9.3 Contract Formation, Terms & Defects

Contract disputes generate a substantial share of the Small Claims Court files that Ontario paralegals handle — unpaid invoices, defective goods, and cancelled service agreements are all, at bottom, contract disputes. The P1 exam tests both the building blocks of a valid contract and the doctrines that can unwind an otherwise valid agreement.

Elements of a Valid Contract

A binding contract requires each of the following:

Intention to Create Legal Relations

Courts presume that commercial agreements are intended to be legally binding, and that social or domestic agreements, such as a promise between family members or friends, are not. Both presumptions are rebuttable with evidence of the parties' actual intent at the time of the agreement.

Consideration

Consideration is something of legal value given in exchange for a promise. It need only be sufficient, not adequate — courts do not weigh whether the exchange was a good bargain, only whether something of value actually passed between the parties. Several rules follow from this:

• Past consideration is not valid consideration. A promise to pay for something already done, with nothing further given in exchange, is generally unenforceable.
• A promise to perform an existing legal duty is generally not fresh consideration, unless the promisor takes on some additional benefit or detriment beyond the original obligation.
• Contracts made under seal do not require consideration at all.
• Promissory estoppel can prevent a party from going back on a gratuitous promise that the other side relied on to their detriment, but in Canada it operates only as a "shield," not a "sword" — it cannot by itself found an independent cause of action.

Capacity

• Minors, under 18 pursuant to Ontario's Age of Majority and Accountability Act, can enforce contracts for necessaries such as food, shelter, and basic clothing, and for contracts generally to their benefit, but most other contracts are voidable at the minor's option.
• Persons who lack the mental capacity to understand the nature and consequences of the agreement may avoid the contract, particularly where the other party knew or ought to have known of the incapacity.
• Corporations contract through authorized directors and agents and generally have the same contractual capacity as a natural person under Ontario's Business Corporations Act.

Certainty of Terms

An agreement that leaves essential terms, such as price or subject matter, too vague, or leaves them entirely to future negotiation as a mere "agreement to agree," may fail for uncertainty and will not be enforced as a binding contract.

Conditions, Warranties, and Implied Terms

Not all contractual terms carry the same weight when breached:

• A condition is a fundamental term going to the root of the contract. Its breach entitles the innocent party to terminate the contract and claim damages.
• A warranty is a lesser term. Its breach entitles the innocent party only to damages, without a right to terminate.
• An innominate term cannot be classified in advance as a condition or a warranty. Courts instead look at the actual effect of the breach: if it deprives the innocent party of substantially the whole benefit intended under the contract, it is treated as a condition.

Many terms are implied by law rather than negotiated by the parties. In consumer transactions, Ontario's Sale of Goods Act implies conditions that goods sold are of merchantable quality and reasonably fit for their intended purpose where the buyer relies on the seller's skill or judgment. The Consumer Protection Act, 2002 overlays additional protections, including a prohibition on excluding many of these implied protections in consumer agreements — a rule paralegals must check before assuming that a "no refunds, no exceptions" clause is actually enforceable.

Vitiating Factors — What Can Undo a Contract

Even a contract that appears valid on its face can be attacked using several established doctrines.

Misrepresentation

A false statement of fact made before contracting, which induces the other party to enter the agreement, can take three forms:

• Fraudulent misrepresentation — made knowingly, or recklessly without belief in its truth; remedies include rescission and damages in the tort of deceit.
• Negligent misrepresentation — made carelessly, without reasonable grounds for believing it was true; damages are available in tort.
• Innocent misrepresentation — made honestly and reasonably; the primary remedy is rescission, undoing the contract, rather than damages.

Mistake

• Common mistake — both parties share the same fundamental mistaken assumption, such as unknowingly contracting to sell goods that had already been destroyed.
• Mutual mistake — the parties are at cross-purposes, each mistaken about a different thing, so there is no true meeting of the minds.
• Unilateral mistake — only one party is mistaken, and the contract may be voidable where the other party knew, or ought to have known, of the mistake.
• Non est factum — a narrow defence allowing a party to disown a signed document that is fundamentally and radically different from what they believed they were signing, provided they were not careless in signing it.

Undue Influence and Duress

• Undue influence arises where one party's free will is overborne by another. Actual undue influence must be proven on the facts, while presumed undue influence arises automatically from certain relationships of trust, such as solicitor and client, doctor and patient, or any relationship of dominance, shifting the burden onto the dominant party to show the agreement was fair and freely entered into.
• Duress makes a contract voidable where it was signed under illegitimate pressure, including threats to a person or their property, or economic duress — illegitimate commercial pressure that leaves no realistic alternative but to agree.

Illegality

Contracts formed for an illegal purpose, or that are contrary to public policy, such as an unreasonably broad restraint-of-trade clause, may be void or unenforceable. Courts will generally not assist either party in enforcing or unwinding an illegal bargain, reflecting the maxim ex turpi causa non oritur actio — no action arises from a shameful cause.