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  • Writer's pictureLaura J. McPhee

The Legal Essentials: Understanding the Elements of a Valid Contract

By Laura J. McPhee and Thomas O'Leary


Contracts are the backbone of our daily transactions, from buying a cup of coffee to signing a major business deal. These legally binding agreements play a vital role in our lives, and understanding what makes a contract valid is essential. In this blog post, the key elements that make up a valid contract are considered.


1. Offer and Acceptance:

Every contract starts with an offer. One party makes an offer to do something or provide something in exchange for something, and the other party accepts that offer. Acceptance must be clear and unconditional, mirroring the offer. Any time a condition to acceptance is offered, or a change to the terms of the offer is made, this is considered a counteroffer, which then must be accepted (or rejected) by the first party. When entering a contract, it's crucial that both (or all) parties have a “meeting of the minds” regarding what's being offered and agreed upon.


2. Intention to Create Legal Relations:

A valid contract requires that both parties understand and intend that they are entering into a legally enforceable agreement. “Agreements to agree” are not enforceable. Social agreements or casual promises will also fail to meet this criterion. This intention can be evidenced in surprising ways - in a recent decision by the Court of King’s Bench for Saskatchewan, a Judge ruled that a “thumbs-up” emoji in a text message can demonstrate an intention to be legally bound, making the agreement enforceable (South West Terminal Ltd. v. Achter Land & Cattle Ltd., 2023 SKKB 116).


3. Consideration:

Consideration refers to something of value exchanged between the parties. It can be money, goods, services, or even a promise not to do something (called forbearance). Courts will not assess the adequacy or relative value of consideration, the common metaphor being that of a “mere peppercorn” as sufficient consideration to support a binding contract. Without consideration, a contract is generally not valid. An agreement not to enforce a debt in exchange for part payment is therefore not binding as no consideration passes to the creditor. Similarly, a direct wager on a sporting event is not enforceable.


4. Legal Capacity:

To form a binding contract, both parties must have the legal capacity to do so. This means that the contracting entity must exist at the date of the Agreement, they must be of sound mind and, in some cases, of a certain age. For example, contracts with minors or those lacking sufficient mental capacity may not be enforceable.


5. Legality of Purpose:

A contract to perform illegal activities or which goes against public policy is not valid. Illegality in this sense requires the very object or purpose of the agreement to be illegal, and that the parties knowingly entered an illegal arrangement. For instance, a contract to engage in illegal gambling or to kill someone would not be enforceable, but one that would breach a licencing bylaw or regulation would be enforceable.


6. Certainty and Possibility of Performance:

A valid contract must have clear terms and conditions and be capable of performance. Both parties should be able to understand their rights and obligations from a plain reading of the contract, through the lens of typical industry practice. While vague or ambiguous language can lead to disputes and uncertain outcomes, courts are very reluctant to entirely void contracts for uncertainty, instead striving to discern a reasonable meaning of the words used in the full context of the agreement. Enforceable contracts must also be capable of being performed. Impossible conditions may cause a contract to be unenforceable, with the oft-cited example being a contract for a singing performance in a concert hall that, unbeknownst to the parties, had burned down hours before.


7. Formalities:

No specific formalities are required as a prerequisite to enforceability unless a statute requires such formality. Generally, contracts may be verbal, written, or a combination. The myth of the valid cheque written on the side of a cow is often used to give colour to this concept. However, statutes require that some types of contracts comply with specific formalities, such as being in writing, witnessed, or notarized. Contracts for the sale of land require writing, for example. It is important to be aware of any special requirements that might apply to any specific contract under consideration.


Conclusions

Understanding the concepts outlined above is an important starting point to ensure that your agreements are legally valid and enforceable. Whether signing a lease, an employment contract, a purchase/sale agreement, a services agreement, or an agreement to act together to a common goal, knowing the basics of what makes a contract legally binding will help you make informed decisions and protect your interests.


When doubts or disputes arise concerning contracts, the Blue Rock LLP team of lawyers are ready to assist. We can provide guidance and ensure that your contracts are sound and enforceable and that you get what you bargained for.


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