5 Contract Law in Canada Part I: Creating a Contract
Learning Objectives
- Understand the fundamental elements of a contract, including offer, acceptance, and consideration.
- Differentiate between unilateral and bilateral offers and understand the acceptance requirements associated with each type.
- Consider the requirement for legal capacity to enter into a contract, including the rules regarding minors, mental incapacity, and intoxication.
- Examine the concepts of duress and undue influence and evaluate their impact on the enforceability of contracts.
- Analyze the concept of illegality.
Understanding contract law is really about starting with an understanding of basic agreements. An agreement is a mutual understanding or arrangement between two or more parties regarding a specific matter. It could be a verbal or written agreement. It could be informal or formal, and it does not necessarily need to be enforceable in a court of law.
On the other hand, a contract is a legally binding agreement between two or more parties that creates an obligation to fulfill certain terms and conditions. Contracts are typically written documents (though not always) and specify the details of the agreement, including the parties involved, the terms and conditions, the rights and obligations of each party, and the consequences for non-compliance.
The major difference between an agreement and a contract is enforceability. Key is the idea that an agreement may not necessarily be legally binding or enforceable, while a contract creates a legal obligation that can be enforced in court. The question that then emerges is: what makes a contract valid and enforceable?
Myth-Busting
Contrary to popular belief, a contract does not necessarily have to be in writing to be enforceable. While written contracts are commonly used and highly recommended, they are not the only means to create a legally binding agreement. Verbal agreements, also known as oral contracts, can be enforceable.
The enforceability of a contract, whether written or oral, primarily depends on the existence of the essential elements required for a valid contract (see below). As long as these elements are present, a contract can be formed and enforced, regardless of its form.
However, it is important to note that proving the terms and conditions of an oral contract can be more challenging compared to a written one. In the absence of written evidence, disputes may arise concerning the exact terms agreed upon or the existence of a contract altogether. This is where written contracts have an advantage, as they provide a clear record of the agreement, minimizing ambiguity and potential disagreements.
Elements of a Valid Contract
Contractual enforceability is critical; this is because enforceability means a court can hold both parties to their agreement. If a contract is not valid and enforceable, then a party is free to disregard its terms and there will be no legal consequences.
Legal Test for Contractual Enforceability
To be valid and enforceable, contracts generally require seven main elements:
- Offer – One party must make a clear and unequivocal offer to enter into a contract.
- Acceptance – The other party must accept the offer, either by agreeing to its terms or by performing the actions required in the contract.
- Consideration – Both parties must exchange something of value, such as money, goods, or services.
- Intention to Create Legal Relations – Both parties must have an intention to create a legally binding agreement.
- Capacity – Both parties must have legal capacity to enter into a contract. For example, minors and mentally incompetent persons may not have the capacity to enter into contracts.
- Consent – Both parties must give their free and informed consent to enter into the contract, without being coerced or deceived.
- Legality – The contract must be for a legal purpose and not violate any laws or public policy.
Without each of these core elements, an agreement would not be enforceable by a court. Given the stakes, a more fulsome explanation of each of the elements is detailed in the remainder of this chapter.
“ It is trite law that creation of a contract requires that there be an offer, acceptance and consideration…”
Century 21 Canada Limited Partnership v. Rogers Communications Inc.,
2011 BCSC 1196 at para. 64
Offers
An offer is a proposal by one party to enter into a contract with another party. When a party makes an offer they are referred to as the offeror and the party receiving the offer is referred to as the offeree. For an offer to be valid, it must be clear and definite, and communicated to the offeree.
While an offer is the initial proposal of the contractual terms, it does not, in and of itself, creates a contract. A contract is only formed if the offeree accepts the offer.
Because the offer must be a clear and unambiguous promise to do something, such as sell a good or provide a service, on specific terms, certain statements by a party will not constitute an offer:
- Requests for Information – These are statements that seek information, rather than make an offer. For example, if a potential buyer asks a seller for information about a product, such as its price or availability, it is not an offer to purchase the product.
- Invitations to Treat – These are statements that are not offers, but rather an invitation to negotiate. Examples include advertisements, catalogs, and price lists. For example, if a store advertises a sale on televisions, it is not an offer to sell a television to anyone at the advertised price. Rather, it is an invitation for customers to come and make an offer.
