That is the question we posed at the beginning of this chapter and are now in a position to answer.
A contract is a legally binding agreement. That is the practical definition that best encompasses what we have discussed so far and will serve as the basis for everything to follow, including our look at what a contract does, which is the subject of Chapter 2. Before we go there, Worksheet 1 is a short quiz designed to help you review what you have learned about contracts so far.
Worksheet 1: Quiz: Contract or No Contract
Consider each of the following scenarios and, based on what you know now about offer, acceptance, and consideration, determine whether in your opinion a contract was formed. The answers are at the end of the quiz.
Questions
1. You call your favourite restaurant to make dinner reservations. You arrive at the restaurant on time but there is no table waiting for you. In fact, the hostess tells you that she gave your table to another couple and nothing else is available. Was your reservation a contract?
2. You promise to stop by your friend’s house to help clear the leaves from his eavestrough. It turns out that the Argos are on TV that afternoon and you decide to stay home. Your (now former) friend calls to tell you that you broke your contract to help him. Is he right?
3. You tell your tailor that you love the new silk she’s just shown you. Two weeks later she tells you that the dress she made for you is ready for pickup and the price tag is $1,000. Shocked, you ask, “What dress?” She says, “The one you ordered when you said you loved the silk.” Did your words create a contract?
4. You play the saxophone and your friend has asked you to sit in on a gig in place of his regular saxophonist, who has come down with a case of bronchitis. You agree and are told you will receive the regular saxophonist’s share of that evening’s gig fees. Has a contract been formed?
5. Because I can’t stand the sight of your purple garage, I agree to paint it at no charge to you if you agree to buy the white paint and brushes for me to use. Do we have a contract?
6. I agree to pay you $20 for a poem, on the condition it is in sonnet form. You provide me with a poem in free verse form. Do I have to pay you the $20?
7. I offer to buy your record collection for $200. You tell me that you want $250. I tell you that is too expensive for me. You tell me that you will accept the $200. Do we have a contract?
Answers
1. No, your reservation is not a contract. Although offer and acceptance are present in making a reservation, consideration is not. That is why neither the patron nor the restaurant can claim the existence of a contract between them. That is also why many restaurants now require a “reservation contract” when reservations are being made for large groups of people.
2. No, your friend is not right. You offered to help him clean his eavestrough and he accepted, but again there was no consideration given for the promise, so there was also no contract. As you know, situations in which someone makes a gratuitous promise to someone else arise on an almost daily basis. If those promises had the force of law behind them, the courts would be even more overburdened than they are now.
3. No. In order for there to be a contract, offer and acceptance are required. Simply stating that you “love” a certain fabric is too ambiguous to reasonably be construed as an offer to purchase a dress. To the extent that showing you the silk can be said to be the offer, simply saying that you “love it” is too ambiguous to reasonably be construed as acceptance. Think of everything that you would be legally obligated to do every time that you said you loved something.
4. Yes. Offer, acceptance, and consideration are all present.
5. Yes. We have a contract because there is offer, acceptance, and consideration. In this case, the consideration is the detriment you are willing to incur (namely buying white paint and brushes) in exchange for allowing me to paint your garage white. Note that the consideration in this case is not a specific payment to me or even a benefit to me in some tangible sense (other than perhaps allowing me to rid myself of an eyesore).
6. No. It was a condition of our contract that the poem be a sonnet. You did not satisfy that condition and I did not waive it.
7. No. As soon as you countered with the $250, that became the new offer (i.e., the counteroffer) and my original offer of $200 was no longer open to you for acceptance. It is now up to me whether or not I will accept the $250 offer and, if not, there is no contract between us.
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2
What Does a Contract Do?
We said in Chapter 1 that a contract is a legally binding agreement, but what does a contract do? Just as there are three components of a contract — namely offer, acceptance, and consideration — it can be said that there are three components of a contractual relationship:
• Performance: Doing what the contract says to do.
• Privity: The legal principle that only those who agree to bind themselves to perform a contract are, in fact, bound to perform it.
• Breach: The failure to perform a contractual obligation to which you are bound.
Together, these three components determine what a contract does. A contract establishes the respective rights and obligations of the persons contracting, allocates risk among them, and provides a legal basis for compensation.
1. Performance
Every contract involves a commitment to do something: buy a car, sell a house, repair a computer, exchange currency, trade a hockey player, pay a mortgage, etc. Whatever the case, there is at least one action (and usually more) at the heart of every contract. Consequently, contractual relationships are based, in part, on the performance of that action, meaning doing what the contract says to do.
For example, in exchange for $100, you agree to tutor a student in mathematics for one hour every Saturday for the next four weeks. Those are what are called the terms of your contract. A term is any provision of a contract that creates both a legal obligation and a corresponding right. (For a further discussion of contractual terms, see Chapter 6.) It is the terms of a contract that “set out” or tell the persons contracting what they must do.
The terms of your contract with the student obligate you to: (i) tutor that student in mathematics, (ii) for one hour, and (iii) every Saturday over the next four weeks. The student is, per the terms of the contract, obligated to pay you $100 for your services.
At the same time, the terms grant you a corresponding right to receive $100 in payment from the student for your services. The student has the right to be (i) tutored in mathematics, (ii) for one hour, and (iii) every Saturday for the next four weeks.
Every contract sets up this mirror image of rights and obligations and, as you can see, when we speak generally of performing a contract, we are not favouring either of the persons involved in the
