Chapter 6: The Elements of a Contract: Consensus and Consideration

Question 1

The five essential elements of a contract

Answer 1

1) Consensus
2) Consideration
3) Capacity
4) Legality
5) Intention

Question 2

The Contractual Relationship

LO 6.1 Discuss the fundamentals of the contractual relationship

Answer 2

The Contractual Relationship

LO 6.1 Discuss the fundamentals of the contractual relationship

Question 3

Contract definition

Answer 3

a voluntary exchange of promises creating obligations that, if defaulted on, can be enforced and remedied in the courts

Note: when agreeing to the terms of a contract, people are creating and defining their own rules and obligations

Important words: Voluntary, exchange of promises, if defaulted

Question 4

Freedom of contract

Answer 4

the parties to a contract are generally not restricted as to the terms of their contractual agreements

• must meet 5 elements of a contract
• Must meet common law requirements

Question 5

Elements of a Contract

To qualify as a valid contract, an agreement must contain certain elements:

Answer 5

1. Consensus
2. Consideration
3. Capacity
4. Legality
5. Intention

Question 6

Consensus definition

Answer 6

an element of a valid contract; both parties must objectively know and agree to its terms through an offer and an acceptance

Mutual agreement to commit themselves to a contract

From Lecture

• Must have both ‘offer’ and ‘acceptance’ (equal void is not both apparent)
• Terms of the contract must be clear and unambiguous
• Failing to read the contract does not act as excuse

Question 7

Consideration

Answer 7

an element of a valid contract; the price one is willing to pay for the promise set out in the offer

There must be a commitment by each party to
do something or to abstain from doing something

A commitment by each part to do something (or abstain from doing something

Question 8

Capacity

Answer 8

an element of a valid contract; the freedom to enter into a contract, which is sometimes limited by law as is the case, for example, with minors, the
insane, the intoxicated, aliens, bankrupts, and Indians

Each party must be legally capable of understanding and entering into the agreement (i.e. infants, intoxication, insanity)

Question 9

Legality

Answer 9

an element of a valid contract; the object and consideration of the contract must be legal and not against public policy

Must be legal and not against public policy

Question 10

Intention

Answer 10

an element of a valid contract; the parties must objectively intend for an agreement to be legally
binding

Both parties must intend that legally enforceable obligations will result from it

Question 11

Formal contract

Answer 11

an agreement under seal

Traditionally, a seal involved making an impression in sealing wax

Question 12

Simple contract (parol contract)

Answer 12

a contract that may be verbal or written but is not under seal; also called a simple contract

Question 13

Express contract

Answer 13

a contract in which the parties have expressly stated their agreement, either verbally or in writing

Question 14

Implied contract

Answer 14

an agreement inferred from the conduct of the parties

Example: When people deposit coins in
vending machines, it can be inferred that they intend to create a contractual relationship, and thus an implied contract is in force

Question 15

Valid contract

Answer 15

an agreement that is legally binding on both parties

Question 16

Void contract

Answer 16

an agreement that is not legally binding because an essential element is missing, aka 1/5 of the elements are missing (goods must be returned to the seller)

Question 17

Voidable contract

Answer 17

an agreement that has legal effect but that one of the parties has the option to end

Seller may keep the goods if title has passed

Question 18

Distinction between void and voidable

Answer 18

If the original contract is void, the
goods must be returned to the seller. If the original contract is voidable,
the outsider has acquired good title to the goods and can keep them.

Question 19

Unenforceable contract

Answer 19

an otherwise binding contract that the courts will not enforce, such as a contract that does not satisfy the Statute of Frauds (i.e. must be in writing)

Question 20

Illegal contract

Answer 20

a contract that is void because it involves the performance of an unlawful act

• If this is considered the court will not assist the parties to return them to their original position.
• Example: Two drug dealers selling drugs will be assisted by the court as selling drugs is illegal which voids the contract

Question 21

Bilateral Contracts

Answer 21

a contract in which there is an exchange of promises: both parties assume an obligation (both parties have obligations and commitments)

Example: For example, a person may offer a reward for the return of a lost item. It is not until the lost item is returned that the offer is accepted and the contract created

Question 22

Unilateral Contracts

Answer 22

a contract formed when one party performs what has been requested by the other party; there is a promise followed by an act, but not an exchange of promises

Example: An offer of a reward for a lost item (I will give you a reward (promise) if you find my item)

Question 23

LO 6.2 Explain consensus and the significance of a “meeting of the minds” PAGE 822

Answer 23

LO 6.2 Explain consensus and the significance of a “meeting of the minds”

Question 24

The law does not recognize the
excuse that one of the contracting parties did not read the contract or that
he did not understand it.

