4) Parktown Realty Inc developed an upscale condominium complex. On October 1, Miranda Wine signed an offer to purchase one of the units. Part of that document said, "This offer is irrevocable by the Purchaser until one minute before midnight on the fifteenth day after its date, after which time if not accepted, this offer shall be null and void." As both parties were aware, the real estate market was highly volatile at the time that Miranda signed her offer to purchase. In the preceding months, prices had gone up and down, quite unpredictably. On October 10, Parktown signed that document with the intention of accepting Miranda's offer. Because of an oversight, however, the company did not mail the signed document back to Miranda until October 14. Miranda eventually received the letter on October 20. By that time, the real estate market had collapsed and she was no longer interested in buying a condominium unit at the original price. She therefore insists that her offer lapsed before it had been turned into a contract by Parktown's acceptance. Is she correct?

10) Five years ago, Arvid and Dora were involved in an amorous relationship while they studied business together at college. Since that time, they have gone their separate ways and have moved to different cities, but they are still intimate on those rare occasions when their paths cross. Unfortunately, while Arvid's business has flourished, Dora's has foundered and she has fallen on hard times. Last month, Arvid wrote to Dora to offer her a job with his company. The relevant portion of his letter stated, "Given all that we have been through together and given the generous salary that I am offering, I just know that you'll accept. I'm considering the deal done and I'll begin setting up an office for you tomorrow." Arvid's letter did not mention that his offer was also motivated partly by a secret desire to rekindle their old romance into a permanent and stable relationship. When Dora received the letter, she decided to definitely take the job and began making arrangements to join Arvid's company. She did not, however, inform her old friend of that decision. She wanted to surprise him by simply appearing at his door the next week. However, three days later, her own

company received an unexpected financial grant from the federal government. At that point, she reconsidered her earlier decision to work for Arvid and telephoned him to say that she would not be joining him after all. Because he had already spent a considerable amount of money preparing for Dora's arrival and because he was upset that she spurned his offer, Arvid reacted angrily. He insisted that a contract had been created and that she was his employee. Is he correct? Did Arvid act with an intention to create legal relations? Does it necessarily matter that both Arvid and Dora firmly believed that they had formed an enforceable agreement? Has there been valid acceptance?

PART 3 164 PART 3 Contracts Most people are unaware of the vast number of contracts that they create. Some are obvious. If you bought a car or rented an apartment, you obviously created a contract. You took time to seriously think about the matter, you signed formal documents, and you agreed to pay a substantial amount of money. Exactly the same process occurred, however, if you took a bus to school, paid for parking, or bought a cup of coffee. Big or small, all of those contracts are governed by the same basic rules. Consider your acquisition of this textbook. You may have found it, borrowed it, or received it as a gift, but you most likely bought it. Furthermore, you might have purchased it in a variety of ways. You probably bought it from the campus bookstore, but you might have ordered it online, through Amazon or Kijiji, or direct from the publisher. Alternatively, you might have obtained it second-hand from a former student or a used book seller. Likewise, payment could have taken various forms. Cash is the simplest, but you also could have used a credit card, a debit card, or PayPal. Then again, you may have acquired the book without spending money. An upper-year student may have exchanged the book for a concert ticket. And if you were particularly industrious, you may have persuaded the bookstore's manager to accept your promise to stock shelves on the weekend. a contract is an agreement that contains legally enforceable rights Whichever option you used, you presumably became party to a contract. You and and obligations the other person entered into an agreement that contained legally enforceable rights and obligations. You were able to enter into that agreement because the two of you expe a meeting of the minds is a shared rienced a meeting of the minds, a shared decision to enter into a legal transaction decision to enter into a legal transaction on a particular basis on a particular basis." And the most obvious feature of that contract is that it involved a mutual exchange of value. You both gave up something as part of the deal.' You an exchange of value occurs when probably paid money, while the other person delivered the book. the parties each give up something If a contract was created, it is important to realize that it did not end as soon as you paid the price and received the book. Whether or not we think about it, contracts have an impact on the future. The choices that you made yesterday will limit your options tomorrow. If you bought the book with a credit card, you will have to pay the bill that arrives at the end of the month. If you promised the bookstore's manager that you would stock shelves on the weekend, you will not be able to spend the day in bed. Of course, the same is true on the other side of the contract as well. What happens if the pages start falling out of the book a couple of days after you bought it? If you bought "as is" from a used book dealer, you may not have any remedy. The situation will be different, however, if you purchased it from a bookseller who offered a "satisfaction or money back" guarantee.* You will be entitled to a refund.' Having given the guarantee at the time of sale, the bookseller no longer has any choice in the matter. A court will enforce the promise. Fortunately, textbooks seldom come unglued and you probably will never need to enforce the seller's guarantee. The same is true for most contractual terms. Rights and obligations usually lie quietly beneath the surface while the future unfolds as the parties 1- Of course, not every acquisition involves a contract. There would be no contract in this case if you received the book as a gift or if you found it as abandoned property. 2- Lawyers sometimes refer to this as consensus ad idem, or "agreement on that previously mentioned." 3. Lawyers sometimes refer to this as quid pro quo, or "something for something." As an aside, consider why some booksellers are willing to give such guarantees. They presumably value freedom of choice as much as you do, but they also know that guarantees generate goodwill and increase the prices that customers are willing to pay. 5. As we will see in Chapter 13, the law imposes a number of obligations on a person who sells goods (such as books) even if the parties' contract does not expressly do so.CHA PTER 3" The Nature and Creation of Contracts 155 expected. In that sense contract law represents the pathology of commerce. Legal issues usually arise only if a commercial relationship becomes unhealthy. It would be dangerous, however, to assume that business people do not need to know about the law. While most contracts are performed without problems, most of the problems that do arise are avoidable. They occur because the parties failed to think carefully about the legal implications of their actions. Bear that in mind as you read the chapters on contract. The cases that that we discuss are unusual precisely because they went to court. Business people need ajudge only when something has gone terribly wrong. By knowing your rights and obligations at the outset, you can almost always avoid that situation. Of course, when something does go wrong, it may be preferable from a business perspective to avoid the courts. We discussed that proposition in Chapter 2. 