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Ch 8-11 Contracts - Formation Incapacity Mistake.docx

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Rotman Commerce
Dan Shear

CH. 8: CONTRACTS: FORMATION (OFFER AND ACCEPTANCE) Contract Elements - Overview: Contract Requirements (all 4 must be met): “O + A + C + I” Offer: one party (“offeror”) must offer (verbally, in writing, or by conduct) to make a contract (“c”) and specify all key terms + Acceptance: other party (“offeree”) must accept that offer, on those terms, without any changes + Consideration: the (accepted) offer must require each party to give something “in return for” what the other party must give (some exceptions – see Ch. 9 Contracts: Formation (Consideration and Intention)) + Intention: outward conduct of each party must show serious intention to make c Contract Elements - Offer: (1) Terms of Offer: offer must include (or refer to, or provide formula for determining) all key terms to be valid  exception: price: if price not addressed in offer:  if past practice for setting price, law assumes parties will follow that practice  “quantum meruit” (see also Ch. 9 Contracts: Formation (Consideration and Intention)) – must pay “reasonable” price  offer terms must be clear and unambiguous (or offer not valid)  Daniel R. Shear 2000 – 2012 All rights reserved. 1 (2) Offer vs. “Invitation to Make Offer”:  a party may make an offer, or invite the other party to make an offer  the law treats some situations as only an invitation only:  goods on store shelves, racks  goods shown in catalogues  advertisements (where ad refers to type of item(s) being sold but does not indicate which specific one(s) are being sold)  “invitation” does not satisfy “offer” element – “accepting” invitation = making offer (3) “Ticket Cases”:  involve “take it or leave it” standard form offers presented in written document (e.g. “ticket” or “receipt”), or posted on notice(s), or both  offers typically accepted by conduct (e.g. paying for ticket, parking car in lot, etc.)  nothing signed, no negotiation  law imposes a “reasonable notice” requirement:  only bound by those terms in offer for which reasonable notice given at time contract made  the more unreasonable or unexpected the term, the more clearly the notice must be to qualify as “reasonable notice” (4) Signing Contract:  creates strong presumption: read, understood and accepted all terms  some exceptions - see below under “Contract Elements - Acceptance” (5) When an Offer Ends: offer “lapses” (expires): (i) at the time (if any) specified in the offer  Daniel R. Shear 2000 – 2012 All rights reserved. 2 (ii) after a “reasonable time” (if no specific time mentioned)  consider: subject matter of offer, typical “turnover” for that type of subject matter, circumstances under which offer made (iii) upon either party dying or becoming insane offer is revoked (withdrawn): (i) if offeror communicates revocation (either directly to offeree, or indirectly through someone else)  communication must actually be received by offeree  revocation by mail only effective when actually received by offeree  unclear whether faxed revocation “actually received” when arrives in fax machine, or when viewed by offeree (ii) if it becomes unreasonable for offeree to believe offer still open offer is rejected (or offeree makes counter-offer) (6) Promise to Keep Offer Open:  not binding unless offeror receives “consideration” in return for this promise  i.e. must make separate contract (offeror promises to keep offer open for specified time, in return for consideration from offeree) – called “option” or “option agreement”  in effect there could be two contracts: (1) option agreement, and (2) contract that would result if original offer in question is ultimately accepted  Daniel R. Shear 2000 – 2012 All rights reserved. 3 (7) Counter-offer:  if “accept” offer but not exactly on terms offered, no acceptance – it is “counter-offer”  counter-offer rejects and cancels original offer (no longer able to accept original offer)  vs. “mere inquiry” – asking whether offered terms represent the “best” offer is not treated as counter-offer Contract Elements - Acceptance: (1) Terms of Acceptance: must be unqualified - cannot alter, add to or take away from any of the terms offered (2) Method of Acceptance:  “unilateral” contracts – where offer invites acceptance simply by doing what offer requires, acceptance involves doing what offer requires (e.g. offering reward)  “bilateral” contracts – where offer requires acceptance by promising to do something, acceptance involves communicating that promise to offeror before offer lapses or is revoked  general rule: may be communicated verbally, in writing, or by conduct  if offer specifies way acceptance must be communicated, must follow that way (3) Silence:  general rule: not acceptance  exceptions:  Daniel R. Shear 2000 – 2012 All rights reserved. 