key factor in deciding whether an offer has been made?
______________________________________________________________________
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7. What are the key points of anti-spam legislation passed by the federal government?
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8. What penalties accompany the anti-spam legislation?
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9. What five events can terminate an offer?
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10. What is the legal significance of revocation and at what point is it relevant?
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11. Explain what is meant by the term firm offer in contractual relations.
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12. What is the purpose of an option agreement?

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13. Explain how an offer can lapse.
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14. What impact does a counteroffer have on an offer?
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15. What is the rule on communication of acceptance?
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16. If an offeror dies before an offer is accepted, does the offer end?
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17. How does insanity affect the offer process?
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18. Explain the postal rule.

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19. What is the best way to avoid the postal rule?
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20. What rule of acceptance typically governs instantaneous communications?
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21. Why is there a need for legislation to govern electronic commerce?
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22. How can one party prove that an offer and acceptance occurred when the other party
denies that the necessary events occurred?
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______________________________________________________________________
23. What is the significance of the Uniform Electronic Commerce Act (UECA)?
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24. Describe the structure of the UECA.

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25. Can parties stipulate that an offer and acceptance are not sufficient to create a contract?
Explain.
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______________________________________________________________________
______________________________________________________________________
26. Explain the link between consideration and freedom of contract.
______________________________________________________________________
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
27. What is the traditional legal significance of a party agreeing to alter a contract in a way
that benefits only one of them?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
28. Summarize the doctrine of promissory estoppel.
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29. What is the legal effect of placing red seals beside signatures on a contract?
______________________________________________________________________
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30. What is meant by a rebuttable presumption? What is its relevance to the contract
process?
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Chapter6
ANSWERS
Key Terms
Offerpage 114
A promise to perform specified acts on certain terms.
Invitation to treatpage 115
An expression of willingness to do business.
Standard form contractpage 116
A take it or leave it contract, where the customer agrees to a standard set of terms that
favours the other side.
Offerorpage 118
The person who makes the offer.
Offereepage 118
The person to whom an offer is made.
Revocationpage 118
The withdrawal of an offer.
Option agreementpage 120
An agreement where, in exchange for payment, an offeror is obligated to keep an offer open
for a specified time.
Lapsepage 121
The expiration of an offer after a specified or reasonable period.
Rejectionpage 122
The refusal to accept an offer.
Counterofferpage 122
The rejection of one offer and proposal of a new one.
Acceptancepage 122
An unqualified willingness to enter into a contract on the terms in the offer.
The price paid for a promise.
Gratuitous promisepage 128
A promise for which no consideration is given.
Pre-existing legal dutypage 130
A legal obligation that a person already owes.
Promissory estoppelpage 132
A doctrine whereby someone who relies on a gratuitous promise may be able to enforce it.
Matching
1.
2.
3.
4.
5.
6.
7.
8.
Gpage 126
Cpage 122
Apage 114
Dpage 115
Fpage 122
Epage 118
Ipage 128
Bpage 114
105
9.
10.
Chapter6
Jpage 128
Hpage 132
Questions
1. What are the basic elements of a contract?
Page 114: An agreement becomes an enforceable contract when the following conditions are
met:
There is an offer and an acceptance of it.
It is complete (or certain).
It is deliberate.
It is supported by mutual consideration.
2. What role does certainty play in an offer to enter into an agreement?
Page 115: Only a complete offer can form the basis of a contract. All essential terms must
be set out or the contract will fail for uncertainty. An offer does not have to meet the
standard of perfect clarity in how it is expressed. An offer can achieve the requisite standard
of certainty even if it leaves some matters to be decided in the future.
3. For what practical reason are advertisements not classified in law as offers?
Page 116: If advertisements were offers to sell and responses by customers were
acceptances, then the storeowner could be held responsible for breach of contract if the store
ran out of an advertised item. Because the advertisement is considered an invitation to treat,
it is the customer who makes the offer to purchase the goods. The storeowner can refuse the
offer if the product is no longer available. The result is not a contract because there was an
offer to purchase but no acceptance.
4. Discuss the standard form contract.
Page 116: The standard form contract is entered into without any negotiations. It requires
one party to consent to a set of standard terms that often heavily favour the business that
created them. Because standard form contracts are not usually subject to bargaining, they are
known colloquially as take it or leave it contracts.
5. What is the rationale for suggesting standard form contracts are not inherently objectionable?
Page 116: The use of standard form contracts reduces transaction costs and increase
business volume, giving the business a potential way to lower prices.
6. What is the key factor in deciding whether an offer has been made?
Page 117: If the offer is sufficiently comprehensive that it can be accepted without
clarification or elaboration, it is an offer in law.
7. What are the key points of anti-spam legislation passed by the federal government?
Page 117: All senders of advertising email must clearly identify who they are and provide
contact information. Senders must also provide an unsubscribe option that is easy to use and
functional. The legislation mandates an opt-in system whereby recipients must explicitly
agree to receive such communications rather than receiving them subject to opting out. The
legislation prohibits the installation of programs on recipient computers.
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8. What penalties accompany the anti-spam legislation?