'W'hile a clear understanding of your legal rights and obligations allows you to litigate more effec tively, it may be better to resolve a dispute inermally. Legal proceedings tend to signal the end of a business relationship. The longterm benets of retaining a healthy com mercial relationship are often more important than winning a particular dispute. So far, we have discussed the creation of contracts in very general terms. We can now be more specic. Every contract must full certain requirements. Three are espe cially important: 1. The parties must have an intention to create legal Iridium. 2. They must reach a mutual agreement through the process ofqizr and carptance. 3. They must enter into a bargain by each giving wnsidemtion. We will discuss the rst two elements in this chapter and the third in Chapter 3. As you may have noticed, our list does not include the writing of a contract. In fact, most contracts do not have to be written in order to be enforceable. In Chapter 10, we will discuss some exceptions to that rule. At the same time, we will also consider other factors that may render a contract ineffective, such as illegality and incapacity to contract. Comparing Torts and Contracts Before examining the creation of contracts, it is important to consider one more intro ductory issue: the difference between torts and contracts. We previously addressed that issue in Chapter 1 and again in Chapter 3. You should take a moment to review that material, especially Concept Summary 3.2 (see page 65). Intention to Create Legal Relations A contract cannot exist without an intention to create legal relations. The par ties must intend to create a legally enforceable agreement. To decide that issue, a court asks whether a \"reasonable person" would have believed that the parties intended their promises to be enforceable. We previously discussed the reasonable person concept in Chapter 6. The test is objective rather than subjective. Instead of focusing on what the parties actually thought, ajudge asks what a reasonable person in the parties' circunlstances would have thought. In the contractual context, there are two good reasons for that approach. First, a test of subjective intentions would be diliicult to apply because a person could easily lie at trial. Second, the law of contracts aims to protect reasonable expectations. If you and Lo. 0 Lo. 9 an insulin to male legal relaunns exists it a reamnable person would believe that the parties intend to create a legally enforceable agreement PART 3 PART 3 166 PART 3 Contracts I enter into an apparent contract for the sale of widgets, I will reasonably expect to receive those widgets even if, during the sale negotiations, you secretly planned to keep them for yourself. Furthermore, I may have relied on those reasonable expectations in planning for the future. I may have agreed to re-sell the widgets to a third party. I may have hired extra employees to deal with the widgets on arrival. I may have altered my factory in order to use the widgets in the manufacture of some other product. If the law did not protect reasonable expectations, it would be impossible to plan for the future, and the business world would become hopelessly inefficient. The existence (or non-existence) of an intention to create legal relations is usually obvious. A reasonable person simply ignores unrealistic and exaggerated proposals. A lecturer's sarcastic promise to pay $5000 for a correct response in class cannot be taken at face value. To further simplify matters, the courts use two presumptions in commercial contexts, the parties are presumed to intend legal relations in family or social contexts, the parties are presumed to not intend legal relations Those presumptions, however, are rebuttable-they can be negated by the facts. For example, a business person may be able to convince a judge that a document was not intended to be binding even though it looks very much like an enforceable agreement. Likewise, a son 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." In the business world, the issue of intention to create legal relations can arise in a variety of ways. A document that otherwise satisfies all of the requirements for a con- tract may contain a clause that says that the apparent agreement is "subject to formal contract" or "subject to further negotiation." A court will likely find that although the parties could have created a contract, they did not yet do so. Neither party can be forced to perform the deal. However, if the parties then go ahead and actually perform, a court may decide that a contract has come into existence on the basis of their actions, rather than their document. The issue of intention to create legal relations is also important in a case that involves a comfort letter.10 Suppose that a small company wants to borrow money. Its bank would like to create a loan contract, but it is worried that the company may not be able to repay. The bank therefore asks the company's directors for some assurance that they will help out if necessary. The directors refuse to give a personal guarantee, but they provide the bank with a comfort letter that contains an informal promise that the loan will be a comfort letter is a document that provides an assurance that a debtor repaid." A comfort letter is a document that provides an assurance that a debtor will will honour a debt honour a debt. The crucial point is that a comfort letter creates a moral obligation, but not a legal obligation. It is valuable, in a practical sense, because many business people fulfill their promises-even if they are not legally liable-in order to protect their reputations. 6. Edwards v Skyways [1964] 1 WLR 349 (CA). 7. Balfour v Balfour [1919] 2 KB 571 (CA). *. Rose & Frank Co v JR Crompton & Rose Lid [1923] 2 KB 261 (CA). 9. Jones v Padavation [1969] 2 All ER 616 (CA). 10. Toronto-Dominion Bank v Leigh Instruments Lid (Trustee of) (1999) 178 DLR (4th) 634 (Ont CA). 11. As discussed in Chapter 22, a personal guarantee is a contract. In the current example, such a contract could have been created between the directors and the bank. The bank could have promised to lend money to the company-the directors could have promised to repay the loan if the company failed to do so.CHAPTER 7 The Nature and Creation of Contracts 167 The issue of intention to create legal relations is most difficult when the circum- PART 3 stances combine social elements and commercial elements. How would you decide the case in You Be the Judge 7.1? You Be the Judge 7.1 Fobasco Ltd v Cogan (1990) 72 OR (2d) 254 (HCJ) When major league baseball came to Toronto in 1976, Eddie Cogan bought eight season's tickets in a prime location-field level, behind Questions for Discussion first base. At that time, he agreed to sell four of his tickets to Fobasco Ltd, 1. Would a reasonable person believe that the parties had entered a company owned by his friend and business associate, David Fingold. into contractual relations? Or did they merely have a social David, in turn, gave the tickets away to Fobasco's prospective customers, arrangement? in an effort to drum up business. Although that arrangement lasted for many years, Eddie decided in 1986, around the time that the Blue Jays 2. While contracts generally do not need to be written to be effective, do became contenders and shortly before they moved into SkyDome, that he you believe that the lack of writing in this case