Study 7 – The Law of Contract – Common Law

Five elements of a valid contract

1. Offer and acceptance (agreement)
2. Capacity of parties to contract

1. Consideration
2. Genuine Intention
3. Legality of Object

Contract definition: a contract is an agreement (1) between legally capable parties (2) for a consideration (3) demonstrating intent (4) to do something which is legal. (5)

Offer and Acceptance

Offers must be definite and communicated. A price tag or an advertisement, are not considered offers but rather invitations to do business.  An offer can be lapsed for the following reasons:

• The offer is not accepted within the time specified in the offer.
• The offer is not accepted after the passing of a reasonable amount of time if none specified.
• The offer is not accepted before either party dies or becomes incapacitated.
• An offer can be revoked by the offeror at any time prior to acceptance but must be communicated.

Acceptance must be absolute. Any new term added is considered a counter offer, which may be accepted or declined by the originating party and invalidates the original offer. Acceptance must be communicated either in writing, orally or by performance. Lack of action can not be deemed consent.

Capacity – certain people can not enter into binding contracts.

• Minors – individuals under the age of majority (18 years). Usually contracts are not enforceable against minors except when they are contracting for the necessities of life (food, lodging, clothing). Minors can choose to repudiate contracts at their option, the contracting party does not have that right.
• Other persons of diminished capacity – persons of unsound mind or incapacitation through alcohol or drugs are treated the same way as minors. The incapacitated person must promptly repudiate the contact upon becoming sober and prove that they were incapable of making a rational decision.
• Corporations – Have the same ability as natural persons to contract.
• Native Peoples – living on a reserve is limited based on the Indian Act.

Consideration

Consideration is evidence of the serious intent of the parties to contract. Consideration must have some monetary value but can be either cash or a service. Consideration does not need to be adequate and must be future. Gratuitous promises are not enforceable by law.

Genuine Intention

Intent to create a legally binding contract must exist. In domestic agreements the law assumes a legally binding agreement as not intended. In commercial agreements that law assumes a legally binding agreement was intended if the behaviour of the parties suggests it.

Legality of Object

The object of the contract must be legal. E.G. a contract to commit a crime is not enforceable.

Void and Voidable Contracts

A void contract is treated as if it never existed and has no legal effect.  

A voidable contract can be affirmed or rejected at the option of the aggrieved party.

Reasons for voiding a contract: Mistake, Misrepresentation, Undue Influence, Duress.

• Mistake – can be a mistake about the terms of a contract or mistake about assumptions fundamental to the contract.
• Misrepresentation – an incorrect statement which may convince a party to enter into a contract. Misrepresentation must be with regards to a material fact and can be; innocent, fraudulent or non disclosure. A material fact is a fundamental fact so basic that withholding this fact would alter the terms or a contract or cause it not to be made.   
• Undue Influence –when a contract has been signed due to an overpowering influence of another party, usually a special relationship exists. E.g. Husband/wife, doctor/patient.
• Duress – when a party has entered a contract under threat of violence, injury, imprisonment, criminal prosecution or civil action.  These contracts are voidable at the option of the victim.

Discharge of a Contract

Performance – completion by both parties of contractual obligations.

Agreement – mutual agreement to terminate the contract.

Frustration – impossible to perform contractual obligations.

Operation of Law – means a change in law renders the contract impossible to complete.

Breach – One of the parties fails to perform all or part of their obligation. A partial breach of contract by one party will not allow the other party to repudiate the entire contract. Courts may force preformance of a contract or set a monetary value on the contract.

Sample Exam Questions – Principles & Practices

Multiple Choice

December 2001

1. Under Common Law, which of the following is true of offer and acceptance?
1. A counter–offer cannot be made or accepted.
2. Acceptance of an offer must be absolute and correspond to the terms of the offer.
3. An offer may be withdrawn by the offeror at any time even after acceptance.
4. If a counter-offer is refused, the party making the counter-offer still has the option of going back and accepting the original offer.

