Contract Law Essentials: Formation, Terms, and Enforcement

Posted on Jul 17, 2025 in Law & Jurisprudence

Understanding Contract Fundamentals

Contracts require an intention to create legal relations, whereas torts arise from legal duties. The objective “reasonable person test” is applied to determine if parties intended to create a legally enforceable agreement. This approach protects reasonable expectations, allowing for better planning and efficiency in economic agreements. Contracts can be oral or written.

The desire to create legal relations (mutual agreement) is established through:

Offer
Acceptance
Consideration
By parties with capacity

Parties to a contract are the Offeror and Offeree. Once an offer is accepted, a contract is formed, and no one person can unilaterally make changes.

Historical Context of Contract Law

Historically, contract law did not develop until the 16th century. To this day, it is mostly governed by common law principles, although a number of statutes also play a role. Contract law provides a framework and some certainty for economic agreements between persons.

Contract Formation Essentials

The formation of contracts requires:

Intention to Create Legal Relations
Mutual Exchange of Value (Consideration)
A Meeting of the Minds (Offer and Acceptance)

Intention to Create Legal Relations

The focus is on when a court will find an agreement legally enforceable. The test is objective, applying the “reasonable person test” to protect reasonable expectations. Context is crucial in this determination.

Court Presumptions on Intent

Commercial Context: Parties are presumed to have intended to create legal relations. This presumption is rebuttable by facts.
Family/Social Context: Parties are presumed not to have intended legal relations. This presumption is also rebuttable.

Key Contractual Terms Defined

Promisor: The person who agrees to “do” something.
Promisee: The person to whom the promise is made by the promisor.
Offeror: The person who is making the promise or offer.
Offeree: The person to whom the promise or offer is made.
Consideration: An interest, right, profit, or benefit that accrues to one party, while a loss or detriment is suffered or given by the other party.
Gratuitous Promise: A promise made without consideration, conferring a benefit (essentially, a gift).

Understanding the Offer in Contracts

An offer is more than just an intention to create legal relations; it must lead to a mutual agreement through offer and acceptance. Not all statements are offers, which helps avoid risks. By definition, an offer indicates a willingness to enter into a contract on certain terms.

Offeror: The party who offers to enter into a contract.
Offeree: The person who receives an offer to enter into a contract.

Invitation to Treat Explained

An Invitation to Treat refers to statements that indicate a willingness to receive an offer or a willingness to negotiate an agreement. Many statements are classified as invitations to treat. Determining if a statement is an offer or an invitation is based on the reasonable person test.

Offer vs. Invitation: The Reasonable Person Test

It is crucial to consider whether it is reasonable to believe the person making the statement is prepared to create a contract every time acceptance is received, or if they are more likely prepared to receive and consider offers. This can be a difficult test to apply, but courts are guided by rebuttable presumptions (e.g., a sale limited to 50 items might suggest an offer, not just an invitation).

Communicating an Offer Effectively

A statement must be communicated and received as an offer. The reasonable person test applies here: Was the statement intended to be received as an offer? It is essential to know when the offeror became aware, as an offer is not valid until received by the offeree, and the offeror is not bound until it is accepted.

Life Cycle of an Offer

An offer does not last indefinitely and can be terminated in several ways:

Revocation: The offeror is the “master of the offer” and can generally revoke it before acceptance.
Firm Offer: One which is promised to be held open for a specified time, but may still be revoked unless consideration is given to keep it open (e.g., an option contract).
Lapse: The offer expires after a specified time or a reasonable time if no time is specified.
Death or Insanity: If either party dies or becomes insane prior to acceptance, the offer typically terminates.
Rejection: The offeree declines the offer.
Counter-Offer: The offeree proposes new terms, which acts as a rejection of the original offer and creates a new offer.

Rejection and Counter-Offers

When Party A makes an offer to Party B, and Party B is interested but seeks different terms, this constitutes a counter-offer. The effect of a counter-offer is to:

Reject the existing/original offer.
Create a new offer.

A contract is only formed where the original offer is entirely accepted. Caution is advised to distinguish between a mere statement (e.g., a request for information) and a counter-offer. The fundamental sequence is: Offer → Offeree + Accepted = Contract.