4  previous series of dealings between parties where silence considered acceptance  normal industry trade practice followed by both parties  parties agree in advance that silence means acceptance (4) Acceptance vs. Counter-offer vs. Mere Inquiry:  see above under “Contract Elements - Offer” (5) Signing Contract:  creates strong presumption – read, understood and accepted all terms  exceptions:  “non est factum” (“it is not my doing”) – e.g. illiterate or blind or do not understand language in which contract written  misrepresentation by omission (Tilden case - see Ch. 12 Contracts: Misrepresentation, Undue Influence, Duress) (6) “Mail Rule”:  applies where offeror does not specify required or preferred means of acceptance and reasonable for offeror to anticipate that acceptance might be by mail  general rule: acceptance effective when properly stamped and addressed acceptance letter is mailed (even if letter never received)  if offer states required method for acceptance (and that method is not mail), or prohibits acceptance by mail, no acceptance if mailed  if offeror states “preference” for acceptance by some means other than mail, but does not prohibit acceptance by mail, mailed acceptance not effective until offeror actually receives it  faxes and e-mails:  Daniel R. Shear 2000 – 2012 All rights reserved. 5  not clear whether “mail rule” would be extended to cover faxes and e-mails  Daniel R. Shear 2000 – 2012 All rights reserved. 6 CH. 9: CONTRACTS: FORMATION (CONSIDERATION AND INTENTION) Contract Elements - Consideration: (1) Meaning:  what a party is to give in return for what other party is to give  “give” can be to the other party or to a 3 party, and includes “give up” (2) Gratuitous Promise:  involves promise to give something when other party not required to give anything in return  generallynotenforceable(butsee“ExceptionstoConsideration”below) (3) Adequacy of Consideration:  “consideration” requires each party to give something – but does not require the things given to be of equivalent value (4) Settlement:  agree not to sue (or to stop lawsuit) in return for something (e.g. payment)  involves one party giving a “release” (giving up right to sue other party for something) in return for the other party giving something (e.g. $$)  release normally meets consideration requirement (unless each party knows lawsuit would not have succeeded – because then not really giving up anything by giving release) (5) Past Consideration:  involvessomethingalreadygiven(oralreadyrequiredtobegiven)byXtoY  Daniel R. Shear 2000 – 2012 All rights reserved. 7  cannot subsequently be used as new consideration from X in return for something new that Y is required to give in return (6) Existing Legal Duty:  involves situation where:  you already have a legal obligation to someone (e.g. Jay Doe) o e.g. have contract with Jay to sell Jay your used textbook for $10  and then you promise Jay that you will perform that same obligation (sell Jay your used textbook) in return for something new Jay will do (e.g. pay you additional $15 for that textbook)  you are not giving Jay any new consideration in return for Jay’s promise to pay more  so Jay’s promise to pay more is a gratuitous promise  BUT if you promise someone else (e.g. Z) that you will perform that obligation (sell Jay your used textbook), you are giving new consideration to Z  you are making a legal commitment to Z that you have not already made to Z (because you had only previously made that commitment to Jay) Exceptions to Consideration: (1) Promise Under Seal:  promise made in writing and signed under seal  “signed under seal” means signing and putting a seal (or writing “seal”) beside signature  promise is binding even if no consideration given in return for that promise (2) Injurious Reliance:  Daniel R. Shear 2000 – 2012 All rights reserved. 8  can apply to any promise  4 requirements: (1) (gratuitous) promise to give something + (2) reasonable to expect other party to rely on promise and change their conduct as a result + (3) other party does rely on promise and changes their conduct as a result + (4) “injustice” would result if promise not binding  note: currently mainly U.S. concept, but gaining some recognition in Canadian courts (3) Promissory Estoppel:  can only apply to promise to alter existing contract between the parties  4 requirements: (1) existing contract between X and Y + (2) X gives promise (express or implied) to alter contract for benefit of Y and X can expect Y to rely upon that promise + (3) Y relies on that promise + changes his/her conduct as a result + (4)Y would sufferreal hardship (as a result of relianceonX’s promise) if promise not binding  until recently could only be used as “shield” (i.e. if X sued Y based on original contract, Y could rely on X’s promise to alter contract)  but now may be possible to use as “sword” too (i.e. Y suing X to enforce X’s promise) Quantum Meruit:  general rule: offer must contain or refer to all key terms of proposed contract, or not valid  “quantum meruit” exception applies where reasonable for parties to expect that person ordering/requesting goods or services would pay something for them  Daniel R. Shear 2000 – 2012 All rights reserved. 9  states that where parties never discussed or agreed upon price, “reasonable” price applies (i.e. fair market value in that market or geographic area) Contract Elements - Intention:  must be reasonable to assume from outward conduct of parties that they had serious intention to make legal contract All rights reserved.00 – 2012 10 CH. 10: CONTRACTS: INCAPACITY, ILLEGALITY, NON-COMPETITION Legal Incapacity: (1) “Minors” Defined:  persons under the “age of majority”: 18 in Ontario (19 in B.C.) – at time contract made  law considers this a form of legal “incapac
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