is significant? What would prefer to sit next to his own sons rather than Fobasco's clients. He if the parties, as business people, normally put all of their contracts told his old friend that their arrangement was at an end. into writing? David was upset because he could not otherwise get good seats for 3. If you believe that a contract should be recognized, should Eddie be the games. He therefore sued for breach of contract, claiming that Eddie required to make tickets available to Fobasco Ltd forever? had contractually agreed to sell tickets to Fobasco on an annual basis. Offer L.O. 34 5 67 THE NATURE OF AN OFFER A contract requires more than an intention to create legal relations. The parties must also enter into a mutual agreement through the process of offer and acceptance. An offer is an offer is an indication of a will- an indication of a willingness to enter into a contract on certain terms. A person who ingness to enter into a contract on offers to enter into a contract is called the offeror. A person who receives an offer is certain terms called an offeree an offeror is a party who offers to An offer can be dangerous. The danger lies in the fact that a contract comes into enter into a contract existence as soon as an offer is accepted. At that point, both parties are obligated to fulfill the promises contained in the agreement. And once a contract comes into existence, an offeree is a party who receives an offer to enter in neither party, acting alone, can change its terms or bring it to an end. Consider a simple example. After the first class of the year, your business law lecturer posts a notice on a bulletin board: "Managing the Law for Sale. Brand new-only $25." Eleven students slip "acceptance" letters under the lecturer's office door that afternoon. The lecturer is horrified to find the acceptances the next morning. If the original notice is classified as an offer, then each acceptance created a separate contract. It is irrelevant that there was only one copy to sell. Each student would be entitled to either the book or expected benefit of the contract. The lecturer would be liable for at least $750.12 To manage that risk, the courts insist that only some statements qualify as offers. The lec- turer's notice probably was not one. 12. Contractual remedies are discussed in Chapter 12. If 11 contracts were created, the lecturer could fulfil one by handing over the book. The other ten students would be entitled to expectation damages-the difference between the actual value of the book (approximately $100) and the price that the lecturer agreed to accept ($25).PART 3 168 PART 3 Contracts INVITATION TO TREAT an invitation to treat is an indication Many statements are classified as invitations to treat rather than offers. An invitation to of a willingness to receive an offer treat is an indication of a willingness to receive an offer. It is, in other words, an invita- tion for others to make offers. Consequently, a person who responds to an invitation is an offeror, and a person who initially presents the invitation is an offeree. The distinction between an offer and an invitation to treat depends on the reason- able person test. Is it reasonable to believe that the person making the statement is pre- pared to create a separate contract every time an acceptance is received? Or is it more reasonable to believe that that person is merely prepared to receive and consider offers? That test is often difficult to apply, but the courts are once again guided by pre- sumptions. An item on a shelf is presumed to be an invitation to treat, even if it has a price tag attached. Similarly, an advertisement in a newspaper or a page in a catalogue presumably is not an offer. Those rules are designed to protect businesses from over- exposing themselves. In our earlier example, the lecturer heard from eleven students, but had only one book to sell. A court would probably classify the lecturer's initial notice as an invitation and the students' letters as offers. The lecturer therefore would be able to accept one of those offers, while rejecting the rest. Those presumptions, however, are rebuttable. An advertisement may be considered an offer if a reasonable person would read it that way. That may be true if an advertise- ment expressly states that a limited number of items are available while supplies last. Suppose, for example, that a store distributes a flyer that says: "Widgets for sale-$250 each to the first ten customers." In that situation, the store would not be in danger of being bound to an unmanageable number of contracts, regardless of how many shoppers showed up. 14 COMMUNICATION OF AN OFFER A statement is not an offer unless it is communicated and received as an offer. The issue, as usual, is governed by the reasonable person test. A court will ask whether a reasonable person would have believed that a statement was intended to be received as an offer. The issue is not as simple as it might appear. Suppose the directors of a company decide during a meeting to offer a $10000 bonus to a long-serving secretary in exchange for her early retirement. The directors then ask the secretary to type their handwritten notes of the meeting. In doing so, she learns of the proposed bonus, completes the task at hand, and promptly tenders her res- ignation. She probably is not entitled to the bonus payment. The minutes of the meeting were communicated to her as a typing assignment-not as a contractual offer. In those circumstances, the reasonable person would not believe that the directors intended to be bound by their communication. 15 13. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Lid [1953] 1 QB 401 (CA). 14. Business people occasionally try to take advantage of that rule. A store may advertise a terrific price on items that it does not actually have in stock, hoping that shoppers who show up can be persuaded to buy other higher priced items. Attempts to "bait and switch" are generally prohibited by statute: Competition Act, RSC 1985, c C-34, s 52 (Can); Fair Trading Act, RSA 2000, c F-2, s 9 (Alta); Trade Practice Act, R.SBC 1996, c 457, s 2 (BC); Trade Practices Inquiry Act, CCSM, c T110, s 2 (Man); Trade Practices Act, R.SN 1990, c T-7, s 5 (Nild); Consumer Services Act, RSNS 1989, c 94, s 6(1)(c) (NS); Business Practices Act, R.SO 1990, c B.18, s 2 (Ont); Business Practices Act, R.SPEI 1988, c B-7, s 2 (PEI); Competition Protection Ad, R.SQ, c P-40.1, ss 224-225 (Que); Consumer and Commercial Affairs Act, RSS 1988, c C-29.2, s 8 (Sask) 15. Blair v Western Mutual Benefit Association [1972] 4 WWR. 284 (BC CA).PAR If a statement is communicated as an intended offer, it generally does not have to take any particular form. It may be contained in a written document. If you buy a television from a department store on credit, you will probably be asked to complete a lengthy application that contains countless terms and conditions. That is your offer to the store. Alternatively, an offer may be made verbally. If you walk into a restaurant and say, "A cheeseburger and a milkshake, please," you are offering to enter into a contract for the purchase of a meal. An offer may even be inferred from conduct alone. If you silently sit in a shoeshine's chair and the attendant polishes your shoes, you have offered, and the attendant has accepted, a contract to shine your shoes. 