- Puffery – refers to exaggerated or vague statements made by a seller or advertiser that are not meant to be taken as factual claims. Puffs are sales language and are not considered offers. For example, if a restaurant advertises that it has the “best pizza in town,” this statement is considered puffery because it is subjective and cannot be objectively proven. Similarly, if a car dealership claims that its cars are “the most reliable on the market,” this statement is also considered puffery.
Boots Cash Chemists was a well-known pharmacy chain in the UK, and the Pharmaceutical Society of Great Britain was the regulatory body responsible for overseeing the practice of pharmacy.
Boots had a self-service system in their stores where customers would select items from shelves and bring them to the register for payment. The Pharmaceutical Society argued that by placing the items on the shelves, Boots was making an offer to sell, and the customer’s act of taking the items to the cash register constituted an acceptance of that offer, forming a binding contract.
The court disagreed with the Pharmaceutical Society’s argument and held that Boots’ display of goods on the shelves was not an offer but rather an invitation to treat. The court reasoned that the customer makes an offer to purchase the items when they present them at the cash register, and the cashier accepts the customer’s offer by ringing up the sale. Therefore, the contract is formed at the cash register, which is the point of acceptance.
The Boots decision established that a display of goods on shelves, whether in a self-service store or otherwise, is generally considered an invitation to treat rather than an offer.
Types of Offers
Assuming that a statement is definite enough to be an offer, there is still the added consideration of exactly what type of offer has been extended: a bilateral or a unilateral offer.
In a bilateral situation, both parties must make a promise to form a contract. Accordingly, both the offeror and offeree will be promising something to each other. An example of a bilateral offer is a job offer. An employer may offer a candidate a job and in exchange the employee would be offering back their work. Because both the employer and employee are promises something to each other, it is a bilateral offer which turns into a bilateral contract on acceptance.
A unilateral offer, on the other hand, is an offer that can be accepted by performing a specified act or by refraining from doing something. The offeree does not need to make a promise, but rather, must perform the specified act to accept the offer and form the contract. Typically, these types of offers are seen as rewards where the offeror makes a promise to pay if a specified act is performed. For instance, a company may offer a reward to anyone who provides information that leads to the capture of a criminal. If someone provides the information and the criminal is captured, the offeror is bound to pay the reward.
While bilateral offers and unilateral offers are both the initial proposal of terms, the distinction carries significance because it changes the form of acceptance required.
Termination of Offers
- Revocation – an offer can be revoked or withdrawn by the offeror any time before it is accepted by the offeree. For example, if a company offers a job to a candidate but later decides to withdraw the offer, the offer is terminated. In order for an offer to be revoked, the offeror must clearly communicate their revocation the other party. One restriction on revocation is that, once an offer has been accepted, it becomes a binding contract and cannot be revoked.
- Rejection – an offer will be terminated if the offeree rejects the offer. For example, if a person offers to sell their car to another person, but the other person declines the offer, the offer is terminated. The offer is no longer open for acceptance.
- Lapse of Time – an offer can be terminated if the offeree does not accept the offer within a reasonable time. For example, if a company offers a discount to its customers for a limited period, and the customers do not accept the offer before the deadline, the offer is terminated. Sometimes the time period is described in the offer itself however, if an offer does not have a deadline then a reasonable time period is used. The key question for the court is would a reasonable person still view the offer as being available for acceptance?
- Counteroffer – an offer can be terminated if the offeree makes a counteroffer. A counteroffer is a new proposal made by the offeree, which terminates the original offer. For example, if a person offers to sell their car for $10,000, and the other person offers to buy it for $8,000, the original offer of $10,000 is terminated by the counter-offer.
- Death or Incapacity – an offer can be terminated if the offeror dies or becomes incapacitated before the offer is accepted. For example, if a person offers to sell their house to another person, but dies before the offer is accepted, the offer is terminated.
“the question is whether the offer is still alive. It is not alive unless the offeror wishes it to be so, for otherwise there is no agreement. When no indication is given by the offeror of the proper duration of the offer, then the court by applying the test of reasonable time is making a plausible guess as to the offeror’s probable intention.”
Cote, An Introduction to the Law of Contract, states at p. 23
Acceptance
A contract is formed when the acceptance of an offer occurs; at that point, both parties are legally bound to fulfill their obligations under the contract.
In general, for an offer to be considered accepted, the offeror must clearly communicate their offer to the other party, and that offeree must show their acceptance through some affirmative action (such as signing a document or saying “yes” to the offer). The acceptance of an offer must also be unconditional meaning there can be no changes to the terms of the offer (that would be a counteroffer) and the offeror must receive the acceptance.