Answer 24

Meaning if you do not understand the contract, tough shit

Question 25

It should be stressed that a valid offer and an acceptance are not always obvious and yet, from the conduct of the parties or other factors, it is clear that the parties have a mutual understanding.

Answer 25

In such circumstances, the courts are willing to imply the existence of a contract, and no evidence of a specific identifiable offer and acceptance is required.

Question 26

Offer LO 6.3 Describe a valid offer

Answer 26

Offer LO 6.3 Describe a valid offer

Question 27

Offer definition

Answer 27

a tentative promise to do something if another party consents to do what the first party requests

Question 28

A valid offer contains

Answer 28

all of the terms to be included in the contract; all that is required of the other party is to give its consent or denial Example: The parties, the subject matter of the contract, any price to be paid, as well as any other important terms should all be stated in the offer.

Question 29

Interim agreement

Answer 29

a binding contract that will subsequently be put into a more formal document; usually referred to as an agreement of purchase and sale in a real estate transaction

Question 30

A _________ will also be binding if | all significant terms are included in it.

Answer 30

letter of intent (LOI)

Question 31

Subject-to clauses | Subject to

Answer 31

a term making a contract conditional on future events The condition which must occur prior to the contract completing (i.e. real-estate offers subject-to financing, or the ability for me to sell my house)

Question 32

Quasi-contracts

Answer 32

a contractual relationship involving a request for goods and services where there is no agreement on price before the service is performed; courts impose an obligation to pay a reasonable price (quantum meruit) in these situations

Question 33

Invitation to Treat definition

Answer 33

an invitation to engage in the bargaining process An offer to the world to start negotiations, not binding Example: Most newspaper, radio, television, and internet advertisements

Question 34

The typical process to create a contract

Answer 34

Figure 6.1 Basically goes: Invitation, negotiations, offer, counteroffer, acceptance (if no more counter offers)

Question 35

Offer by Conduct

Answer 35

Example: A customer in a self-serve store takes the goods to be purchased to a cashier and places the goods and money on the counter Example: A person hails a cab by the gesture of raising a hand and calling, “Taxi!” However, an auctioneer’s comment “Do I hear $50?” is merely an invitation to the people in the audience to make an offer

Question 36

Communication of an Offer

Answer 36

You can accept only an offer that has been communicated to you as an individual, to you as a member of a group, or to the world at large. - You cannot accept an offer made to someone else or ne that you did not know about - Offer crossing paths in the mail that have the same terms cannot be considered a contract - Cannot accept an offer that you know is no longer available - All important terms must be disclosed, so if a business wants to include disclaimer terms they must be reasonably brought to the attention of the customers at the time it is made

Question 37

It should be noted that, for a contract to be _______, all important terms must have been disclosed to the offeree

Answer 37

binding

Question 38

The End of an Offer There are several ways for an offer to come to an end before acceptance.

Answer 38

1. End of a specified time. 2. Expiration of a reasonable time 3. Death or insanity of offeror 4. Revocation 5. Rejection and counteroffer 6. Illegal activity - if the activity contemplated by the contract becomes illegal before acceptance, the offer is terminated 7. Good destroyed - if the goods being contracted for are destroyed prior to the acceptance of the offer, then the offer is terminated

Question 39

1. End of a specified time.

Answer 39

The offer will end at the time stated in the offer. Note that the offeror is still free to revoke the offer before this time expires, unless an option has been purchased.

Question 40

2. Expiration of a reasonable time

Answer 40

If no time is specified in the offer, it will expire at the end of a reasonable time. What is reasonable depends on the circumstances.

Question 41

3. Death or insanity

Answer 41

The offer will end even if the | offeree is unaware of the death or insanity.

Question 42

Insanity

Answer 42

when a person cannot understand the nature or consequences of his acts

Question 43

4. Revocation

Answer 43

The offeror may revoke an offer any time before acceptance, but the revocation must be communicated to the offeree to be effective. (When letters are used, the revocation is effective only when received by the offeree.)`

Question 44

5. Rejection and counteroffer

Answer 44

During the bargaining process, several different proposals may be put forward, rejected, and then followed by counterproposals. Each counteroffer or rejection ends the offer before it.

