Managing the law the legal aspects of doing business 4th edition mcinnes solutions manual

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Chapter 7–The Nature and Creation of Contracts

CHAPTER 7 THE NATURE AND CREATION OF CONTRACTS CONTENTS Teaching Approach Additional Teaching Suggestions 1. Intention to Create Legal Relations 2. Battle of the Forms 3. The Postal Rule and Overtaking Communications 4. Acceptance by Performance Discussion Boxes 1. You Be The Judge 7.1—Fobasco Ltd v Cogan 2. Ethical Perspective 7.1—Dickinson v Dodds 3. Business Decision 7.1—The Granting of Options 4. Business Decision 7.2—Battle of the Forms 5. Business Decision 7.3—The Postal Rule Review Questions Cases & Problems Case Briefs TEACHING APPROACH We now move into the second substantive section of the text. The preceding chapters discussed the law of tort in considerable detail. This chapter marks a turn from torts to contracts. It consists of eight chapters. The first six chapters deal with issues that are relevant to contracts generally:  Chapter 7 explains The Nature and Creation of Contracts, by focusing on the core issues of intention to create legal relations, offer and acceptance.  Chapter 8 considers the role that Consideration and Privity play in the formation and enforcement of contracts.  Chapter 9 looks at the Terms and Representations that may be included in a contract.  Chapter 10 examines a number of Contractual Defects.  Chapter 11 explains how a contract may be brought to an end through Breach and Discharge.  Chapter 12 canvasses the various Contractual Remedies that may be available in the event of breach.

The final two chapters deal with special types of contracts that are especially important to business:  Chapter 13 considers Sale of Goods.  Chapter 14 considers Bills of Exchange.

Throughout the chapters on contracts, a special emphasis is placed on the issue of risk management. Students are encouraged to think about ways in which, as business people,

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they may make the most of contractual arrangements, while also avoiding some of the more common problems that arise in practice.

ADDITIONAL TEACHING SUGGESTIONS Intention to Create Legal Relations Drawing upon the ideas that are discussed in the case briefs of Balfour v Balfour and Rose & Frank Co v JR Crompton & Rose Ltd that appear below, students could be asked to consider the social and ethical implications of the applicable presumptions. Generally speaking, there are rebuttable presumptions that an intention to create legal relations: (i) does not exist in a family or social context, but (ii) does exist in a commercial context. It occasionally is suggested that those rules serve the interests of men over women: S Hedley “Keeping Contract in its Place – Balfour v Balfour and the Enforcement of Informal Agreements” (1985) 5 Oxford J of Legal Studies 391. Promises within a domestic context are more likely to be made by a husband to a wife – than by a wife to a husband – for the simple reason that men historically had much more to give. Upon marriage, the man and woman become one and that one was the man. Married women were traditionally incapable of holding property on their own. That obviously is no longer true. But it does remain true that wealth tends to be concentrated in men’s hands.

Consequently, the presumption against contractual relations in domestic contexts generally prevents women from legally enforcing promises made by men. In contrast, the presumption in favour of contractual relations in commercial contexts generally allows men to accumulate greater wealth in their “natural” sphere of activity. The same basic point can be expressed through the distinction between “private” and “public.” The courts generally will not enforce agreements in a domestic context because they do not want to interfere in “private” matters. In contrast, they generally are willing to intervene in the “public” world of the marketplace. The dichotomy between “private” and “public” is, however, somewhat artificial. The courts will not intervene in family matters because they are “private.” To a large extent, however, they are “private” precisely because the courts have refused to intervene.

Battle of the Forms Drawing upon the ideas that are discussed in the case brief of Butler Machine Tool Co v Ex-cell-O Corp that appears below, students could be asked to suggest other ways of resolving the problems that arise through a battle of the forms. They should appreciate both the need for conceptual purity (eg there cannot be a contract without consensus ad idem) and the need for practical results (eg the recognition of a contract in a commercial context, especially if the agreement has been executed). There are at least four possibilities: (i) a strict “mirror” principle that requires agreement between the parties, (ii) an approach that allows the last shot to win, (iii) an approach that allows the first shot to win unless the details of a subsequent shot are specifically drawn to the initial party’s attention, and (iv) an approach that allows the court to consider what is reasonable in light of all of the shots that were fired.

The Postal Rule and Overtaking Communications The rules regarding the communication of offers and acceptances give rise to interesting policy issues. There are, unfortunately, few cases on point.