2. Which of the following is NOT a legal entity?
1. James Slim
2. James Slim operating as Slim Insurance Brokers
3. James Slim’s Insurance Brokers
4. Slim Insurance Brokers Limited

3. A contract that may be affirmed or rejected at the option of one of the parties is said to be
1. cancelable
2. void
3. voidable
4. unenforceable

4. A material fact is one that
1. An applicant for insurance is under no obligation to disclose.
2. Could affect the underwriter’s decision about a particular risk.
3. Is applicable to all risks of the same general class.
4. The insurer should know without being told about by either the applicant or the agent/broker.

5. A non-disclosure is
1. concealing of facts other than material facts.
2. Making a fraudulent misrepresentation.
3. Not disclosing a fact.
4. Not disclosing a material fact.

July 2001

6. Which of the following is common to both general and insurance contracts?
1. Indemnity
2. Insurable interest
3. Legality of object
4. Utmost good faith

7. Which of the following is NOT a legal entity?
1. James Slim
2. James Slim operating as Slim Insurance Brokers
3. James Slim’s Insurance Brokers
4. Slim Insurance Brokers Limited

8. Under Common Law, which of the following is a valid reason for the voiding of a contract?
1. Breach
2. Duress
3. Frustration
4. Performance

9. Under Common Law, which of the following provides grounds for discharging a contract?
1. Duress
2. Frustration
3. Mistake
4. Misrepresentation

April 2001

10. In contract law, the rules of offer and acceptance state that
1. an offer, once accepted, can be revoked provided neither party has fulfilled any of the terms.
2. Contracts cannot be entered into lightly and are binding even if there are mistakes about the intent.
3. The acceptance must be definite and communicated
4. The offer can be accepted at any time as long as it has not been withdrawn.

11. Under Common Law, consideration with respect to a legal contract
1. can be in return for some service to be determined sometime in the future.
2. Is the careful deliberation each party goes through before entering into the contract.
3. Is whatever the two parties agree upon provided that it has some monetary value.
4. Must be adequate with respect to the value of the contract as between parties.

December 2000

12. A contract offer may lapse because
1. it was not accepted within a reasonable time
2. the amount offered was not high enough
3. there was no interest from the offeror
4. there was not interest from the offeree

13. Consideration is
1. a requirement of contracts of indemnity only
2. a requirement of insurance contracts only
3. equivalent to the actual cash value
4. required in most contracts in the common law provinces.

14. A material fact
1. is a fact that could influence the acceptance of a risk.
2. Is any fact that contributes to the description of the risk.
3. Is any fact that must be disclosed by law.
4. Refers to all key information concerning the risk.

15. Non-Disclosure means
1. concealing facts other than material facts
2. making a fraudulent misrepresentation
3. not disclosing a fact
4. not disclosing a material fact.

April 2000

16. Consideration in respect to a legal contract
1. means that both parties to a contract have given the matter full thought
2. is not necessary with respect to contracts made under seal.
3. Does not have to have a monetary value
4. Must be adequate with respect to the value of the contract between the contracting parties.

Essay Questions

April 2001

1. One of the basic elements of a contract is agreement (offer and acceptance). Discuss each of the following related points:

i) Communication of an offer (4 marks)

ii) Acceptance of an offer (4 marks)

iii) Counter – offer (4 marks)

iv) Lapsing or revocation of an offer (4 marks)

To what extent is consideration an important element of a contract? What would constitute consideration?

What would constitute consideration? When is consideration not essential? (4 marks)

July 2000

2. How may an offer for a legal contract be communicated? (4 marks)

For what FOUR (4) reasons may an offer of contract be lapsed or revoked? Give an example for each reason. (16 marks)

April 2000

3. Explain the following terms in the context of an insurance contract. Give an example in each case.
1. Material Fact (5 marks)
2. Warranty (5 marks)
3. Non-Disclosure (5 marks)

List FIVE (5) methods by which a legal contract may be discharged under common law. (5 marks)