THE LAW OF

CONTRACT
PhD. Nguyen Thi Hong Nhung

WHAT IS A CONTRACT?
A contract can be defined as an agreement
between two or more persons or corporations
A contract creates obligations as well as rights
for each of the parties
If one of the parties to a contract does not
meet his or her obligations, the contract is
enforceable by a court

ELEMENTS OF A VALID CONTRACT

There are six elements in a valid contract:
1.Intention to create a legal relationship
2.Offer
3.Acceptance
4.Consideration
5.Capacity to contract
6.Legality
Some, but not all, contracts must be in writing,
such as contracts for the purchase of land

INTENTION TO CREATE A LEGAL

RELATIONSHIP
An intention to create a contract that is
legally binding is an essential first step in
contract formation
There is a presumption at law that promises in
a business contract are intended to be binding,
a presumption which does not exist for
contracts of a social nature
Advertisements are not enforceable promises
but rather invitations to do business

OFFER
An offer is a tentative promise to perform
subject to a certain condition or conditions
Until it is accepted, an offer is not enforceable
An offer must be communicated by the offeror
to a specific offeree, since an offer is not valid
until it is received by the offeree
In other words, an offeree cannot agree to an
offer of which he or she is unaware

ACCEPTANCE
Only the specific offeree to whom an offer is
made can accept it, and acceptance must be
unconditional - on the exact terms of the offer
Acceptance must, in turn, be communicated to
the offeror in the manner specified or implied at
the time the offer was made
The time of acceptance is when the offeror is
made aware of the acceptance, or alternatively
at the moment when the offeree places a letter
of acceptance to the offeror into the mailbox

ELECTRONIC CONTRACTS
An offer made over the Internet will, unless
otherwise specified by the parties, become an
enforceable contract in the jurisdiction where
the offeror conducts business, and at the time
he or she receives the acceptance
The offerees action of clicking on the click box
containing the words I agree constitutes
acceptance and the instant formation of an
enforceable contract

COUNTER OFFER
A counter offer ends an offer
Anything less than unconditional acceptance of
an offer is either a counter offer or an inquiry
A counter offer is really a fresh offer from the
offeree which the original offeror may accept
Following a counter offer, the only way the
original offer from the original offeror can come
back into existence is if the offeror revives it

SILENCE AND FORM OF ACCEPTANCE

Silence on the part of the offeree cannot be
construed as acceptance
There is no obligation on an offeree to refuse
or reject an offer unless there is a previous
arrangement to that effect between the parties
The form or method of acceptance may be
verbal or written, but may also be by conduct
such as a handshake, nod of the head or the
raising of a numbered card during an auction

UNILATERAL AGREEMENTS AND LAPSE

A unilateral agreement calls for the offeree
to actually complete or perform his or her part
of the contract as a way to signify acceptance
of an offer
This performance by the offeree takes the
place of written or verbal acceptance
An offer will lapse within a reasonable time if
no specified date for acceptance is provided,
and will lapse upon the death of either party

REVOCATION OF AN OFFER
If an offeror decides to withdraw an offer
he or she may do so at any time before the
offer is accepted
The offeror must communicate the revocation
directly or indirectly to the offeree
An offeree who wishes to ensure an offer
remains open for a specified time must create
an option agreement with the offeror, either
under seal or for consideration

CONSIDERATION
Consideration is the exchange of something
of value or benefit between a promisor and a
promisee
Consideration in exchange for a promise of
performance is often money, but need not be
Alternative types of consideration include a
promise by the promisee not to do something,
a relinquishment of the right to sue, a delivery
of goods, or a seal affixed on a contract

ADEQUACY OF CONSIDERATION
The amount of consideration or fairness of it
does not concern the courts, so long as the
consideration is something of value or benefit
exchanged in return for a promise
The timing of a discussion about consideration
is significant: to be valid, consideration must
arise out of the negotiations between the
promisor and promisee to create a contract,
not out of a pre existing obligation and not
after the fact when performance has already
been completed

TENDERS
A call for tenders by a government or private
company communicates a request for goods or
services and is an offer to negotiate a contract
Tenderers respond to the offer by making bids,
and a deposit or bid bond is often required to
underscore the commitment of the tenderer to
perform if his or her bid is selected
If the tenderer selected ultimately declines to
execute the contract with the government or
private company, the deposit is forfeited

EQUITABLE OR PROMISSORY
ESTOPPEL
A gratuitous promise is unenforceable due to
lack of consideration
But if a fact is asserted and someone relies on it
to his or her detriment, the person who made
the statement cannot later deny it
Estoppel creates a defence against a promisors
claim for enforcement of a contract against a
promisee when the promisee relied, to his or her
detriment, upon a gratuitous promise from the
promisor