Page 118: Fines for non-compliance are up to $1 million for individuals and $10 million for
organizations, per violation. A private right of action is available to spam victims, which can
be used either individually or as class actions.
9. What five events can terminate an offer?
Page118: An offer can be terminated by revocation: the offeror can revoke the offer at any
time before acceptance as long as notification is given; lapse: an offer lapses at the end of a
given time or a reasonable time; rejection; counteroffer; or death or insanity.
10. What is the legal significance of revocation and at what point is it relevant?
Page 118: A revocation legally cancels a previously made offer. Revocation can occur by
the offeror at any time after an offer is made and before acceptance by notifying the offeree
of the withdrawal.
11. Explain what is meant by the term firm offer in contractual relations.
Page 120: A firm offer is a promise to leave the offer open for a set time. Such an offer is
enforceable only if the other party has purchased it or otherwise has given the offeror
something in return for the commitment.
12. What is the purpose of an option agreement?
Page 120: An offer can be revoked at any time before acceptance, provided that the party to
whom the offer was made is informed. This is true even when the party making the offer
promised to leave the offer open for a given time. A promise not to revoke an offer is not a
legally binding promise and can be broken. If someone wants time to decide whether or not
to accept an offer but does not want to risk having the offer revoked before deciding, he or
she can enter into a separate agreement, called an option agreement, and pay money to keep
the offer open. Then the offer cannot be revoked and the person has time to decide whether
to accept or reject the offer.
13. Explain how an offer can lapse.
Page 121: If an offer contains an expiry date, the offer will lapse when the time expires.
Without and expiry date, an offer will remain open for a reasonable time, the length of
which depends on the situation. If the offeree believes that a reasonable time has not yet
passed, he or she may try to accept the offer and create a contract. However, the offeror may
no longer have any interest in making a contract, believe that a reasonable time has passed,
and that the offer is dead. In that case, there can be no acceptance and no contract.
14. What impact does a counteroffer have on an offer?
Page 122: A counteroffer is a rejection of the offer, which automatically terminates the
offer. A person making a counteroffer may believe he or she is simply negotiating better
terms and that the parties will eventually reach a deal, but that person risks having the other
party decide not to negotiate and to treat the offer as terminated through rejection.
15. What is the rule on communication of acceptance?
Page 122: Acceptance must be communicated, which means that the offeror has to know
that the offer was accepted and that the parties have a contract. Acceptance can be made in
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person, in writing, by mail, by fax, by email, by telephone, or other methods. In some cases,
communication of acceptance is by conduct, whereby the party simply begins to perform the
contract.
16. If an offeror dies before an offer is accepted, does the offer end?
Page 122: Generally, an offer ends if the offeror or offeree dies. However, if the offer
concerns a contract that would not require the affected party to personally perform it, a court
may decide that the offer could be accepted.
17. How does insanity affect the offer process?
Page 122: Someone who makes an offer and subsequently becomes insane would not be
bound, as a general rule.
18. Explain the postal rule.
Page 126: If an offeror intends the postal rule to apply to an offer, then acceptance is
effective at the time of mailing the acceptance, rather than at the time of delivery (when
acceptance is normally expected to occur). Even if the letter containing the acceptance is
never delivered, a contract is formed at the time it is sent.
19. What is the best way to avoid the postal rule?
Page 126: To avoid the postal rule, make it clear when an offer is made that actual
communication or notice of acceptance is required.
20. What rule of acceptance typically governs instantaneous communications?
Page 126: Courts have generally applied the ordinary rule of acceptancethat acceptance is
effective only when communicatedto all forms of instantaneous communication,
including the telephone, telex, and fax.
21. Why is there a need for legislation to govern electronic commerce?
Page 126: Electronic contracts are governed by the same rules as all contracts. How these
rules apply in international commerce is uncertain. The United Nations Commission on
International Trade Laws Model Law on Electronic Commerce covers a broad range of
electronic commerce issues, including the formation of contracts. Its purpose is to serve as a
model for countries creating legislation for electronic commercial transactions.
22. How can one party prove that an offer and acceptance occurred when the other party
denies that the necessary events occurred?
Page 126: Ideally, documents will be available as proof of offer and acceptance. Oral
agreements are very difficult to prove without independent verification or corroboration.
23. What is the significance of the Uniform Electronic Commerce Act (UECA)?
Page 132: The Uniform Law Conference of Canada created UECA to remove barriers to and
facilitate the growth of electronic business in Canada. It is intended to serve as the basis for
provincial and federal electronic commerce legislation. It was modelled on the United
Nations Commission on International Trade Laws Model Law on Electronic Commerce.
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24. Describe the structure of the UECA.