17 THE LIFE OF AN OFFER An offer does not last forever. If it is accepted, it gives way to a contract. And if it is not accepted, it will cease to exist at some point. There are several possibilities: revocation lapse of time death or insanity rejection counter-offer Revocation Revocation occurs if the party who made an offer withdraws it. The offeror is the revocation occurs if the offeror "master of the offer" and, consequently, is generally entitled to revoke it at any time. withdraws an offer As a matter of risk management, however, there is some need for caution. Revocation is not effective unless it is reasonably communicated to the offeree. Until that happens, the offer remains open and the offeree can create a contract through acceptance. FIRM OFFERS Although the basic rules regarding revocation are quite simple, two types of situations call for special attention. The first involves firm offers. A firm offer is an a firm offer is an offer that the offer that the offeror has promised to hold open for a certain time. That terminology, offeror has promised to hold open for however, is dangerously misleading. A firm offer is not very firm at all. As a general rule, a certain time the offeror can revoke it at any time. The reason, as Ethical Perspective 7.1 shows (see page 170), turns on the fact that a firm offer is not contained in a contract and therefore is not enforceable in law. Nevertheless, as you read that case, consider how you, as a business person, would act in such circumstances. Despite the general rule, a firm offer cannot be revoked if the offeror's promise was placed under seal or if the offeree paid for the right to accept within a certain period. Seals are discussed in Chapter 8. We can address the other possibility here. an option is a contract in which the An option is a contract in which the offeree provides something of value in offeree provides something of value in exchange for the offeror's promise to exchange for the offeror's promise to hold an offer open for a specific period. That sort hold an offer open for a specific period 16. In Chapter 10, we will discuss situations in which a contract must be written to be enforceable. 17. If the parties to a contract do not stipulate a price, the courts may require the purchaser to pay a reasonable price. Lawyers sometimes refer to this as quantum merit, or "as much as it is worth." 18. Revocation generally can be communicated in the same way that the offer was communicated. An offer that was sent by email, for instance, can be revoked that way as well. In most circumstances, however, any other reasonable mode of communication is valid as well. Accordingly, as long as the reasonable person would agree, an emailed offer may be revoked by telephone.PART 3 170 PART 3 Contracts Ethical Perspective 7.1 Dickinson v Dodds (1876) 2 Ch D 463 (CA) George Dickinson was one of several people interested in buying a piece unenforceable because it was entirely gratuitous. George had not of land from John Dodds. On Wednesday, John wrote to George, offering provided anything of value in exchange for John's promise to hold his to sell the property and promising to hold that offer open until Friday offer open until Friday morning. While George was considering his options on Thursday, he learned that John was negotiating with another potential buyer. George Questions for Discussion immediately tried to accept the offer, but he was unable to find John that night. He finally caught up with him the next morning and expressed his 1. Do you approve of John's behaviour? What do you think of the fact desire to buy the property. By that time, however, George had learned that the law allowed him to break his promise? Is the law that gov- from a third party that John had already sold to someone else. ers firm offers morally acceptable? George sued John for failing to fulfill his promise to keep the 2. Although firm offers are revocable, most successful business people offer open. The lawsuit failed. The court held that John's promise was honour such promises. What reasons might motivate them to do so? of arrangement is common in certain fields, including real estate transactions. Assume that a landowner has offered to sell the property to you. You believe that you might want to buy in the future, but you are not prepared to commit yourself to that transaction just yet. You might purchase an option from the owner. That option would accomplish two things. First, it would allow you and the owner to create a sales contract at some point in the future. Second, it would immediately create an entirely separate contract that required the owner to wait while you decided whether you wanted to buy the land. As you might expect, one must take special care in granting options. Consider the situation in Business Decision 7.1. Business Decision 7.1 The Granting of Options ABC Corp is investigating the possibility of developing a shopping mall in a certain neighbourhood. To do so, it will need to buy your land. It also Questions for Discussion will need to obtain zoning approval for its proposal. Although you have 1. Will you grant the option? If so, on what terms and at what price? offered to sell your property for $100 000, ABC Corp does not want to be locked into a contract unless its zoning application is allowed. However, 2. How does the existence of other potential buyers affect your decision? it also knows that other companies may offer to buy your land to develop 3. How will your expectations about the future market value of your land their own projects. It therefore wants to buy an option that will require affect your decision? you to hold your offer open for 90 days. TENDERS The second special situation involving the revocation of offers is more com- plicated. It is also very important in the business world. Suppose that a city wants a new a tender is an offer to undertake a library built. It uses a newspaper advertisement to make a call for tenders. A tender is an project on particular terms offer to undertake a project on particular terms. Because of the need to consider every aspect of the proposed project, tenders tend to be expensive to create. 19. Lawyers use the word "gratuitous" to describe an act that was not required by law -in effect, a gift. Of course, just as no one is required to give a gift, no one is obligated to hold open a firm offer.CHA PTER 7 The Nature and Creation of Contacts 171 If the general rules that we discussed earlier are applicable, the law would presume that the city's advertisement is an invitation to treat, and that each tender that is submit ted by a construction company is an offer. Until the city accepts one of those offers, there will be no contract. And without any contract, there will be no obligations. Neither party will be happy with that situation. The construction companies want an assurance that the city will select the winning tender fairly. It would be infuriating to spend a large amount of money creating a tender only to discover that city council intended at the outset to award the project to a particular rm. At the same time, the city wants an assurance that the construction companies will not revoke their bids. It would be frustrating to examine the tenders in detail only to have one Withdrawn before it could be accepted. To avoid those problems, Canadian courts have developed special rules for the ten dering context.20 The crucial fact is that there are two sets of contracts.21 I Connect A: The rst set of contractscalled Contracts Aare process contracts. They govern the parties' rights and obligations during the selection process. The city has a separate Contract A with each company that submits a tender. Each Contract A imposes obligations that prohibit the city 'om acting unfairly, and prohibit the companies from revoking their tenders before one is selected.22 I Conn-act B: The second contractcalled Contract Bis the cansmwtiarr contract. There is only one Contract B, which is created when the city accepts one of the tenders. That Contact B requires company to build the library in accordance with its tender, and requires the city to pay the agreed price. That analysis works because the city's call for tenders serves two functions: 1' The city's call for tenders constitutes an tiger to enter into a Contract A, with each company that submits a tender, to govern the selection process. 