CAPACITY TO CONTRACT
Public policy dictates that, in general, persons
under the age of majority, persons with mental
disabilities, and persons impaired by alcohol or
drugs may be unable to appreciate the nature
of contractual obligations
Contracts they enter may not be enforceable
against them; for example, impaired persons
who immediately repudiate a contract upon
becoming sober and show that the other party
should have realized their lack of capacity may
avoid obligation under a contract

RESTRICTIONS UPON CAPACITY

Corporations, labour unions and bankrupt
persons may have restrictions placed upon
their ability to contract
A companys incorporating documents may limit
the subject matter or monetary limits of
contracts its officers may enter on its behalf
Unions may be restricted to entering collective
agreements on behalf of employees, and an
undischarged bankrupt person may only be
allowed to purchase necessaries

THE REQUIREMENT OF LEGALITY

A contract with an illegal purpose is
unenforceable by a court
Similarly, a tradesperson or professional who is
required by law to be licenced but who is not
licenced cannot ask a court to enforce a contract
against a client who does not pay
Contracts which are against public policy such as
those that impair the integrity of our markets or
corrupt governance are not enforceable

CONTRACTS IN RESTRAINT OF TRADE

A restrictive agreement concerning the sale of
a business attempting to protect goodwill must
not be too broad geographically or too long in
duration; otherwise a court may sever the
restrictive clause from the contract
Restrictive covenants in employment contracts
will not be enforced unless the employer can
demonstrate the likelihood of significant harm
Public policy favours the economic freedom of
the employee over the employers interest

ASSIGNMENT OF CONTRACTUAL
RIGHTS
The privity of contract rule states that only
the parties to a contract can enforce the
contract or be liable under it
There are exceptions to the privity rule such as
partnership contracts in which one partner can
create liability for another; the acceptance of
land or goods with conditions negotiated by
others; the doctrine of constructive trust in
which a court finds a contract will benefit a
third party; and statutory enforcement of third
party rights such as a life insurance policy

NOVATION
A third party may acquire rights under a contract
through a novation, where his or her name is
substituted for the name of one of the original parties
to the agreement by consent
Alternatively, a fresh agreement can be created in
which the third party becomes one of the two
contracting parties, terminating the original contract
Vicarious performance allows an employee or
contractor to perform an employers duties

STATUTORY ASSIGNMENT
An assignee of contractual rights can sue in
his or her own name if
1.The assignment is in writing, signed by the
assignor
2.The assignment is absolute
3.Express notice is given to the party whose debt
is assigned, with title taking effect on the date of
the notice
4.Title to the assignment is taken subject to any
equities between the original parties to the
contract
There is a risk the debtor may claim a set-off

ASSIGNMENTS BY LAW
Upon the death or bankruptcy of a party to
a contract, a number of assignments are
automatically engaged
Upon death, a deceaseds rights and
obligations under contracts are assigned to his
or her executor
Similarly, following a voluntary assignment into
bankruptcy, the bankrupts rights and
obligations pass to the trustee in bankruptcy

NATURE AND EXTENT OF

PERFORMANCE
Less than complete performance of a
contract is a failure to respect its terms
If performance of the promise is not exact and
precise, the contract may not be discharged
Offering to perform a promise is formally called
tender of performance and may arise by either
1.Tender of payment, or
2.Tender of performance of an act described in
the contract

TENDER OF PAYMENT
Tender of payment occurs when the debtor
formally offers payment to the creditor in the
exact amount due, at the required time, and in
the proper place
If anything other than legal tender is to be used
to pay, there must be prior arrangements in the
contract permitting payment by cheque, credit
card or bill of exchange
Interest ceases to run after the tender of
payment, whether it is accepted or not

TENDER OF PERFORMANCE
Performance of a promised act creates the
expectation of tender of payment
The performance must be in accordance with
the contract terms, including the appointed
time and place for delivery of goods, transfer
of land, or accomplishment of a service
A failure to perform is a breach, entitling the
other party to damages or specific performance
in the case of land or unique goods

DISCHARGE BY OTHER MEANS

Full and satisfactory performance by both
parties is the ideal way to discharge a contract,
but discharge may also occur by other means
The option to terminate gives each of the parties
the opportunity to end the contract by providing
the other party with a specific period of notice
Similarly, a condition subsequent specified in
the contract may, when it occurs, discharge all
contractual rights and duties

ACT OF GOD AND FRUSTRATION

An act of God is a manifestation of the force
of nature which could not have been precluded
by human intervention and which prevents the
performance of a contract
The doctrine of frustration is the inability to
discharge a contract by performance due to
unforeseen circumstances beyond the control
of both of the parties, and is often the
destruction of something critical to
performance of the contract

CONDITION PRECEDENT
The opposite of a condition subsequent, a
condition precedent delays or prevents a
prepared and signed contract from coming into
force and effect until the happening of a
specified event
If the specified event never occurs, both parties
to the contract are discharged from any duty to
perform
Without the fulfillment of the condition
precedent, no enforceable contract ever exists