Understanding Contract Acceptance

Acceptance is a promise, and most contracts are bilateral, meaning a promise is exchanged for a promise. Both parties must fulfill their obligations once the contract comes into existence. Acceptance must be unequivocal and correspond exactly to the terms offered, serving as a clear response to the offer.

Acceptance by Performance

Acceptance can be demonstrated through:

Words (express acceptance)
Conduct (implied acceptance)
Silence (rarely, and only in specific contexts, e.g., Consumer Protection Act regarding unsolicited goods).

When an act is exchanged for a promise, it forms a unilateral contract. In such cases, the offeree is obligated to fulfill the contract once the stipulated act is performed.

Key Considerations for Acceptance

Special considerations apply to acceptance in various scenarios:

Distant negotiations
The General Rule (instantaneous communication)
The Postal Rule (non-instantaneous communication)
Electronic Contracts

The Postal Rule in Acceptance

The Postal Rule addresses uncertainty for non-instantaneous communication. It states that acceptance is effective where and when it was sent, even if the correspondence is lost. This rule creates risks where mail is lost, as revocation cannot occur as long as the letter is “in the system.” It applies only to acceptance, not to offers or revocations.

Acceptance Through Performance

When an offer is based on stipulated acts, an act exchanged for a promise forms a unilateral contract. No contract is formed until the offeree fully performs the act, and crucially, performs the act with the offer in mind.

Modern Acceptance Methods

For acceptance at a distance, the general rule applies to instantaneous or minimal delay communications. The Postal Rule applies to non-instantaneous communication. For modern electronic contracts, the Electronic Commerce Act, 2000, S.O. 2000, c.17, provides specific regulations.

Gratuitous Promises and Estoppel

Courts generally will not enforce a gratuitous promise (a promise made without consideration), such as most charitable donations. However, exceptions exist, including promises made under seal (a “deed”).

Estoppel is an equitable principle that may prevent a promisor from going back on their word where a promise was made and the person to whom it was made relied upon it to their detriment. Promissory estoppel (or equitable estoppel) requires five elements:

An existing legal relationship at the time the statement was made.
A clear promise establishing intent to be bound.
Reliance by the party raising estoppel.
The party who received the promise must have acted upon it to their detriment.
The promisee must have “clean hands” (acted equitably).

The Concept of Consideration

Consideration is “the price” paid in return for a promise; it is something of value. Without consideration, there is no contract. While money is the most common form, other forms of consideration include:

Exchange of goods or services.
Relinquishing a right.
An agreement to refrain from doing something.

A contract generally requires a mutual exchange of value between parties. A gratuitous promise is not consideration, and the law will not enforce it because it lacks this essential element. A contract involves mutual promises, where each party must receive something of value. Forbearance to sue (a promise not to pursue a lawsuit) can also constitute consideration, as it provides value in avoiding the risks and costs of litigation. There must be mutuality of consideration.

Consideration vs. Gratuitous Promises

A gratuitous promise is not a contract. It is when a person agrees to do something for free, without reward. A contract, conversely, is a bargain where each party gets something in return for their promise to perform obligations. Without consideration, there is no contract, and courts will usually not enforce a gratuitous promise. Exceptions include contracts under seal, situations of unjust enrichment, or certain binding charitable donations.

Sufficient vs. Adequate Consideration

Sufficient: Consideration must be “sufficient,” meaning it must be practically anything of value. This requirement is easily met but is essential. It excludes “social value” such as respect or affection. The “Peppercorn Theory” illustrates this: even a very small, nominal value can be sufficient.
Adequate: Consideration does not need to be “adequate,” meaning it does not need to be of equivalent value to the consideration received. It is generally up to the parties to determine the fairness of the exchange.

Types of Consideration: Past, Present, Future

Past Consideration: An exchange that occurred prior to the promise to pay. This is generally unenforceable as it is not given in exchange for the current promise.
Present Consideration: An exchange and promise to pay that occur at the same time.
Future Consideration: An agreement for payment or performance to occur in the future.
Forbearance to Sue: A promise not to pursue a lawsuit. This holds value in avoiding the risks and costs of litigation. Settlements often involve sacrificing the full value hoped for in exchange for some payment to avoid the risk of liability and indemnity, representing mutual consideration.