One possible exception to the clear communication of acceptance is in unilateral offers. With unilateral offers, the acceptance is the full performance of the offer terms. A seminal case dealing with unilateral offers and their acceptance is the English case of Carlill v. Carbolic Smoke Ball.
Foundational Law – Carlill v Carbolic Smoke Ball Company, [1893] 1 QB 256
Carlill v. Carbolic Smoke Ball Co dealt with the issue of whether an advertisement could be considered a legally binding contract. The case involved a company called the Carbolic Smoke Ball Co, which produced a product called the “Carbolic Smoke Ball” that was advertised as a cure for the flu. The company placed an advertisement in the Pall Mall Gazette in which they offered a reward of £100 to anyone who used the smoke ball and still contracted the flu.
Carlill saw the advertisement and decided to purchase and use the smoke ball as directed. Despite using the smoke ball, she still contracted the flu and subsequently brought a claim against the company for the £100 reward. The company argued that the advertisement was not a serious offer and was merely a “puff,” or promotional statement, and therefore not a binding contract.
The court, however, ruled in favor of Carlill, stating that the advertisement was a clear and definite offer (unilateral) that had been made to the public at large, and that Carlill had accepted the offer by acting on it and fulfilling all the necessary conditions. As a result, the court held that the company was legally bound to pay the £100 reward to Carlill.
Consideration
What is consideration?
“Quid Pro Quo” = “Something for Something”
Consideration is necessary for a contract to be legally binding, and requires that both parties must receive some benefit or suffer some detriment under the contract. For example, if one party promises to paint a house in exchange for money, the money is the consideration given by the other party in exchange for the promise to paint the house. If one party promises not to sue the other party in exchange for payment, the payment is the consideration given in exchange for the promise not to sue. Something for something.
Consideration can be anything of value, including money, goods, services, or a promise to do or not do something. However, some form of valid consideration must be exchanged between the parties to ensure enforceability of the contract.
Sufficiency of Consideration
An often challenging question is what can constitute valid consideration for an exchange. The general rule is that consideration must be “sufficient”. “Sufficient” consideration means that the value of the consideration exchanged by each party to the contract is deemed sufficient by the law to create a legally binding agreement. Almost all things that have economic value, regardless of the amount, constitute sufficient consideration; for example, $1, a chocolate bar, painting a fence, driving someone to the airport, etc. Ultimately, the court does not need the consideration exchanged to be equal but, the parties do need to ensure something of value is given and received.
An interesting case where the sufficiency of consideration was challenged was the case of Hamer v. Sid-way 124 N.Y. 538 (1891).
Foundational Law — Hamer v. Sidway, 124 N.Y. 538 (1891)
William E. Story promised his nephew, William E. Story II, that if he refrained from drinking alcohol, using tobacco, swearing, or playing cards or billiards for money until he turned 21, he would pay him $5,000. The nephew complied with the terms of the agreement and reached the age of 21, but his uncle refused to pay him the money.
The New York Court of Appeals held that the nephew had provided sufficient legal consideration for his uncle’s promise to pay him $5,000. In this case, the nephew had promised to refrain from certain activities until he turned 21, which was a legally binding promise. The uncle had also received a benefit from the nephew’s promise, which was the nephew refraining from certain prohibited activities. Ultimately, the court concluded that there was a valid contract between the two parties and that the uncle was required to pay the promised sum of $5,000.
Hamer v. Sidway also illustrates another point about consideration: that parties do not always have to promise benefits to each other. Rather, consideration can also be a detriment – the loss of something of value. In the Hamer case, the nephew’s loss was the loss of smoking, drinking, and other activities.
Forbearance as Consideration
A loss as consideration can also come in the form of forbearance to sue. Forbearance to sue refers to a person’s decision to refrain from pursuing legal action against someone else as consideration for a contract. The act of refraining from legal action is considered valuable consideration as it is a detriment to the party; the party is losing something, the legal claim, in exchange for a contractual promise.
As an example, let’s say that Julian owes Jasdeep $10,000 under a loan agreement, but Julian has failed to make any payments on the loan. The typical remedy is for Jasdeep to sue Julian for the unpaid amount. However, instead of suing Julian, Jasdeep agrees to forbear from suing in exchange for a car provided by Julian. As such, Jasdeep’s forbearance to sue is the valuable consideration in exchange for the car. The agreement for the car in exchange for the forbearance would therefore, involve sufficient consideration between the two sides.