OPERATION OF LAW
A change in the law is another method by
which a contract may be discharged
The subject matter of a contract may, for
example, become illegal, or the Bankruptcy and
Insolvency Act may absolve one of the parties to
a contract from indebtedness
Further, if a limitation period for filing a lawsuit
under a provincial or territorial limitation act
expires, a remedy for a breach of contract may
be statute barred

MERGER
Informal contracts are sometimes replaced
by a formal agreement made under seal
As long as the content or substance of the
written agreement remains the same, the
original informal contract can be said to be
discharged when it is merged or incorporated
into a formal contract having an identical effect

AGREEMENT
Parties who mutually agree to abandon
their rights and obligations under a contract
can offer each other, as consideration for their
promises, a waiver of their right to enforce a
contract
Similarly, both parties can agree to discharge
an existing agreement and, by process of
novation, enter a new one with fresh terms or
different parties if they so choose

MATERIAL ALTERATION OF TERMS

When a change goes to the root of the
contract, it is known as a material alteration
which can be said to alter the character of the
agreement
Such a change has the legal effect of
discharging the original contract and giving rise
to a new agreement containing the material
term

BREACH OF CONTRACT
A breach of contract is a failure by one of the
parties to honour and complete an express or
implied term
This conduct results in the entitlement of the
innocent person to commence an action for
damages and to treat the contract, in some
circumstances, as discharged

TYPES OF BREACH OF CONTRACT

Express repudiation is the refusal verbally, in
writing, or by conduct to perform contractual
duties; and anticipatory breach occurs before
the performance is actually due when it
becomes apparent that one party is not likely
to perform
The doctrine of substantial performance
protects a party who breaches some aspect of
a contract after completing all essential terms
associated with its purpose from an attempt by
the other party to avoid performance

BREACH OF WARRANTY
Where a repudiation is of a subsidiary
promise rather than of an essential term, there
is a breach of warranty
The breach of a minor term which is not a
condition entitles the victim to damages but
not to rescission of the contract
A victim of a breach of warranty, in other
words, must nevertheless fulfill his or her part
of the contract

IMPLIED REPUDIATION
Unlike an express repudiation, an implied
repudiation must be discerned from the conduct
of one of the parties or from various statements
he or she makes prior to the time when
performance is due
Implied repudiation is the most difficult type of
anticipatory breach to identify
If a condition in a contract has been breached,
the non performance may entitle the innocent
party to treat the contract as ended

FUNDAMENTAL BREACH
A fundamental breach is one that is so
serious that it goes to the very root of the
contract, allowing the innocent party to escape
his or her obligations to perform
An exemption clause generally attempts to limit
the liability of someone who has breached a
contract; however if the breach is of a
fundamental nature, courts will construe the
exemption clause strictly against the person
who drafted it to the extent that the clause
may provide no protection at all

REMEDIES FOR BREACH OF CONTRACT

Compensation for loss for breach of contract
is available to the injured party, but the loss
must be proven to the court
The goal of damages is to place the victim of
the breach in the same position he or she
would have been in if the contract had been
performed as initially contemplated
Remedies besides damages include specific
performance and quantum meruit

THE EXTENT OF LIABILITY FOR LOSS

A whole series of contracts may be
adversely affected when someone commits a
single breach of contract that causes a chain
reaction
The defence of remoteness may be raised by a
defendant, but any damages actually caused
by a breach of any kind of contract are
recoverable, providing that when the contract
was made such damage was reasonably
foreseeable as liable to result from the breach
Czarnikow v. Koufos, [1966] 2 WLR 1397

DUTY TO MITIGATE & LIQUIDATED

DAMAGES
Reasonable steps to lessen the loss must be
taken by the victim of a breach of contract
A defendant who can show that a plaintiff did
nothing to mitigate loss may have the amount of
his or her liability reduced according to the
degree of neglect by the plaintiff
Liquidated damages represent an authentic
estimate, at the time a contract is entered into,
of what the amount of damages will be upon a
breach and may be inserted as a clause

RESCISSION & SPECIAL REMEDIES

Rescission sets aside an agreement, restoring
the parties to their pre-contractual positions
Specific performance is an equitable remedy
requiring the defendant to carry out his or her
promises under the contract when damages are
inappropriate
An injunction is a preventative remedy which
requires the defendant to refrain from
committing certain future acts adverse to the
purpose of the contract

SUMMARY
Contracts in business include those for
employment, the sale of goods, and private or
government calls for tender of services
To create a valid contract, there must be an
intention to do so, offer and acceptance, an
exchange of consideration, capacity to enter an
enforceable contract, and a legal purpose
Businesses must be knowledgeable about their
accountability in the gathering and saving of
client information