Contract Law
A contract is “an agreement that creates rights and obligations that can be enforced in law.” It is “a voluntary exchange of promises or commitments between parties that are legally enforceable in our courts.”
Contracts, and the legal right to rely on their enforcement, form the foundation of day-to-day business interactions. Therefore, it is essential that accountants have a good working knowledge of contract law.
This coverage of contract law in this document focuses on seven main topics:
1. The elements required to enter into a valid contract;
2. Privity of contract (identifies who can enforce a contract) and assignment of rights;
3. The requirement of writing;
4. Interpretation of contracts;
5. Contractual defects;
6. The various ways a contract can be discharged or brought to an end; and
7. Breach of contract, including remedies for breach.
Entering Into A Contract—Elements Of A Valid Contract
For a valid contract to exist, seven elements must be present:
1. An intention to create legal relations – The parties must have intended to create a legally enforceable agreement.
2. Offer – One party indicates its intention to enter into a contract on certain terms.
3. Acceptance – The other party agrees to enter into the contract proposed by the offeror.
4. Consideration – When conveying acceptance, the offeree promises something of value to the offeror.
5. Certainty of terms – The parties must reach agreement on all of the essential terms in the contract.
6. Capacity to contract – The parties are legally permitted to enter into the contract.
7. Legality – The purpose of the contract is legal.
Each of these elements will be discussed in more detail below.
An Intention to Create Legal Relations
Both parties to an agreement must intend to create a legally enforceable agreement in order for a valid contract to be formed. In answering the question of whether there was intention to create legal relations, the courts use an objective test: whether a reasonable person would believe that the parties intended to enter into a contract. The rationale for this is that a subjective test of what the parties themselves actually thought would be difficult to apply because the parties could easily lie about their intentions. As well, since the law of contract aims to protect reasonable expectations, it is appropriate that people be entitled to rely on outward appearances. Therefore, the law presumes that people entering into agreements intend their promises to be legally binding.
The courts usually presume that an intention to create legal relations exists in a business context but not between family members or close friends. People often make promises to family and friends that they would not make to strangers.
Advertisements are not normally taken as enforceable promises. Advertisers are given a certain amount of latitude in how they describe their goods to the public. As well, the courts view an advertisement or a display of goods as a mere invitation to do business rather than an intention to enter into a contract with members of the public.
However, the above presumptions may be rebutted or disproved. The court may be persuaded that promises made by family members or advertisers were intended to be promises binding in law.
Offer
An offer is “a tentative promise made by one party (the offeror), subject to a condition or containing a request to the other party (the offeree).” It is an “indication of a willingness to enter into a contract on certain terms.” Making an offer entails a risk because, as soon as it is accepted, a binding contract exists.
To be valid, an offer must be:
1. Complete – It must contain all the major terms of the agreement;
2. Precise – If the offer is too vaguely worded, a court may later find the agreement to be too ambiguous to be enforced; and
3. Communicated to the offeree – This may be done by act (sitting in the chair at the hair salon), words, writing, or a combination of these.
Difference Between an Invitation to Treat and an Offer
An offer has to be more than a willingness to enter into negotiations. The latter is merely an invitation to treat. Whether what is communicated is an offer or an invitation to treat is a question of degree and is dependent upon the language used. In making the distinction, the courts use an objective test of how a reasonable person would interpret a particular statement in that specific situation.
As a general rule, the courts have held that an advertisement of goods for sale at a stated price is not an offer to sell the goods at that price but merely an invitation to do business or an invitation to treat (a willingness to receive an offer). However, if an advertisement offers a fixed number of items at a fixed price on a first-come, first-served basis, this may constitute a valid offer.
Similarly, advertisements that offer a reward to any person who uses a preventive medicine but still catches the illness have been found to be valid offers. This was the subject of the landmark case Carlill v. Carbolic Smoke Ball Company where a company was forced to pay the £100 offered to Carlill, who used its carbolic smoke ball yet still contracted influenza. The courts viewed the advertisement as an offer to the world, especially since the advertisement stated that £1,000 had been deposited with a bank to show the company’s sincerity.
In a self-service store, the customer is the offeror and the cashier is the offeree. The display of goods is an invitation to do business. The customer makes an offer by taking the goods to the cashier who accepts the offer by ringing them in. This was the subject of Pharmaceutical Society of Great Britain v. Boots, where Boots Pharmacy started selling some pharmaceutical products on a self-service basis, and the Pharmaceutical Society held that these transactions were unsupervised in contravention with legislation. The court found that the items on the shelf were merely an offer to treat. Section 38 of the Ontario Consumer Protection Act, 2002, states that an Internet supplier “shall provide the consumer with an express opportunity to accept or decline the agreement,”86 thus suggesting that the Internet consumer is the offeree. This contradicts the traditional rule in retail sales that the retailer is only making an invitation to consumers to make offers and that the consumers are the offerors.
Standard Form Contracts
A standard form contract is an offer presented in a printed document or notice, the terms of which are uniform for everyone, e.g., an airline ticket or parking receipt.
In general, by accepting a standard form contract, the offeree is deemed to have accepted every term of it; that is, the offeree is presumed to have knowledge of all of its terms and to be bound by them. Thus, if the offeror has taken reasonable steps to bring terms to the attention of the offeree, the offeree will be bound despite a lack of actual knowledge of the terms (e.g., even if he or she does not read the notice on the back of the parking receipt that makes reference to liability disclaimers posted throughout the lot). In the absence of reasonable steps, such as where the term is in small print or is inconspicuous, the offeree may not be bound by the term.
Ways in Which an Offer May Be Terminated
Once it has been determined that there is an offer, the question then becomes for how long the offer is valid. A contract may be terminated in a range of ways, as shown in Figure
Figure : Termination of Offers
An inquiry by the offeree regarding the terms of the offer does not amount to either a rejection or a counter-offer.
It is possible for the offeree to protect itself from revocation of the contract by the offeror by purchasing an option, a separate contract where the offeror is paid to hold an offer open for acceptance for a specified period.
Similarly, in the case of tenders (offers to undertake specific projects on specific terms), the courts will probably find that the bidding process immediately creates a standing offer that the bidder is not entitled to withdraw. This gives the party calling for tenders the opportunity to review all offers before selecting the winning bid.