Forbearance is actually a very common form of consideration and is used in litigation settlements. To avoid the cost and time of legal proceedings, parties may agree to settle a case without going to court; one party agrees to withdraw the lawsuit in exchange for some other consideration.
Past Consideration
Past consideration is a type of consideration that is not sufficient to form a valid contract. The concept refers to a promise or act that was completed in the past, and which is being offered as the basis for a present or future promise. Promising something that was done in the past can be problematic because the courts generally view such past consideration as being invalid.
The reason why past consideration is not valid is because it is not being given in exchange for the promise, but rather appears to be a response to it. In effect, the exchange is “something for something already done”.
One notable exception to the rule that past consideration is not valid is when the past act had been initially requested. The request exception states that if a promise is made to pay for a past act that was done at the request of the promisor, then the past act can be considered valid consideration. This is demonstrated by the English case of Lampleigh v. Brathwait, (1615), 80 ER 255 from 1615.
Foundational Law – Lampleigh v. Braithwaite, (1615), 80 ER 255
Braithwaite had killed a man and was now about to executed. He was clearly in need of assistance and reached out to Lampleigh, asking him to seek a pardon from the King on Braithwaite’s behalf. Lampleigh did as requested and impressively, obtained a King’s pardon for Braithwaite’s crime. Upon Lampleigh’s return, Braithwaite promised to pay Lampleigh £100 for his services, but he later refused to pay. Lampleigh sued Braithwaite for breach of contract.
The Court of King’s Bench held that the promise made by Braithwaite was enforceable, even though the consideration for the promise was a past act (obtaining the pardon). This was because Lampleigh had done the act at Braithwaite’s request, and the promise to pay was made in recognition of Lampleigh’s services. Therefore, Braithwaite was required to honour the contractual promise of the £100.
When Consideration is Not Required
Throughout this section, it has been made clear that consideration must be given and received in order for the contractual promises to be valid. There are two exceptions to this general position: seals and promissory estoppel.
A physical seal, such as a wax seal or a stamp, was historically used as a way to indicate the parties’ agreement to the terms of a contract. Additionally, the use of a physical seal was considered to be a substitute for the receipt of consideration — this means that a promise made by a party under seal could be enforceable even it was not supported by valid consideration. Even in modern business, the use of a physical seal may still serve as a substitute for consideration and render a promise valid.
For example, imagine Alice is a wealthy philanthropist who wants to donate a large sum of money to a charity. Alice drafts a document that promises to donate $100,000 to the charity, and she seals the document with her official wax seal. The document states that the donation is a one-way promise, and that the charity is not required to provide anything in return for the donation.
Legally, the use of the seal on the document would be enough to make Alice’s promise legally binding, even though the charity is not offering any consideration in return. If Alice fails to make the promised donation, the charity may be able to sue her to enforce the promise.
The second exception to the consideration rule is promissory estoppel. Promissory estoppel is a legal argument that is made when a party has relied on a promise made by another party, and has suffered a detriment as a result of relying on that promise.
Legal Test for Promissory Estoppel
In order for promissory estoppel to apply, the following elements must be present:
- A promise must be made by one party to another;
- The promisor must have intended for the promise to be relied upon by the promisee;
- The promisee must have relied on the promise to their detriment; and
- It would be unjust to allow the promisor to go back on their promise.
Foundational Law – Central London Property Trust Ltd v High Trees House Ltd, [1947] KB 130
This case concerned a 99-year lease of a block of flats in London which was agreed to by the parties in 1937.
In 1940, due to the outbreak of World War II, occupancy of the flats was severely impacted, and many of the flats became vacant. To alleviate the financial burden on the tenant, High Trees House Ltd, the landlord, Central London Property Trust Ltd, agreed to reduce the rent by half for the remainder of the war period. The parties agreed to this reduction in a letter, which was later confirmed by a deed in 1945. After the war ended, the flats began to fill up again and the landlord sought to claim the full rent. The tenant argued that the landlord was estopped (prevented) from claiming the full rent because of the earlier agreement to reduce the rent.
The English High Court held that the landlord was estopped from claiming the full rent due to the tenant’s reliance on the promise of reduced rent.
This case established that where one party has made a clear and unequivocal promise to another party, and that promise has been relied on by the other party, the promisor may be prevented from reneging on the promise, even if there is no consideration for the promise.