Past Consideration and Pre-Existing Obligations

From the principle of mutuality, it follows that there can be no past consideration. Consideration must be given in exchange for the other party’s consideration. Past consideration arises before the contract comes into contemplation and is therefore no consideration at all; it cannot support a contract. There is no legal obligation to keep a promise for past consideration, such as a service provided before any promise or agreement to pay.

While past consideration will not support a contract, there are three types of Pre-Existing Obligations that are distinct:

Public Duty
Contractual Obligation owed to a Third Party (TP)
Contractual Obligation owed to the same party

Debtor-Creditor Relationships & Debt Forgiveness

A common issue arises in debtor-creditor relationships regarding the requirement for fresh consideration when a promise is made to forgive an existing debt. Where a lesser amount is offered than the actual debt, it may seem to be new consideration (e.g., to avoid the risk of suit). However, such a promise to accept a lesser sum in full satisfaction of a greater debt is generally not binding unless:

The promise is made under seal.
There is fresh consideration, such as earlier payment or payment in a different form.
The Mercantile Law Amendment Act, R.S.O. 1990, c.M.10, s. 16, provides for the extinguishing of an existing debt for a lesser amount under certain conditions.

Legal Formalities and Contract Legality

A contract cannot violate any statute or public policy to be enforceable. Such contracts may be declared void, or illegal, or both. Where a contract is void for being unlawful, remedies may be available, and a court may try to restore the parties where possible. However, where a contract is also illegal, a court will generally not grant remedies if a party knowingly entered into the illegal contract.

Contract Illegality Explained

Illegal agreements may be explicitly or implicitly prohibited by statute, or they may offend public policy. A covenant in restraint of trade is one that unreasonably restricts one party’s liberty to carry on a trade, business, or profession.

Contracts Violating Statutes

One must examine the specific statute(s) to determine if a contract is void, or void and illegal. Contracts that include prohibited activities have an unlawful purpose by implication. Examples include violations of the Criminal Code, Customs Act, Workplace Safety and Insurance Act (WSIA), Planning Act, or Bankruptcy and Insolvency Act. Contracts contrary to public interest, such as price fixing or eliminating competition (under the Competition Act), are also forms of restraint of trade.

Common Law Effects of Illegality

The common law addresses illegality in several ways:

If there is an intent to perform in an unlawful way, the contract remains, but it is unenforceable in a suit where the person seeking to enforce it has the unlawful intent.
Where unlawful intent is common to all parties, the contract is unenforceable.
Courts aim to prevent a party from recovering where they are forced to rely upon illegal acts.

For example, a contract to supply child labour would be void ab initio (void from the beginning) if expressly or impliedly illegal under a statute.

Contracts Violating Public Policy

Contracts that violate public policy are generally void and may also be illegal. Examples include agreements that interfere with the administration of justice, injure the public service, or involve committing an illegal or dishonest act. It is important to note that what constitutes public policy changes as society evolves.

Agreements seeking to unreasonably limit a business’s ability to engage in trade or an individual’s ability to earn a living are also against public policy. Examples include restrictive covenants and non-competition clauses.

Formalities of Contract Form

Formal (Deeds): These are contracts in writing and sealed by the promisor. Applying a seal historically evidenced a serious intention to be bound, even without consideration. A deed is an official record (e.g., a house deed).
Simple: All other contracts are considered simple. They may be oral or in writing and their classification as “simple” does not reflect their complexity. These contracts are enforceable except where the Statute of Frauds applies.

The Significance of a Seal

The use of a seal indicates that the party intends to be bound by the document despite the lack of consideration (e.g., for a gratuitous promise or a formal contract). Its validity and enforceability arise from its solemn form. Corporations and other legal entities, such as governments, usually use a corporate seal identifying the corporation by name. Some statutes require a signing officer to sign beside the seal.