2' The city's call for tenders also constitutes an invitation to treat to receive offers to enter into Contract B, a building contract, for the construction of the library. The tenders that the companies submit also serve two purposes: 1' A tender constitutes a company's :1:pr of the city's offer to enter into a Contract A. 2. A tender also constitutes an rr to enter into a Contract E. Figure 7.1 illustrates the tendering process (see page 172). Lapse An offer does not last forever. If it is not accepted or rejected, then it will eventually lapse. An olfer will lapse when either a deadline set by the offeror, or a reasonable length of time, has passed. The situation is simplest if the offeror. as master of the offer, expressly states that the offer must be accepted within a certain period. That is almost always true for some types of offers, such as options. If no deadline is set, then an offer is open for a \"reasonable 20' The special tendering rules apply only ifthe parties intend under the reasonable person host. That is nuts, how ever, in the vast majority ofcases 21' R v Ran Eagr'ueerr'ng E-rCmurmm'an (Eastern) Ltd {1981] 119' DIR {Bid} 2.67 (SCCJ; \")3 Enterprises v Dua Commission (1999) 170 DIR {4th} 5'7 {ECG}. 2? The precise content ofCon'tracl A depends upon the circunlslancu, especially the call for lenders. A call for ten- ders may, for instance, oier a process contract that sets deadlines and requims the pays-neat o'fdeposils. an offer will m trailer] either a deadline set by the nemr, or a reasonable Iengl of time. has passed PART 3 172 PART 3 Contracts FIGURE 7.1 The Tendering Process Stages Contract A Contract B Call for tender by city offer by city + invitation to treat by city Submission of tender acceptance by company by company + offer by company Selection of tender acceptance by by city city Source: Author created period." In deciding what constitutes a reasonable period, a court will look at many factors, including the subject matter of the proposed contract, the nature of the agree- ment, the volatility of the market, the existence of other potential offerees, and the usual practice in the industry. An offer to sell farmland in a financially depressed region may be open for many weeks; an offer to sell shares in a wildly fluctuating market may be open for mere hours or minutes. Death or Insanity It is often said that an offer is automatically revoked if either the offeror or the offeree dies. A dead person does not have the capacity to enter into a contract, and there cannot be a meeting of the minds if only one person is alive. An exception may apply, how- ever, if the proposed contract does not call upon the affected party to perform personally. That may be true if the offer pertains to the sale of land rather than the performance of a concert. In that situation, the offeree may communicate acceptance to the deceased offeror's estate, or the deceased offeree's estate may communicate acceptance to the offeror.24 The same rules generally holds true for insanity. Rejection rejection occurs when the offeree refuses an offer Rejection occurs when the offeree refuses an offer. An offer is terminated once it is rejected. Suppose that Bruno offers to sell his business to Helga for $100 000. If she says, "No, thank you, I'm not interested," the offer is dead. And because it is dead, Helga can- not later accept it if she changes her mind and decides that she really would like to buy the business after all. Unless Bruno repeats his initial offer, Helga must make an offer to him and hope that he accepts it. a counter-offer occurs when an Counter-Offer offeree responds to an offer by indicating a willingness to enter into A similar rule applies to counter-offers. A counter-offer occurs when an offeree responds a contract but on different terms to an offer by indicating a willingness to enter into a contract but on different terms. 23. The concept of capacity is discussed in Chapter 10. 24. In this context, "estate" refers to the person representing the interests of the deceased.CHAPTER 7 The Nature and Creation of Contracts 173 PART 3 A counter-offer has the effect of rejecting an existing offer and creating a new one. Consequently, as Figure 7.2 shows, a counter-offer causes the parties to switch roles. FIGURE 7.2 Offer and Counter-Offer Event Party A Party B Offer offeror offeree Counter-offer offeree offeror Source: Author created. To create a contract, an offer must be entirely accepted. Any attempt to accept on different terms constitutes a counter-offer. Returning to our previous example, suppose Helga responded to Bruno's offer by saying, "You've got yourself a deal, but I can pay only $75 000." Her statement is a counter-offer. It kills Bruno's offer to sell for $100 000 and replaces it with her own offer to buy at $75 000. If Bruno rejects Helga's offer, she cannot revive his initial offer by saying, "Okay, I'll pay the full $100 000." If she wants the business, she must either make her own offer at $100 000 or hope that Bruno repeats his original offer. He may do so expressly. Alternatively, he may impliedly re-state his offer by saying something like, "No, I won't take less than $100 000." The general rule regarding counter-offers can be harsh. For that reason, a judge may characterize an offeree's statement as a harmless inquiry rather than a counter-offer. Therefore, if Helga had said, "I'd love to buy your business, but I'm just wondering if you'd take $75 000 for it," she might be able to persuade a judge that even if Bruno had said, "No," his original offer would still be open for acceptance. BATTLE OF THE FORMS A judge may also try to avoid the general rule regarding counter-offers in a battle of the forms. A battle of the forms occurs when each party a battle of the forms occurs when claims to have entered into a contract on the basis of its own standard form document. each party claims to have entered A company that frequently buys or sells particular goods or services normally has a into a contract on the basis of its standard form document that it insists on using for every transaction. For example, if you own standard form document want to buy a television from an electronics store, the store will insist on using its pre- prepared document and it usually will not negotiate its terms. That document saves the company the time and expense of creating a new agreement every time it does business. Problems arise, however, if both parties are established businesses. Each party will want to use its own form and those two forms are likely to have different terms. 25 To decide which contractual form, if either, applies, a judge will consider several factors, including the usual practice in the industry, past dealings between the parties, the precise sequence of events, and the forms, if any, that the parties actually signed. Consider the example in Business Decision 7.2. 25. Different types of problems can also arise if only one party uses a standard form contract. Corporations often try to use such documents to force complicated and harsh terms on their customers. That problem is addressed in Chapter 9.PART 3 174 PART 3 Contracts Business Decision 7.2 Battle of the Forms For years, Vendor Inc has been selling computer chips to you without Nevertheless, since the agreement is executed (already performed) any problems. During that time, it developed a standard form docu- rather than executory (not yet performed), and since you both reason- ment, which it uses to offer its goods for sale. That document contains ably believed that a contract existed, a judge might be persuaded to a clause that allows unsatisfactory goods to be returned for a refund find that a contract was created. For example, if Vendor signed and within seven days. returned a copy of your document before shipping the computer chips, You also developed a standard form document, which you use for the judge might hold that Vendor agreed to the terms contained in your accepting offers of sale. That document, however, contains a clause that counter-offer, especially since those terms reflect industry practice. 