Intention to Create Legal Relations
In order for a contract to be legally enforceable, the parties must have intended to enter into a binding agreement. This means the parties understood and indeed, wanted, the contract to create a legal relationship between them. This intention can be express or implied, depending on the circumstances surrounding the formation of the contract.
Express intention to create legal relations occurs when the parties specifically state that they are entering into a legally binding agreement. This can be done through the use of explicit language in the contract, such as “this is a legally binding contract” or “by signing below, you are entering into a binding agreement.”
Implied intention to create legal relations occurs when the parties’ words or conduct indicate that they intend to create a legally binding agreement, even if they have not specifically said so. This can be inferred from the nature of the contract, the circumstances in which it was formed, and the parties’ conduct following the formation of the contract.
In order to determine whether the parties had the necessary intention to create legal relations, courts will consider various factors, including the presence of consideration (something of value given by one party in exchange for something else), the degree of formality of the agreement, and the commercial context in which the contract was formed.
It is important to note that some types of agreements, such as social or domestic agreements, may not have the necessary intention to create legal relations, even if they meet all of the other requirements for a valid contract. This is because these types of agreements are typically not intended to create legal obligations.
“The test for an intention to create legal relations is objective. The question is not what the parties subjectively had in mind but whether their conduct was such that a reasonable person would conclude that they intended to be bound.”
Ethiopian Orthodox Tewahedo Church of Canada
St. Mary Cathedral v. Aga, 2021 SCC 22 at para. 37
Ultimately, in determining intention, the courts use the “reasonable person” as an objective test to assess whether the parties’ conduct and communications demonstrate an intention to create legal relations. The court asks whether a reasonable person in the position of the offeree would have believed that they intended to enter into a legally binding agreement. If the answer is yes, then the court will find that the parties had the necessary intention to create legal relations.
Example – Understanding Intention to Create Legal Relations
Imagine a scenario. Thi promises to pay her friend Elijah $500 for mowing her lawn. If Elijah accepts Thi’s offer then the reasonable person would believe that the parties intended to enter into a legally binding agreement. Thi would be legally obligated to pay Elijah the $500.
On the other hand, if Thi jokingly tells Elijah that she will pay him $500,000 to mow her lawn, and Elijah laughs and says “yeah right,” then the reasonable person would not believe that the parties intended to create a legally binding agreement. As such, Thi would not be legally obligated to pay Elijah the $500,000.
The difference in answer between these two scenarios is the idea that a reasonable person, viewing the circumstances objectively, would not expect the latter situation to be a genuine intention to craft a legal relationship.
Capacity to Enter a Contract
Another requirement for contractual enforceability is that the parties both have legal capacity. Generally, capacity to enter into a contract means that a person must be legally able to understand the terms of the contract and the consequences of entering into it. It is obvious that courts should not enforce a bargain between two parties if one or both of them do not have the legal ability to understand it.
Issues where one or both parties do not have capacity can emerge in a few potential scenarios, including where a party is a minor, intoxicated by drugs or alcohol, or suffering from a mental impairment that would prevent them from understanding the nature of the contract. Each of these circumstances will flag a capacity concern and may result in the contract being unenforceable.
Minors
- 18 Years Old – Alberta, Manitoba, Ontario, Prince Edward Island, Quebec, Saskatchewan
- 19 Years Old – British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Yukon
Minors in British Columbia
Contracts with minors in British Columbia are influenced by two separate statutes:
The Age of Majority Act is what determines that the age of majority is 19 years of age in the province. However, the Infants Act is what states the effect of being an infant/minor on the contract.
Section 19(1) of the Infants Act begins by stating the following:
Subject to this Part, a contract made by a person who was an infant at the time the contract was made is unenforceable against him or her …
a contract that is unenforceable against an infant under subsection (1) is enforceable by an infant against an adult party to the contract to the same extent as if the infant were an adult at the time the contract was made.
(a) the contract is specified under another law to be enforceable against an infant;(b) the contract is affirmed by the infant after they reach the age of majority,(c) the contract is performed or partially performed by the infant within one year after they reach the age of majority;(d) the contract is not repudiated (cancelled) by the infant within one year after they reach the age of majority.
Despite some of the complexity in language, if any of those exceptions apply then the contract with the minor is legally enforceable against that minor.