Technical Requirements for Written Contracts

For a contract to be considered properly written, it must:

Identify the parties by name or description.
Identify the terms, including the offer, acceptance, and consideration exchanged.
Be signed by the party whose promise is being enforced.
Ideally include a printed or stamped signature, or a handwritten signature.

Contracts Requiring Written Evidence

Certain contracts must be evidenced in writing. This requirement originally arose under the Statute of Frauds (1677) to reduce the risk of perjury and discourage false claims supporting oral contracts. Those still commonly required to be evidenced in writing include:

Guarantees
Contracts for the sale of an interest in land
Contracts not to be performed within a year

Contracts Involving Land Interests

Not all contracts involving land must be evidenced in writing (e.g., room and board, maintenance agreements). However, long-term leases and the sale of an interest in land must be in writing.

Contracts Not Performable Within a Year

This requirement has a narrow interpretation, including contracts that “possibly” cannot be performed within one year. The rationale is that memory fades over time. A contract that cannot be performed within one year of its making must be committed to writing. Time runs from the making of the contract. Examples include a construction contract beginning in March 2022 but not completing until July 2023, or a loan with payments over 16 months. Marriage contracts/pre-nuptial agreements and the sale (conveyance) of land are also examples.

Consumer Protection & Writing Requirements

Consumer protection legislation often requires a copy of the agreement to be provided to the customer. This aims to avoid the exploitation of consumers and reduce contractual disputes, further illustrating how common law is supplemented by statute. For example, the Consumer Protection Act, 2002, mandates that all personal development services contracts must be in writing where payment is made in advance of services (e.g., gym memberships, modeling contracts).

Capacity to Contract

Defects in contractual capacity can provide one of the parties with a defense, potentially rendering the contract void or voidable. Capacity is one type of defect, alongside writing requirements and mistakes. It is important to distinguish between these different types of defects and their consequences.

Defining Contractual Capacity

Capacity refers to the legal power to give consent. Generally, a party must demonstrate capacity at the time the contract was made. If there was no capacity at that time, the contract may be challenged. The underlying reason for capacity rules is to protect weaker parties from stronger or more able parties. Due to their status, some persons are deemed to lack or have limited capacity. Traditionally, classes of persons who lack capacity include minors and persons under mental illness.

Understanding Incapacity

A party may only enter a contract if they possess the legal power to consent. This applies to children and adults who lack the capacity to consent. Capacity, as the legal power to give consent, sometimes depends on a person’s ability to understand the nature and consequences of their acts. Categories of individuals with limited or no capacity include:

Minors
Mentally incapacitated individuals
Intoxicated individuals
Corporations (though generally have capacity, subject to their corporate powers)
Associations (unincorporated)
Indigenous persons (with specific limitations)
Public authorities

Personal Incapacity: Minors

There is a legal distinction between minors and those who have reached the age of majority. Those under the age of majority generally lack full capacity. Some contracts are voidable at the minor’s option, meaning the minor can choose to uphold or repudiate the contract. However, not every contract is void at the outset (void ab initio). A void contract relieves all future liabilities. A minor who elects to carry out the contract may be bound. Contracts for necessary goods or services for their benefit cannot be avoided by the minor. Similar applications apply to other forms of legal incapacity.

Minors: Necessities

Under the Sale of Goods Act (SGA), a minor is liable to pay a reasonable price for goods suitable to their life. What constitutes “necessities” depends on the context (e.g., food, clothing, shelter, education). Employment contracts are also enforceable against minors as long as they benefit the minor.

Minors: Non-Necessities

Contracts for non-necessities are generally enforceable by the minor but not enforceable against the minor, especially if not fully executed by a creditor. Such contracts may be unenforceable if the minor repudiated them.

Minor’s Failure to Ratify

Prior to validation, a minor can enforce a contract against an adult, but an adult cannot enforce it against a minor. The adult party (ATP) cannot rely upon the minor’s invalidity to escape their own liability. A minor is not responsible for future accrued liabilities under a contract if the contract is not ratified by the minor upon reaching the age of majority.

