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LAW 122 (625)
Chapter 7

ch. 7-The Nature and Creation of Contracts.docx

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Law and Business
LAW 122
Theresa Miedema

Chapter 7 – The Nature and Creation of Contracts - Contract – an agreement that contains legally enforceable rights and obligations o You were able to enter into that agreement b/c you both experienced a meeting of the minds, a shared decision to enter into a legal transaction on a particular basis.And it involved a mutual exchange of value, you both gave up something as part of the deal.  Acontractual relationship can continue even after there has been an exchange of value. • One reason for entering into a contract may be to reserve some rights and obligations for the future. These choices that you made yesterday may even affect you today  Most contracts are performed w/o problems, but also true that most of the problems that do arise are avoidable. They occur b/c the parties failed to think carefully about the legal implications of their actions.  Legal proceedings tend to signal the end of a relationship – the long-term benefits of retaining a healthy commercial relationship are often more impt. Than winning a particular dispute  Every contract requires a number of distinct steps and elements: 1. The parties must have an intention to create legal relations – objective test 2. They must reach a mutual agreement through the process of offer and acceptance 3. They must enter into a bargain by each giving consideration – exchange of element, has to be a deal, some exchange Contract: - Rights and obligations from both parties - Voluntary - Break agreement can be sued - Doesn’t apply to family and social settings - Contract = legally binding - Historically = promises intended to be binding - In order to have a legally binding agreement/contract, parties must have legal consequences - Promises/formal agreements don’t have legal consequences - Contract doesn’t have to be written – oral contracts can be legally binding – but hard or can’t be proved – risk management Torts and Contracts - Both involve primary and secondary obligations o Breach of primary obligations creates secondary duty  Tort: • Primary duty: do not harm another • Secondary duty: compensatory damages  Contract • Primary duty: fulfill your promises • Secondary duty: compensatory damages 1. Intention to Create Legal Relations - Objective test – what are we protecting? Expectation interest - Parties must have intended to create a legally enforceable agreement o Would a reasonable person have believed that the parties intended to enter into a contract o Test of subjective intentions would be difficult b/c a person could easily lie at trial. o Law of contracts aims to protect reasonable expectations - Courts usually presume that an intention to create legal relations exists in a commercial context, but not between friends ot family members o These presumptions can be rebutted, or disproved.  Ex. a business person may be able to convince a judge that while a commercial agreement was contained in a formal document, it wasn’t really intended to be legally binding • Ason may be able to persuade a judge that while his mother’s promise to pay his tuition at business school was given within a family setting, it really was intended to create contractual obligations Rebuttable Presumption – you can argue against it – disprove - Court will assume that… o if friends/family, there was no intention to form a contract/legally-binding agreement o if case of business relationships, there is an intention to form a contract (legally binding agreement) … unless the presumption is rebutted (disproved) - Is it written down? If so, it was meant to be taken seriously – ex. Lawyers & business people o Marriage, family business, loan to relative, property ** TEST - KEEPAN EYE ON CLOSE FAMILY RELATIONSHIPS - Letters of intention – before closing deal – due diligence – get to see other sides documents, finances, etc. looks much like an enforceable agreement, but contains a clause that says that their apparent agreement is “subject to formal contract” or “subject to further negotiation” - Comfort letter – personal guarantee – creates a moral obligation, but not a legal one – valuable in a practical sense, b/c many business people fulfill their promises – even if they aren’t legally liable in order to protect their reputation (pg. 164) 2. The Nature of an Offer - Parties must enter into a mutual agreement through the process of offer and acceptance - Offer – an indication of a willingness to enter into a contract on certain terms - Acceptance – acceptance of the terms - Offeror – a person who offers to enter into a contract – the one who’s doing the thing o Master of the offer – articulate (they make them) the terms of the offer, which have to be accepted. How/when the offer should be accepted. Can also revoke offer - Offeree – a person who receives an offer – who it’s to o Power of acceptance – power to turn the offer into a contract - An offer creates a risk b/c a contract comes into existence as soon as an offer is accepted – both parties become obligated to fulfill the promises contained in the agreement – once a contract comes into existence, neither party can alter its contents to bring it to an end o Can’t undo or get out of a contract w/o making a new one - Invitation to treat – is not an offer, but an indication of a willingness to receive an offer. o An invitation for others to make offers. Sometimes the person who responds to the invitation is an offeror, and the person who initially presented the invitation is the offeree.  Ex. catalogues, advertisements, stores (We browse), ads in newspapers, bulletin boards, craigslists, kijiji, goods on display in stores  “Hamster for sale” – isn’t an “offer” its an invitation to treat – 4 possible people = offeror, guy selling = offeree Invitation to Treat vs. Offer - Objective test o how would a reasonable person interpret a statement? o Is the speaker ready to enter/accept the contract right now? Or were they making the statement simply to receive and consider offers? - “Max offered to sell” – not invitation – it’s an offer - Communication of an Offer – statement isn’t an offer unless it’s communicated and received as an offer. (as long as a proposition is communicated and received as an offer, it usually doesn’t have to take any particular form) The Life of an Offer (pg. 167
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