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Suppose, for instance, that Pam mailed a letter to Dave offering to sell a painting for $100 000. After receiving that offer, Dave sent a letter that rejected the offer. The next day, however, before Pam received his rejection letter, Dave telephoned her and purported to accept her offer. Allowing Dave to overtake his mailed rejection with a telephoned acceptance might allow him to unfairly speculate at her expense. He could reject the offer with a letter and, before it’s actual receipt, monitor the market. If the value of the painting increased during the interim, he could hastily telephone his acceptance. He could, in effect, blow both hot and cold. On the other hand, Pam is really none the worse for wear even if Dave is entitled to overtake his earlier rejection with a subsequent and timely acceptance. She had no contract at the outset. She similarly had no contract when Dave mailed his acceptance. The subsequent creation of a contract would not obviously prejudice her. (At most, she could argue that, unbeknownst to her, the initial rejection brought an end to the possibility that she could be bound to a contract through an effective acceptance.)

The situation would be different, however, if Dave initially mailed an acceptance letter and then used a telephone call to try to revoke his acceptance before the letter’s receipt.

In that situation, the mailed acceptance presumably would, by virtue of the postal rule, result in the creation of a contract as soon as the letter was sent. Pam therefore could argue that, unbeknownst to her, she had contractual rights against Dave. It might be improper to allow him to later overtake receipt of the letter by telephoning a rejection if, for instance, the value of the painting dropped in the interim.

Acceptance by Performance The offer of a unilateral contract is accepted through performance of the stipulated act.

As discussed in the case brief of R v Clarke that appears below, however, the mere performance of that act does not necessarily constitute acceptance. The offeree must have acted with knowledge of the offer. Otherwise, there is no consensus ad idem because, at the relevant time, the parties did not have a meeting of minds – they were not simultaneously thinking about the offer and the promise of a reward.

R v Clarke is often contrasted with Williams v Carwardine (which appears below in a Case Brief). The plaintiff witnessed the murder of a “lusty man.” The deceased’s brother offered a reward of £20 for information leading to the conviction of the murderer. The plaintiff, who knew of that offer, was beaten nearly to death by the murderer, who wanted her to keep quiet. The plaintiff subsequently provided the relevant information to the authorities. She was motivated by a desire to make peace with God before she died. She nevertheless was allowed to collect the reward. Although she had not been motivated by the defendant’s promise, she did know about it when she implicated the murderer.

Students might be asked to consider the relevance of knowledge and motive. Should an offeree be able to accept in ignorance of an offer? Aside from being contrary to orthodox rules, an answer in the affirmative seems unnecessary on policy grounds. A reward obviously was not necessary to motivate the offered. Furthermore, since the offeree acted in ignorance, there is no need to fulfill expectations, as generally is true in contracts.

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Should an offeree be entitled to claim a reward that it knew about, but that was not a motivating factor? That seems a more difficult question. The decision in Williams might be defended on evidentiary grounds. It may simply be too difficult to isolate the basis upon which the offeree acted. Was the reward a motivating factor? The primary motivating factor? Likewise, even if the reward was one of several motivating factors, there may be a need to protect the offeree’s expectations. Finally, motive is generally considered to be irrelevant in private law.

DISCUSSION BOXES You Be The Judge 7.1 Fobasco Ltd v Cogan (1990) 72 OR (2d) 254 (HCJ) 1.

On the facts, the parties likely had a mere social arrangement. (That is the conclusion reached by the trial judge in this case.) Even though there was a long-standing arrangement, there is no proof that Eddie intended to relinquish ownership of the season’s tickets (ie by transferring the tickets into David’s name.) Moreover, it is significant that the parties, who were business people, did not clearly outline their rights and obligations.

Viewed objectively, if they had intended the arrangement to be something more than a favour between friends, they probably would have made it clear that they had entered into contractual relations.

2.

This question asks students to consider the issue from a risk management perspective. Just as business people should know the importance of outlining their prospective rights and obligations, they should also know that, while not generally necessary, it makes good commercial sense to put agreements in writing. Writing probably would have indicated an intention to create legal relations and it would have helped to settle the terms of the agreement.

3.