26 allows unsatisfactory goods to be returned for a refund within 21 days. In some situations, however, it will simply not be possible to save the In fact, most businesses that buy and sell computer chips use a 21-day transaction, and you will be without a contractual remedy for the defec- return period. tive goods. 27 You and Vendor purport to create a contract for the sale of 5000 computer chips. As always, you each use your own form and, as always, neither of you realizes that those forms have different terms. If, after Questions for Discussion 10 days, the chips are found to be defective and you want your money 1. What does this example demonstrate about the need to carefully read back, are you entitled to a refund? every document that affects your business? Strictly speaking, because it did not exactly match the terms of Vendor's offer, your document seems to be a counter-offer rather than 2. How can you avoid the sort of difficulties that arise in this case? an acceptance. And if there has been no offer and acceptance, there cannot be a contract. L.O. 890 Acceptance An offer is turned into a contract when it is accepted. Acceptance can be achieved in two ways: acceptance by promise acceptance by performance ACCEPTANCE BY PROMISE a bilateral contract occurs when a promise is exchanged for a promise Most contracts are bilateral. A bilateral contract occurs when a promise is exchanged for a promise. The offer consists of the offeror's promise to do something; the acceptance consists of the offeree's promise to do something. The contract is called "bilateral" because when it comes into existence, both parties have promises to fulfill. Suppose that you offer to sell your car for $7500. To accept your promise to transfer ownership of the vehicle, I promise to pay the price. As Figure 7.3 illustrates (see page 175), we have a bilateral contract. That would be true whether we expected to complete the exchange immediately or next week. acceptance occurs when an offeree agrees to enter into the contract We can define the element of acceptance even more precisely. Acceptance occurs proposed by the offeror when an offeree agrees to enter into the contract that the offeror proposed. Acceptance must be communicated to the offeror, it must be unequivocal, and it must correspond 26. Butler Machine Tool Co y Ex-cell-O Corp [1979] 1 All ER 695 (CA); Tekdata Interconnection Lid v Amphenol Lid [2010] 1 Lloyd's Rep 357 (CA). 27. In some situations, the court may apply the cause of action in unjust enrichment if one party received a benefit from the other. That possibility is discussed in Chapter 12.CHA PTER ? The Nature and Creation of Contraols FIGURE 7.3 Bilateral Contact promise- as offer )I- Offeror Oeree II promise as acceptance precisely with the terms of the oEer. As we saw earlier, an attempt to accept on tiff-smut terms constitutes a counteroffer rather than acceptance. An acceptance must also he a response to an offer. For that reason, no contract is formed ifI send you a letter that says. \"I will sell you my car for $5000," at the same time that you send me a letter that says, \"I will buy your car for $5000." That situation is sometimes described as a \"crossoffer.\" Each letter contains an offer and neither contains an acceptance. The parties therefore do not have a meeting of the minds. VVords Acceptance usually occurs through written or spoken words. The olferor, as master of the offer, can dictate how those words must be communicated. It is possible to insist that acceptance be communicated to a particular location or provided in a particular form. For example, if an olferor states that \"acceptance must be sent in writing to my oEice," a contract is not formed if acceptance is communicated orally or if a document is sent to the olferor's home. If the olferor does not impose any restrictions, then the ofl'eree can accept by any reasonable means. In that situation, it is safest to respond in kind. A written offer should be accepted in writing, a telephoned offer should be accepted by telephone, and so on. A court, however, is likely to allow acceptance to occur by any reasonable means. Conduct In some circumstances, an offer may be accepted by conduct. If I offer to cut your lawn for $100, you might accept by saying, \"Yes." Given the circunlstances, however, you might also simply nod agreeably or silently shake my hand. As long as a reasonable person would interpret your action as acceptance, 3 contract is created. SHence Acceptance may occur through conduct and without words, but silence alone cannot be acceptance. Though it may seem obvious, that rule is very important. Assume that an unscrupulous company sends goods to you along with a note that says, \"You will he charged for these items unless you tell us that you do not wish to purchase them." If silence alone could constitute accepiance, you would be in danger ofheing held to a contact that you did not want. To eliminate that problem, the law says that silence alone is never acceptance. You therefore will not be required to pay, even if you completely ignore the offer}:a The courts developed the basic rule regarding silence. Some jurisdictions also have legislation that discourage businesses from foisting goods or services on unsuspecting 2:. Mrtam .- My {1352) 142 ER 1057 [Ex Ch). 1?5 PART 3 176 PART 3 Contracts consumers. In Ontario, the Consumer Protection Act allows recipients of unsolicited goods to use them without fear of being charged.25 Significantly, however, those rules are limited to unsolicited goods and services. The situation may be different if you did something in the past that allows a company to treat your silence as acceptance. For example, by joining a book club, you may enter into a contract that requires you to pay for a monthly selection unless you return it within a specified time. In such circumstances, your silence plus your earlier promise to abide by your agreement with the company may constitute acceptance. Acceptance at a Distance Special problems can occur when business people do not deal face to face. Practically speaking, of course, contracts cannot always be created in person. Businesses often deal with each other across vast distances. And even when they are neighbours, they may not have the time or desire to arrange a meeting. Furthermore, consumers are increasingly entering into transactions and paying bills not only through the mail, but also over the telephone or by various electronic means, such as ATMs and the Internet. Two issues arise when parties deal with each other at a distance. First, if the lines of communication break down, it is necessary to decide whether a contract was formed. Suppose that an insurance company, in exchange for a certain payment, offers to protect your business against the risk of property damage. As required by the offer, you mail your letter of acceptance and a cheque to the insurer. The letter is lost in the postal system and never arrives. If your property is later damaged by a flood, do you have insurance coverage? Is the insurer liable even though it never received your letter: Second, even if the lines of communication work properly, it may be necessary to determine where and when a contract was formed. Returning to the previous example, suppose your business is located in Alberta, but the insurance company is located in Manitoba. Assume that the insurance