Void Contracts Involving Minors

Where a contract is not only non-beneficial to the minor but also harmful or prejudicial, it may be considered void. In such cases, no steps need be taken by the minor to repudiate it. The minor may recover all property or money returned without restoring the adult. For example, if a minor offers to sell a car at below market rate with zero interest, the risks to the minor are too high, and there is no advantage for them to enter or be bound by such a contract.

Incapacity Due to Impairment

A person lacks capacity if, at the time they entered the agreement, they were under a mental compromise, intoxication, or mental illness that prevented them from understanding the nature of their actions.

Intoxication and Contract Capacity

Intoxication may serve as a defense to enforcement by a sober party. A contract is voidable if:

Intoxication affected the party’s ability to appreciate what they were doing.
The contracting party was alert to the intoxication.
Upon sobering, the intoxicated party promptly repudiated the contract.

Mental Impairment and Capacity

Some forms of mental illness may be sufficient to allow repudiation of a contract. Statutory laws may declare individuals incapable of managing their own affairs. Contracts made prior to a judicial finding of incapacity may be voidable.

Capacity of Associations

Generally, unincorporated business organizations, including charities, private clubs, and religious societies, have no independent legal existence. It is possible for one of their members to enter into a contract for the benefit of the association. Provinces may legislate capacity for some associations (e.g., unions).

Capacity of Indigenous Persons

Indian bands are unincorporated but have legal capacity. However, some limitations apply to Indigenous persons contracting using reserve land (e.g., for collateral, or to transfer without Crown consent).

Contractual Terms vs. Pre-Contractual Statements

During negotiations, statements are made by parties to induce the other to enter a contract. These are pre-contractual statements. A statement becomes a contractual term ONLY if it is included as a legally enforceable term within the agreement. A pre-contractual statement imposes no contractual obligation and does not form part of the contract itself.

Representations and Contractual Terms

Representations are statements made to induce someone to enter a contract. They are not something that has been agreed to as a binding part of the contract, but rather are made during negotiations. If desired, these statements must be specifically included as terms of the contract. One party may wish to include them, as this may open the door to remedies if they prove untrue.

A misrepresentation is a misstatement of a fact critical to the inducement or making of a contract (as per Fridman – Law of Contract). A misstatement of fact that induced the other party to enter a contract is a material misrepresentation, which may relieve the other party of their obligations.

A Term is a part of the contract itself. These are statements that impose obligations under the contract. Where intended by both parties to form part of the contract, they become a term of the agreement.

Condition: An essential term that goes to the root of the contract. A breach of a condition destroys the value of the contract, depriving the innocent party of the benefit of the contract.
Warranty: A minor or subsidiary term. A breach of a warranty is less serious than a breach of a condition.

The determination of whether a term is a condition or a warranty requires examination of the contract as a whole.

Fundamental Breach of Contract

A fundamental breach is one that goes to the “root” or the heart of the contract. It does not apply to minor terms. It can be challenging to determine the nature of such a breach, requiring interpretation of the terms as a whole and consideration of the context.

Types of Misrepresentation

Misrepresentation involves words or conduct with the intention of inducing the other party to enter into a contract. There are different types:

Innocent Misrepresentation: Made without fraud or negligence to induce entry into the contract.
Negligent Misrepresentation: Careless or negligent statements.
Fraudulent Misrepresentation: The party knows the statement is untrue but makes it to induce entry into the contract.

Legal Consequences of Misrepresentation

The primary contractual consequence of misrepresentation is Rescission.

Rescission: Effectively the “cancellation” of the contract. It is a discretionary remedy, not available as of right. The goal is to restore the parties, to the extent possible, to their pre-contractual state. It may be accompanied by an order for restitution.
Damages: In some cases, damages may be awarded, for example, if a paint order was not waterproof as required, leading to losses.