Section 19(a) revolves around situations where other provincial laws have expressly stated that a contract with a minor is valid. For example, a contract for residential tenancies can still be enforced against the minor even though they were a minor at the time of contract formation. Section 19(a) allows the government flexibility to institute laws which are still binding on minors.
Section 19(b) deals with scenarios where the minor reaches the age of majority (19 years old in BC). At that point, the minor has the option to affirm or ratify a contract they entered into when they were a minor. If the individual chooses to affirm the contract after turning 19, it becomes binding and valid. For example, if a person signed a contract to lease an apartment when they were 17 years old, they can choose to affirm the contract and continue living in the apartment after reaching 19. That tenancy agreement is now valid.
Under section 19(c), if a contract was entered into by a minor and they start fulfilling their obligations under the contract within one year after reaching the age of majority, the contract becomes valid. For instance, imagine a minor signed a contract for a gym membership. When they turn 19 and go to the gym for a workout, their partial performance of the contract obligations would validate the contract.
Lastly, section 19(d) states that if a minor reaches the age of majority and does not explicitly repudiate or cancel the contract within one year, the contract would be considered valid. For example, imagine if a minor entered into a gym membership contract and never used it between them turning 19 to then 20 years of age. They would have the ability to get out of the contract between their 19 and 20th birthday. However, after turning 20, the contract would be considered legally binding. Therefore, minors should cancel any contracts before turning the age of 20 (unless they have already affirmed or partially performed).
Ultimately, businesses in BC should always confirm the age of the other contracting party or get a co-signor or guarantor for the contract.
Myth-Busting
Myth: “In British Columbia, I can enforce a contract if the other party has signed it.”
Incorrect. If a contract with a minor is entered, the adult cannot enforce it per the terms of the Infants Act.
To avoid a scenario where the business does not have a valid contract with anyone, they should always ask the minor to provide an adult co-signor or guarantor for their contractual obligations. By having an adult co-signer, the contract gains an additional layer of legal enforcement. If the minor fails to fulfill their obligations under the contract, the adult co-signer can be held accountable for breach of the terms even if the contract could not have been enforced against the minor.
In terms of risk management, always secure a co-signor when age is in question.
Mental Incapacity
In order for a contract to be enforceable, both parties must have the mental capacity to enter into it. If a contracting party is suffering from a mental illness, disability, disease, aging, or other condition that affects their ability to understand and make decisions about the contract then the contract will not be enforceable.
In provinces like British Columbia, the law starts with a presumption of capacity for adults. Indeed, section 3(1) of the Adult Guardianship Act, R.S.B.C., c. 6 in BC states that:
Until the contrary is demonstrated, every adult is presumed to be capable of making decisions about the adult’s personal care, health care and financial affairs.
As such, all adults are presumed to have legal capacity to enter into contracts unless some other evidence is shown to override that presumption.
Where there are concerns about mental incapacity, the court can step in and determine whether an individual had capacity to make legal decisions. If it is determined that an individual lacked the necessary capacity to enter into a particular agreement, the court may declare the arrangement or relationship null and void.
Legal Test for Mental Incapacity
The test for determining mental capacity often falls to an assessment of two factors:
- whether the individual has the ability to understand the nature of the contract; and
- whether the individual has the ability to understand the contract’s specific effect in the circumstances.
iFinance Canada Inc. v. B.M., 2021 BCCRT 164 at paras. 27-28.
Ultimately, the court has to determine whether the individual is capable of processing and assessing information about the contract; this is at the heart of the factual analysis of capacity. If one party lacks the required mental capacity, the contract would be deemed unenforceable.
Intoxication
The final area where capacity can be problematic is where one party is intoxicated by drugs or alcohol. If a person is so intoxicated that they lack the capacity to understand the nature and consequences of the contract, they may be able to argue that the contract is unenforceable.
Legal Test for Intoxication
Generally, for a contract to be voidable because of intoxication, the court must be satisfied that:
- the intoxication affected the party’s ability to understand and agree to the terms of the contract; and that
- the other contracting party was aware that the party was intoxicated
Davis v. Cooper, 2010 ONSC 4230 at paras. 21.
Firstly, was the intoxication severe enough to impair the person’s judgment, perception, or ability to reason? For example, suppose that a person enters into a contract to purchase a car while heavily intoxicated. If it can be shown that the person did not understand the terms of the contract or that their judgment was impaired, the contract would be voidable.