company is required to pay a fee to the Govern- ment of Manitoba if a contract is formed there, but not if it is formed in Alberta. Where was your contract formed? Is the insurer liable for the fee? Those questions are easiest to answer under three headings: the general rule the postal rule electronic contract legislation THE GENERAL RULE The traditional rules were formulated long before the rise of electronic commerce. Life was simpler. If you wanted to communicate with someone who was not in your presence, there were very few options. Against that backdrop, the courts created two rules. the general rule states that acceptance by instantaneous communication is The first rule, which is called the general rule, states that acceptance by instan- effective when and where it is received taneous communication is effective when and where it is received by the offeror. Instan- by the offeror taneous communication involves little or no delay between the time that one party sends a message and the other party receives it. The telephone is the prime example instantaneous communication involves little or no delay between the of an instantaneous form of communication. Other devices that involve very little ime that one party sends a message delay between sending and receiving, such as fax machines, have also been classified as and the other party receives it instantaneous. 30 29. Consumer Protection Act 220, SO 2002, c 30, s 13. 30. Rolling v Willann Investments Lid (1989) 63 DLR (4th) 760 (Ont CA).CHAPTER 7 The Nature and Creation of Connects 177 The general rule can be illustrated with our previous example. Suppose that you are in Alberta and your insurance company is in Manitoba. You use a telephone to call your insurer and accept its offer of coverage. Your acceptance takes effect when and where it is received. That means that your contract was formed in Manitoba when your insurer heard you say something like, \"I accept." In contlast, if your sutement was inaudible because you happened to be driving through a tunnel while talking on your cellphone, a contract would not be formed. Acceptance is effective only when and where the oEeror actually receives it. The general rule is justied on the ground that a person who sends an instanta neous communication typically knows if it fails. A telephone may make an unusual sound, a fax machine will provide a \"Transmission Failed" message, and so on. If com munication fails while you are trying to accept an offer, you will know that you need to try again. It is important to appreciate. however, that the courts do not rigidly apply the general rule in every case. Even if a form of communication is normally instanta neous, the circumstances may demand otherwise. As usual, the reasonable person test is applied. Suppose that you try to accept an offer by sending a fax to the offeror's place of business at 11:59 on a Friday night. Although the general rule would say that a contract was created as soon as the message reached the offeror's fax machine, a reasonable person knows that businesses seldom check their machines at that time. Your communication therefore might not be considered effective until 8 o'clock on Monday morning. THE POSTAL RULE The general rule is appropriate for instantmeous forms of com munication, but it does not work well with noninstantaneous communications. A non- instantaneous communication is a tom of communication that involves a substantial delay between the time that it leaves one person and reaches another. A letter sent through the mail (or post) is the paradigm of a noninstantaneous communication. Pack ages sent by courier also t within that category by analogy.\" The general rule would be unacceptable for noninstantaneous communications because there normally would be no way for the olferee to know if or when an acceptance letter had arrived. Uncertainty is bad for business. Until the olferor conrmed receipt of the acceptance letter, the ofl'eree would be reluctant to act in reliance upon the contract. Take a simple example. You offer to pay me $5000 for a series of lectures. I mail my acceptance letter in Saskatoon and address it to your ofce in Halifax. If the general rule applied, so that my acceptance was effective only when it reached you in Halifax, I would hesitate to book a ight, even if airfare would be much more expensive the next day. I would worry that you might revoke your offer before my letter reached you. For those reasons, the courts created the postal rule. The postal rule states that an acceptance that is communicated in a noninstantaneous way is effective where and when it is sever.32 Continuing with our example, a contract would be formed in Saska toon as soon as I dropped my acceptance letter into the mailbox, even though the letter would not be expected to arrive in Halifax for several days. Although the postal rule generally works well in practice, you should be aware of several points. 31'Nm Starla a: Wzyvmuth Sm Mud: 1123(1933} 149 DLR. (3nd] 631', ail-1d 4 DLR. (4:11) 314 {NS CA). 37' Ofeourse, ll'le post-11 rule will not apply if'lhe aenee's letter is not capable Declaring delivered. That is true, for instance, ifarl aenee uses the wrong address or fails to place schierIt passage on an envelope. 3 non-Instant\" enmneuhm is a form of communication that involves a suhstantial delay between the ti me that it leaves one person and reaches another [he petal rule slates that an amptanee that is communicated in a noninstantaneous way is eective where and when it is sent PART 3 178 PART 3 Contracts Lost Letters: The first point is the most surprising. Because an acceptance letter is effective when and where it is placed into a mailbox, a contract is created then and there. That is true even if the letter is lost in the system and never reaches the offeror. 35 Managing Risks: Because an offer may be accepted by a letter that never arrives, the postal rule creates a significant risk. Offerors may be liable for failing to per- form contracts that they do not even know exist. It is important to appreciate, however, that the postal rule does not apply to every non-instantaneous accept tance. If the risk is considered intolerable, then the offeror-as master of the offer-can state that an acceptance letter will be effective only if and when it is received. And even if the offeror says nothing, the postal rule will not apply if no reasonable person would consider it appropriate in the circumstances.34 Revocation: Because the postal rule leads to the formation of a contract as soon as an acceptance letter is posted, the offeror cannot revoke the offer while the letter is in the system. Once a contract is created, neither party, acting alone, can change or terminate it. Acceptance Only: The postal rule is restricted to acceptances. It does not apply to offers, counter-offers, revocations, or rejections. An attempt to do one of those things is effective only when and where it is actually received. Business Decision 7.3 requires you to consider the postal rule. Business Decision 7.3 The Postal Rule On June 1, Maria sent you a letter offering to sell you her watch for $50. On June 3, she sent another letter that supposedly revoked her offer. On Question for Discussion June 5, you received Maria's offer and immediately put an acceptance 1. Assuming that the usual rules apply, do you and Maria have a letter into a mailbox. On June 7, you received Maria's revocation letter. contract? And on June 9, she received your acceptance letter. ELECTRONIC CONTRACTS The general rule and the postal rule were developed by the courts. A third set of rules, governing the electronic formation of contracts, was created by legislation. Those rules are examined in more detail in Chapter 18, which is devoted to elec- tronic commerce. For now, it is enough to sketch the rules of online offer and acceptance. The Uniform Law Conference of Canada, a body of experts, formulated the Uni- form Electronic Commerce Act (UECA) in 1999. The UECA is not an actual statute and it is not binding on anyone. It was designed instead to provide a model for provincial legislatures to follow when creating legislation for electronic commerce. Every province and territory has adopted UECA in one form or another.5 3. Household Fire & Carriage v Grant (1879) 4 Ex D 216 (CA). 