Contract Interpretation Principles

The Parol Evidence Rule

The traditional Parol Evidence Rule states that everything important should be put into writing, and prior discussions are superseded by the written contract. Generally, one cannot rely upon oral evidence to add, subtract, vary, or qualify a written contract that is clear. Such evidence is usually problematic or inadmissible. However, modern exceptions exist:

Ambiguous language
Essential collateral agreement
Essential implied agreement
Condition precedent existing outside of the contract
Remedy of rectification

The underlying rationale of the rule was to avoid disputes and resolve differing versions of agreements. The literal approach dictates that where a contract is in writing and its language is clear and unambiguous, no other evidence (written or oral) can be used to interpret, vary, or contradict the terms of the written agreement (the “four corners of the document”). The court will not look to other sources to interpret unless the language is unclear, in which case the court will look beyond the document where relevant.

Exception: Ambiguous Language

If contract language is ambiguous, oral or written evidence may be allowed for the purpose of assisting in interpreting the agreement.

Exception: Essential Collateral Agreements

An essential collateral agreement is a separate and independent contract. It has its own consideration and could be enforced independently of the main contract. It may also have some impact upon the main contract despite not being specifically referenced. Where given effect, this collateral contract will modify the main contract, despite its written terms.

Exception: Essential Implied Terms

Where a term, customary in a trade or convention, was inadvertently omitted from a contract (e.g., in standard forms), a party may rely upon oral or written evidence of the custom or convention to demonstrate that an implied term was left out of the contract.

Golden Rule & Contra Proferentem

In contract interpretation, the Golden Rule states that words should be given their plain and ordinary meaning unless doing so would result in absurdity. Additionally, the principle of contra proferentem dictates that if there is ambiguity in a contract, the meaning least favorable to the author of the clause will prevail.

Standard Form Agreements & Clauses

Standard Form Agreements are mass-produced documents, often presented on a “take it or leave it” basis. Examples include clickwrap agreements, exclusion clauses (limitations, waivers), ticket contracts, and signed forms containing boilerplate clauses.

Exclusion Clauses

Exclusion clauses are drafted to protect one party from liability for any failing in performance or obligation. To be enforceable, they must be:

Drafted in clear, unambiguous language.
The person against whom the clause is intended to operate must be given reasonable notice.
The person against whom the clause is intended to operate must have agreed to it.

A party generally cannot contract out of their own negligence. Exclusion clauses must be clear and brought to the attention of the other party to be enforced. However, an exclusion clause may not be enforced if its effect is so significant that it would “undermine” the contract (e.g., goods lost during shipping due to gross negligence).

Common Boilerplate Clauses

Standard form agreements often contain boilerplate clauses, which help provide a framework and efficiency in drafting. Examples include:

Exclusion clauses
Force Majeure clauses (addressing unforeseen circumstances)
Confidentiality clauses
Arbitration clauses
Jurisdiction clauses
Entire agreement clauses

Rectification as an Equitable Remedy

Rectification is an equitable remedy. If, following lengthy negotiations, the written contract does not accurately reflect the parties’ true intentions, rectification ensures that the objectives of the parties are honored, not altered. To obtain rectification, one must demonstrate a clear, unambiguous, and mutual mistake in recording the agreement.

Penalty Clauses

Penalty clauses specify a pre-determined compensation for breach. They may include prohibitions on litigation or modest compensation. A common type is a liquidated damages clause. Courts will not enforce a clause if the amount is inadequate or if it amounts to a penalty rather than a genuine pre-estimate of loss.

Contract Frustration

Frustration provides relief where contract performance becomes impossible through no fault of the parties. It may be available where:

An act of a third party (TP) or a force of nature occurs.
Events are outside the parties’ control, and neither party is responsible.
The subject matter ceases to exist.
Death renders performance impossible.
Unexpected changes to the law occur.

Frustration also covers situations where performance is theoretically possible but makes no commercial or practical sense. Two main theories explain frustration:

Implied Theory: Treats frustration as an implied condition precedent, assuming parties would have included it had they considered it.
Construction Theory: Courts consider the common object through a subjective analysis of what the parties actually said (this is the preferred approach).

Legislative impacts on frustration include the Sale of Goods Act and Ontario’s Frustrated Contracts Act.

Plain Language in Contracts

Historically, legal documents were often written in Latin or French, strategically limiting access and understanding. The movement towards plain language in contracts, exemplified by initiatives like Citibank’s in 1973, aims to make legal documents clear and accessible to all parties.