Question 45

Counteroffer

Answer 45

a new offer, the proposal of which rejects and terminates the offer available until then

Question 46

Option agreement

Answer 46

a subsidiary contract creating an obligation to hold an offer open for acceptance until the expiration of a specified time

Question 47

Standard form contract

Answer 47

a contract with fixed terms prepared by a business

Question 48

Acceptance LO 6.4 Describe an effective acceptance

Answer 48

Acceptance LO 6.4 Describe an effective acceptance

Question 49

Acceptance definition

Answer 49

an agreement by one party to the terms of the offer made by another All or nothing proposition

Question 50

Communication of an acceptance

Answer 50

Acceptance of an agreement is usually accomplished by communicating it to the offeror. It is possible, however, for an offer to be accepted by conduct. - Sign the dotted line - Or say "I accept" - Or through action (ill sell you this car if you put a deposit down, and you put it down, thats acceptance through action) - Silence is not usually accepted unless it is ongoing business (for the last 4 weeks, every week, i have bought coffee beans)

Question 51

The Postbox Rule

Answer 51

a principle that a mailed acceptance is effective when and where it is dropped into a mailbox -Affects date of acceptance and jurisdiction of the contract (Example, If I fly to Ontario, accept a contract, sign my name and send it off, under Ontario law the contract is set up there, unless the location if explicitly stated)

Question 52

Electronic Transactions | LO 6.5 Examine electronic transactions and the formation of contracts

Answer 52

Electronic Transactions | LO 6.5 Examine electronic transactions and the formation of contracts

Question 53

E-commerce

Answer 53

commercial activity using electronic communication

Question 54

E-commerce legislation (in common law provinces)

Answer 54

specifies how the time and place of the formation of electronic contracts, including contracts negotiated via email, are to be determined

Question 55

Consideration LO 6.6 Define “consideration” and the significance of “the price you are willing to pay”

Answer 55

The Price You Are Willing to Pay LO 6.6 Define “consideration” and the significance of “the price you are willing to pay”

Question 56

Consideration definition

Answer 56

The price one commits to pay for the promise of another. Occurs at the time the exchange of promises are made (not necessarily the time they are delivered)

Question 57

Gratuitous promise definition (aka gift)

Answer 57

a one-sided agreement that the courts will not enforce -Still an obligation to do a good job

Question 58

Adequacy of Consideration LO 6.7 Discuss the irrelevance of the adequacy of consideration

Answer 58

LO 6.7 Discuss the irrelevance of the adequacy of consideration

Question 59

Suppose someone agrees to exchange a car for another’s promise to “do some work around the house.”

Answer 59

Such a promise would not be enforceable because the work to be done is not specified

Question 60

Gratuitous Promises Are Not Consideration LO 6.8 Consider why gratuitous promises are not consideration

Answer 60

Gratuitous Promises Are Not Consideration LO 6.8 Consider why gratuitous promises are not consideration

Question 61

Past consideration

Answer 61

something completed before an agreement is made; it is not valid consideration Example: Verbal contract or employment contract where employees add additional tasks or duties not addressed when hired

Question 62

Illegal Consideration

Answer 62

a promise to commit an unlawful act or to do something against public policy, which is not valid consideration and will not be enforced by a court Example: Can you pay me in drugs

Question 63

Examples of Valid Consideration LO 6.9 Present some examples of valid consideration

Answer 63

Examples of Valid Consideration LO 6.9 Present some examples of valid consideration

Question 64

Quantum meruit (aka quasi-contract)

Answer 64

“as much as is deserved” - Latin Court obligation for a reasonable price paid for requested services

Question 65

Quasi-contract

Answer 65

a contractual relationship involving a request for goods and services where there is no agreement on price before the service is performed; courts impose an obligation to pay a reasonable price (quantum meruit) in these situations

Question 66

Exceptions to the General Rule LO 6.10 Outline two exceptions to the general rule that consideration is required if a promise is to be enforceable

Answer 66

Exceptions to the General Rule LO 6.10 Outline two exceptions to the general rule that consideration is required if a promise is to be enforceable

Question 67

Promissory estoppel (also known as equitable estoppel)

Answer 67

the principle that when a gratuitous promise to do something in the future causes a person who relies on that promise to incur an expense, the promisor will not be allowed to enforce other contractual rights that are inconstant with that promise; the promise can only be used as a defence by the promisee;

Question 68

Equitable estoppel

Answer 68

the principle that when a gratuitous promise to do something in the future causes a person who relies on that promise to incur an expense, the promisor will not be allowed to enforce other contractual rights that are inconstant with that promise; the promise can only be used as a defence by the promisee; also known as promissory estoppel

Question 69

When a contract is sealed, _______________

Answer 69

consideration is not necessary