Page 126: UECA has three parts. Part 1 sets out basic functional equivalency rules. It
provides that a contract will not be denied effect on the sole ground that it was entered into
electronically. Part 2 sets out special rules for the formation and operation of contracts,
including the effect of using automated transactions, correction of error, and the sending and
receipt of computer messages. Part 3 makes special provision for the carriage of goods.
25. Can parties stipulate that an offer and acceptance are not sufficient to create a contract?
Explain.
Page 128: Yes, parties can mandate that an agreement is not legally enforceable until the
precise wording of the contract has been agreed on and the contract has been written and
signed. It is often signalled by such phrases as this agreement is subject to formal contract.
26. Explain the link between consideration and freedom of contract.
Page 128: Freedom of contract is a fundamental principle of contract law. Parties have the
freedom to negotiate any deal that is mutually acceptable. It is up to the parties, not to a
judge, to decide what is fair and reasonable. As a result, the adequacy of consideration is not
questioned by a judge. The role of a judge is to enforce the bargain that the parties made, not
to question whether or not it was fair.
27. What is the traditional legal significance of a party agreeing to alter a contract in a way
that benefits only one of them?
Page 129: Normally, the alteration is of no legal significance. New promises need fresh
consideration.
28. Summarize the doctrine of promissory estoppel.
Page 132: A gratuitous promise is not enforceable because of the absence of consideration.
However, it may be unfair not to enforce a gratuitous promise when someone has relied on
it. The courts will recognize promissory estoppel as a defence when an innocent party
changed his or her position because of a promise made by the other party.
29. What is the legal effect of placing red seals beside signatures on a contract?
Page 131: The practice, which originated to authenticate written agreements before the rules
of contract law were fully developed, has the legal effect of evidencing the serious intent of
the promisor and amounts to an acknowledgement that the promise is enforceable, even if it
is gratuitous.
30. What is meant by a rebuttable presumption? What is its relevance to the contract
process?
Page 135: A rebuttable presumption is a legal presumption in favour of one party that the
other side can seek to rebut or dislodge by leading evidence to the contrary. It is relevant to
the contract process because courts normally assume that commercial parties intended to
enter into a contract when other aspects of the contracting processoffer, acceptance,
consideration, and so onare present.
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StudyGuidetoaccompanyCanadianBusinessandtheLaw,5thedition

Understand how business negotiations can result in the formation of a contract or

Commercial transactions conducted over the Internet.

12. What is the purpose of an option agreement?

18. Explain the postal rule.

24. Describe the structure of the UECA.

8. What penalties accompany the anti-spam legislation?

24. Describe the structure of the UECA.

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