As to the second part of the test, the other party to the contract must know or should have known that the contracting party was intoxicated. When the party is aware of the intoxication and enters the contract anyway, it appears as if they are taking advantage of it in a way that should render the agreement unenforceable.
An interesting example of intoxication is the SCC case of Bawlf Grain Co. v. Ross, (1917) 55 SCR 232.
Foundational Law — Bawlf Grain Co. v. Ross, (1917) 55 SCR 232
This case involved a dispute over the sale of wheat between Bawlf Grain Co. and Ross, a farmer. Ross had been drinking heavily on the day he agreed to sell his wheat to Bawlf Grain Co., and later claimed that he was too intoxicated to have formed a binding contract.
The case turned on whether Ross was capable of understanding the nature and consequences of the contract at the time it was made.
Ultimately, the court held that Ross was not too intoxicated to have formed a binding contract. While he had been drinking, he was still capable of understanding the nature and consequences of the contract. The court noted that Ross had experience with similar contracts in the past and that the contract in question was not overly complex. Therefore, the contract between the parties was valid.
Consent
Given that contracts are about the voluntary undertaking of obligations, it’s no surprise that parties must freely and unconditionally consent to the contract terms. While consent can often be understood in terms of capacity, consent can also be problematic in situations where one party feels threatened (duress) or pressured (undue influence) into a deal.
Duress
Duress refers to the use of force, coercion, or threats to induce someone to enter into a contract against their will. If a contract was entered into under duress, it may be considered voidable.
Duress can take many forms, including both physical duress and economic duress. Physical duress refers to situations where physical force or the threat of physical harm is used to compel someone to act against their will. For example, if someone is physically restrained and threatened with harm unless they sign a contract, this would be an example of physical duress. On the other hand, economic duress refers to situations where someone is forced to agree to a contract or make a transaction due to economic pressure or threats. For example, if someone is threatened with harm to their business unless they agree to a contract with unfavourable terms, this would be an example of economic duress.
Undue Influence
While duress relates to threats, undue influence is about pressure. Undue Influence refers to the use of excessive or improper pressure on an individual to enter into a contract. This pressure can come in many forms, including emotional, physical, or psychological manipulation, or a position of power or authority over the individual.
“Because the essential notion of a contract is based upon free consent by the parties to it, relief must be given by the courts from contracts procured by improper pressure … Such a rule is obviously needed; what is more difficult is to draw the line between improper pressure which will render a contract voidable, and the various inducements and predicaments which operate every day to induce people to enter into contracts which they would rather they did not have to make; indeed the line is probably impossible to describe in general terms.”
Ermineskin Cree Nation v. Foureyes, 2005 ABQB 522 at para. 20
It is important to note that not all forms of persuasion or influence will be considered undue. In order for a court to find that undue influence was present, the pressure or coercion must have been such that it overwhelmed the individual’s ability to make a free and informed decision.
Legal Test for Undue Influence
More specifically, the legal test for undue influence typically requires proving the following:
- there is a relationship of dependency (such as solicitor and client, parent and child and guardian and ward);
- the contract is unfair in the sense that a party was unduly burdened or disadvantaged; and
- the party claiming undue influence must show that the other party exercised a pervasive influence through manipulation, coercion, or abuse of power.
D.L.G. & Associates Ltd. v. Minto Properties Inc., 2014 ONSC 7287 at paras. 96.
For example, imagine there is a landlord is in a position of power over a tenant who is desperate for affordable housing. The landlord then forces the tenant to sign a lease agreement with unfair terms that are heavily in favor of the landlord. In this case, the court might find that there was an inequality of bargaining power between the parties, and that the landlord used their power to obtain an unfair advantage over the tenant, thereby exerting undue influence. Another example would be a lawyer persuades a vulnerable client to sign a document that transfers a significant portion of their assets to the lawyer without adequate explanation or advice.
Legality
To introduce the final element of enforceability of a contract, let’s consider the following news story out of the state of Kansas in the United States:
Should the court enforce a contract between a kidnapper and the kidnapped involving the exchange of money in return for helping hide from the police? The answer is obviously, no. However, looking at the contractual elements we have canvassed so far, they are all met, nothing fails. Enter the concept of legality.
For a contract to be enforceable there must be legality of the subject-matter. A contract to do something illegal will generally be void and have no legal effect.
There are several types of contracts that may be considered illegal, including contracts that involve illegal activities and contracts that are against public policy. For example, a contract to purchase illegal drugs would be illegal because the subject matter of the contract is illegal.
