An Introduction to Contracts
Canadian Business and the Law, EIGHTH EDITION
Objectives
After studying this chapter, you should have an understanding of
• the general concept of a contract
• the business context of contract formation
• the business context of contractual performance
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Introduction to Contract Law (1)
What Is a Contract?
• contract: An agreement between two or more parties that is enforceable in a court of law.
• By definition, a contract is enforceable in a court of law.
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Introduction to Contract Law (2)
What Is a Contract?
• Contracts require six elements:
o An agreement: It is composed of an offer to enter a contract and acceptance of that offer.
o Complete: The agreement is complete, that is, certain.
o Deliberate: Both parties must want to enter into a contractual relationship.
o Voluntary: The agreement must be freely chosen and not involve coercion.
o Between two or more competent persons: Only competent parties may enter into a
contract, and only parties can sue or be sued.
o Mutual consideration: Each party must give something of value in exchange for something
of value from the other party.
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Introduction to Contract Law (3)
Must Contracts Be in Writing?
• As a general rule, oral contracts are enforceable contracts.
• There are some exceptions to this general rule, and some contracts must be in writing in order
to be enforceable.
o One example is a contract involving an interest in land.
• It is almost always preferrable to get the contract in writing.
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Introduction to Contract Law (4)
Advantages of Contracts
• Contracts permit both parties to rely on the terms they have negotiated and plan their business
affairs accordingly.
• They create binding promises that can be enforced in court.
• If a dispute arises between the two parties, there are various options for dispute resolution.
• They ensure that each party receives what they bargained for.
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Introduction to Contract Law (5)
Contracts and Commercial Activity
• Contracts are the legal cornerstone of any commercial operation.
• Using contracts, a business can sell a product or service, hire employees, rent office space,
borrow money, purchase supplies, and enter into any other kind of binding agreement it
chooses.
• Contract law allows participants to create their own rights and duties.
• Contracts come in a wide variety—from a simple purchase of pens at a stationary store to a long-
term supply contract.
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Business Application of the Law 5.1
Concert Hall Cancels Alleged Contract with Maximum Fighting Inc
• A music centre leased its premises to a mixed martial arts group for an event.
• The music centre cancelled the arrangement, saying that the booking was done in error and that
the venue was a facility designed for concerts and was not a “suitable venue.”
• The mixed martial arts group filed a lawsuit for breach of contract and sought compensation for
loss of profit, loss of sponsorship funds, and out-of-pocket expenses—such as printing and
advertising—as well as for embarrassment and damage to reputation.
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Creating the Contract (1)
Communication
• It is important for the business person to know when simple business communications
crystallize into legal obligations.
• Contract law concerns itself with what the negotiators say and do, not with what they think or
imagine.
• Contract law is governed by whether a reasonable person, observing the communication that
has occurred between the negotiators, would conclude that an offer and acceptance had
occurred.
• objective standard test: A test based on how “a reasonable person” would view the matter.
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Creating the Contract (2)
Bargaining Power
• The business reality is that negotiating parties rarely have equal bargaining power.
• equal bargaining power: The legal assumption that parties to a contract are able to look out for
their own interests.
• Courts do not normally assess the fairness or reasonableness of the contractual terms that the
business parties have chosen.
• Courts assume that the parties had their eyes open, considered all the relevant factors,
evaluated the risks, and were prepared to accept both the costs and the benefits of the contract.
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Creating the Contract (3)
Bargaining Power
• Though one party may have made a bad deal, this is not justification for securing the court’s
assistance and intervention.
• People are expected to take care of themselves.
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Case 5.1 (1)
Churchill Falls (Labrador) Corporation Ltd v Hydro-Québec, 2018 SCC 45
• In 1969, Churchill Falls (Labrador) Corporation Ltd (CFLCo) entered into a 65-year contract with
Hydro-Québec.
• Hydro‑Québec undertook to purchase most of the electricity produced by the plant, whether it
needed it or not, and to protect CFLCo from any cost overruns incurred in the construction.
• Hydro‑Québec also obtained the right to purchase electricity at fixed prices for the entire term
of the contract.
• This protected it from inflation and assured it that it would benefit from low prices in the event
of an increase in market prices for electricity.
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Case 5.1 (2)
Churchill Falls (Labrador) Corporation Ltd v Hydro-Québec, 2018 SCC 45
• The contract proved to be heavily disadvantageous to CFLCo. Hydro-Québec has made
approximately $28 billion in profits from contract—compared to just $2 billion for CFLCo .
Resolution:
• Supreme Court of Canada decided in favour of Hydro-Québec, concluding that the contract was
enforceable as written.
• There was no obligation on Hydro-Québec to renegotiate the contract.
• Both parties were experienced negotiators who “bound themselves knowing full well what they
were doing, and their conduct shows that they intended one of them to bear the risk of
fluctuations in electricity prices.”
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Performing or Enforcing the Contract (1)
Business Relationships
• Business people rarely breach contracts.
• If there is a breach of contract, whether the other side sues for breach of contract is not just a
legal decision; it is also a business decision.
• Suing may not be the best business option even when the legal action itself stands a reasonable
prospect of success.
• Expense and uncertainty of litigation are also reasons to avoid a full-blown legal conflict.
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Business Application of the Law 5.2
Getting It in Writing
• In 1004964 Ontario Inc v Aviya Technologies Inc, 2013 ONSC 51, the plaintiff contracted with the
defendant without ever putting a written contract in place because the parties had an
established and positive ongoing business relationship.
• A conflict over the scope of work arose and the matter ended up in court.
Conclusion: Even when businesses have worked together in the past and built up mutual trust, a
written contract between them helps to avoid misunderstandings, legal conflicts, associated
litigation expenses, and the destruction of business relationships.
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Performing or Enforcing the Contract (2)
Reputation Management
• A business that makes a practice of breaching contracts and paying damages in lieu of
performance is likely to acquire a negative reputation in the industry
o The long-term viability of a business may be compromised.
• Similarly, a business that insists on strict observance of its legal rights may damage its
reputation.
• Sometimes compromise is necessary to protect reputation and avoid public relations disasters.
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