Forming Contractual Relationships
Basic elements of a contract:
 an agreement (comprised of an offer and an
acceptance)
 complete (i.e. certain as to all essential terms)
 deliberate (i.e. parties must intend to create legal
relations)
 mutual consideration
1.
Offer
Definition: An offer is a promise to enter into a
contract, on specific terms, as soon as the
offer is accepted.
Only a complete offer can form the basis of a contract;
that is, all of the essential terms (price, delivery date,
quantity, method of payment, etc.) must be clearly
specified.
Offer distinguished from Invitation to Treat
Advertisements generally are
not classified as offers.
 (except: Carbolic Smoke Ball ad)
Product displays are
not offers
The key factor in deciding whether an offer has
been made:
If the purported offer is sufficiently
comprehensive (i.e. complete as to
essential terms) that it can be accepted
without further elaboration or clarification,
it is an offer in law.
Five ways an offer may be terminated:
i.
ii.
iii.
iv.
v.
revocation
lapse
rejection
counteroffer
death or insanity
Revocation
Rule: The offeror can revoke his offer at any time simply
by notifying the offeree of its withdrawal.
 Revocation in the context of a firm offer (i.e. an offer
stated to be open for a fixed period of time)
 Revocation in the context of a tendering contract
Revocation in the context of a firm offer
Rule in Dickinson vs. Dodds – firm offers can be revoked
prior to their deadlines, even through a reliable third party
source.
Such a promise is enforceable only if:
a. the other party has purchased it; or
b. otherwise has given the offeror something in return for
the commitment.
Avoiding the rule in Dickinson vs. Dodds
One way to avoid the rule in Dickinson vs. Dodds is through
the use of an option agreement.
Three principle features of an option:
i) exclusivity and irrevocability of the offer to
sell within the time period specified in the option;
ii) specification of how the contract of sale may
be created by the option holder; and
iii) an obligation of the parties to enter into a
contract of the sale if the option is exercised.
2.
Acceptance
To be legally effective, an acceptance must:
a.
demonstrate an unqualified and complete
willingness to enter into the contract on the
precise terms contained in the offer; otherwise it
is a counteroffer.
b.
be communicated to the offeror.
rule:
acceptance is effective only when
communicated
exception: the ‘postal rule’
When will the ‘postal rule’ be applied? Factors
considered:

parties’ intentions

sound business practice

who should bear the risk
3.
Consideration
Defined:
Something of value that represents the
‘price’ paid for the other party’s promise.
Consideration is the key ingredient that
distinguishes a legally enforceable promise
from one which is not enforceable.
Important points:
 A promise not supported by consideration can be
broken with impunity in law.
 A pre-existing duty is no consideration; accordingly,
all variations of a contract must be supported by fresh
consideration.
Variation of Contracts
 Traditional Rule:
All variations of a contract
must be supported by fresh
consideration.
 Recently, however, the New Brunswick Court of
Appeal ruled that a contractual variation unsupported
by consideration – provided it is not procured by
economic duress.
Rule: a promise not supported by consideration can be
broken with impunity.
Three Exceptions:
1. promise under seal (e.g. personal guarantee)
2. promissory estoppel
3. part payment of debt
Promise under seal
If a document containing the promise is signed and
sealed, the fact that there may not be consideration for
the promise is irrelevant.
Contracts of guarantee are one of the most common
examples of promises under seal.
Example:
a shareholder of a corporation will be
required to execute a personal guarantee as collateral for a
bank loan direct to the corporation.
Promissory Estoppel
 Without a seal, a gratuitous promise, traditionally,
was unenforceable at common law, even if made with
great deliberation and regardless of adverse
consequences.
 In response to the harshness of this rule courts of
equity developed the doctrine of promissory estoppel.
A party seeking the aid of this doctrine (i.e. the promisee)
must prove:
i.
The promissor, by words or conduct, made a promise or
an asurance that was intended to affect the parties’ legal
relationship and to be acted upon;
ii. The promisee relied on the representation to his
detriment;
iii. The promisee’s own conduct is beyond reproach,
making him eligible for equitable treatment.