34. Saskatchewan River Bungalows Lid v Maritime Life Assurance Co (1994) 115 DLR (4th) 478 (SCC); Holwell Securities Lid v Hughes [1974] 1 WLR 155 (CA). 35. Electronic Transactions Act, SA 2001, c E-5.5 (Alta); Electronic Transactions Act, SBC 2001, c 10 (BC); Electronic Commerce and Information Act, CCSM c E55 (Man); Electronic Transactions And, RSNB 2011, c 145 (NB); Electronic Commerce Act, SNL 2001, c E-5.2 (Nild); Electronic Commerce And, SNS 2000, c 26 (NS); Electronic Commerce Act, RSPEI 1988, c E-4.1 (PEI); Electronic Information and Documents Act 2000, SS 2000, c E-7.22 (Sask); Electronic Transactions And, SNWT 2011, c 13 (NWT); Electronic Commerce Act, SNu 2004, c 7 (Nun); Electronic Commerce Act 2000, SO 2000, c 17 (Ont); Electronic Commerce Ad, RSY 2002, c 66 (YK).CHAPTER 7 The Nature and Creation of Contracts 179 PART 3 That legislation does not change the basic common law rules. As always, a contract must be created through the acceptance of an offer, and that process is completed when and where the acceptance is effectively communicated. The statutes merely provide rules for the application of those traditional requirements in an electronic world. Ontario's Electronic Commerce Act provides an example: Formation and operation of electronic contracts 19. (1) An offer, the acceptance of an offer or any other matter that is material to the formation or operation of a contract may be expressed (a) by means of electronic information or an electronic document; or (b) by an act that is intended to result in electronic communication, such as, (i) touching or clicking on an appropriate icon or other place on a computer screen . . . . (3) A contract is not invalid or unenforceable by reason only of being in electronic form Time of sending of electronic information or document 22. (1) Electronic information or an electronic document is sent when it enters an infor- mation system outside the sender's control or, if the sender and the addressee use the same information system, when it becomes capable of being retrieved and processed by the addressee. Presumption, time of receipt (3) Electronic information or an electronic document is presumed to be received by the addressee, (a) if the addressee has designated or uses an information system for the purpose of receiving information or documents of the type sent, when it enters that information system and becomes capable of being retrieved and processed by the addressee; or (b) if the addressee has not designated or does not use an information system for the purpose of receiving information or documents of the type sent, when the addressee becomes aware of the information or document in the addressee's information system and it becomes capable of being retrieved and processed by the addressee. Places of sending and receipt (4) Electronic information or an electronic document is deemed to be sent from the sender's place of business and received at the addressee's place of business. . . . Place of business (6) If the sender or the addressee has more than one place of business, the place of business for the purposes of subsection (4) is the one with the closest relationship to the underlying transaction to which the electronic information or document relates. . . . Habitual residence 7) If the sender or the addressee does not have a place of business, the person's place of habitual residence is deemed to be the place of business for the pur- poses of subsection (4). SO 2000, c 17 (Ont).PART 3 180 PART 3 Contracts The statutory scheme is different than the traditional common law in some respects. To begin, it does not rely on the distinction between instantaneous and non-instanta- neous communications. Several other points are equally important. Time Sent: A message, such as an acceptance of an offer, generally is deemed to be sent once it enters a system that is beyond the sender's control. If, however, both parties use the same system, a message is deemed to be sent once it can be retrieved by the recipient. Time Received: Much more importantly, if the recipient uses a particular system for the purpose of creating contracts, then a message is deemed to be received as soon as it enters the recipient's system-even if the recipient is unaware of it. If, however, the recipient does not use a particular system for contract formation, then a message is deemed to be received only when the recipient becomes aware that it has entered one of its systems and is capable of being retrieved. Place Sent and Received: A message is deemed to be sent from the sender's place of business and received at the recipient's place of business. If either party has more than one place of business, then the one most closely connected to the contract is the relevant one. If, however, either party has no place of business, then that person's habitual residence is deemed to be a place of business. Default Rules: The statute merely provides default rules. Those rules do not apply if the parties intended otherwise. To better understand those rules, resolve the issues in You Be the Judge 7.2. You Be the Judge 7.2 Electronic Contract Formation Lyoto has owned and operated a catering business in Ontario for less wedding, when Fabiola telephoned him, furious that he had not even than a year. Because the venture is new and small, it does not have a shown up at the reception. proper office or even a proper email account. Lyoto usually works from a Lyoto feels badly, but insists that he is not responsible for ruining desk in his basement, but when he is annoyed by the sound of the wash- Fabiola's big day. The problem, he explained to the court, began with the ing machine-which happens quite often-he goes to the public library. fact that he had a girlfriend named Fabiola while he was in college. When He conducts business using the email account that he was assigned as that relationship ended and she began harassing him, Lyoto created a a college student, as well as a Gmail account that he set up to chat with filter that automatically re-directed any messages containing the word friends or post "anonymous" messages online. His website lists options "Fabiola" to his trash folder. Having forgotten about that filter by the for food and drink, along with corresponding prices. time that he went into business, he had no idea that the new Fabiola had A young woman named Fabiola was to be married. She had dealt wanted to accept his offer. with most of the planning details, but she still needed to find a caterer for the reception afterwards. Having heard about that situation from Questions for Discussion a mutual friend, Lyoto sent a message, from his college account, that offered his services to Fabiola. She was keen to hire Lyoto for the job, but 1. If Fabiola had a contract with Lyoto's business, then he clearly is she was ultimately left deeply disappointed. liable for not catering her wedding. Did the parties have a contract? Fabiola argues that she accepted Lyoto's offer by sending an Assuming that the dispute is governed by Ontario's Electronic email to his college account. In the message, she listed her choices for Commerce Act, or an identical statute in another province, which food items and beverages, and she promised to pay the resulting price. provisions govern? Unfortunately, Lyoto did not see that messag