Assuming that a contract is recognized, it does not appear on the facts that Eddie and David agreed to this arrangement for more than one season at a time. As such, they effectively would have renegotiated the terms of the agreement each year, including, for example, the price and number of tickets involved. Since there was no mutual agreement to enter a legal transaction forever, Eddie would not be forced to make tickets available to Fobasco Ltd indefinitely.

Ethical Perspective 7.1 Dickinson v Dodds (1876) 2 Ch D 463 (CA) 1.

This questions asks students to weigh, from a business perspective, the relative significance of morality, profitability, flexibility and freedom. On the one had, it might be suggested that all promises should be kept (unless, for instance, harm would occur – as when I honour an undertaking to return a weapon to a friend who became insane after I made my promise). On that view, a serious promise, by its very nature, places the promisor under an obligation to act in a certain way. The strength of that obligation intuitively varies with the circumstances. The purchase of land arguably lies toward the more serious end of that continuum. The strength of the obligation is also heightened if the promisee relies upon the promisor’s undertaking. (That might be the case, for instance, if Dickinson incurred expenditures in the belief that the offer was open for his

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acceptance.) On the other hand, it might be suggested that the promisor should not be required to give something for nothing. Following the bargain theory of contractual liability, a person should not, exceptional circumstances aside (eg promissory estoppel, seal), be forced to confer a benefit upon someone without receiving anything in exchange.

2.

There are a number of financial and non-financial reasons that might motivate business people to honour firm offers.

Even if business people do not see any financial benefit to doing so, they may honour firm offers and other gratuitous undertakings simply because they believe it is the right thing to do. Although that factor may not be conclusive very often, there is also a danger in being too cynical about the morality of those in the marketplace.

There are also reasons for honouring firm offers that are a combination of non-financial and financial. Most business people want to develop goodwill in the marketplace. A company’s reputation will suffer if it frequently engages in sharp practice or is thought to be untrustworthy. Moreover, there are financial repercussions to a lack of goodwill and an unfavourable reputation. All else being equal, a customer is more likely to do business with a company that it trusts will not only honour legal obligations, but also its informal promises. Returning to a theme introduced in Chapter 1, students should appreciate that business is based on on-going human relations and that strict enforcement of legal rights is not always desirable in the long-term.

Business Decision 7.1 The Granting of Options 1.

The decision to grant or refuse an option should reflect a number of considerations.  The student should consider whether $100 000 is a reasonable price. The presence of other interested buyers may suggest that the price should be increased to reflect the emerging market position.  The student should consider the possibility that other prospective purchasers may disappear if the land is effectively taken off the market for 90 days. It may be that the other potential buyers are interested immediately or not at all.  The student should also consider the likelihood that ABC Corp will receive zoning approval. If not, then the land will have been frozen for 90 days without any real prospect for sale.  Finally, the student should consider the price that ABC Corp is willing to pay for the option. If that price is sufficiently high, it may off-set the possible negative consequences of freezing the land for 90 days. That last point requires further discussion.

The terms of a business agreement are limited only by one’s imagination and what the parties are willing to agree upon. Under the circumstances, the offeror will want to insist on a price that makes it worthwhile to keep the offer open, particularly in light of the possibility that the other prospective purchasers may be lost. The offeror may also

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consider charging an additional fee in the event that zoning approval is not received, or insisting on another term that requires ABC Corp to buy the land more quickly in the event that an alternative offer is made that reaches a stipulated price.

Finally, as an alternative to an option, the parties might agree to a conditional sale of the sort that is described in Chapter 16. Under that arrangement, a contract of purchase and sale would be immediately created, but performance of the primary obligations would be suspended pending the outcome of the zoning application. In that instance, ABC Corp would, however, likely have an immediate obligation to use its best efforts to secure zoning approval.

2.

If there is a large number of potential buyers, the property could presumably be sold fairly easily to another purchaser. If the interest level is sufficiently high, the offeror may not want to be bound to a single buyer for a set price. Indeed, in such circumstances, the possibility exists to increase the sale price through an auction where the land is sold to the highest bidder. In contrast, where there are no other prospective buyers, the offeror must weigh the benefits of showing goodwill on the one hand, and the possibility of missing out on a deal that does not require approval on the other.

3.

Where the future market value is expected to decline, an option guaranteeing $100 000 makes sound business sense. On the other hand, limiting the price of the land in an increasing market runs the risk of losing substantial profits.

Business Decision 7.2 Battle of the Forms 1.

This exercise is aimed primarily at the issue of risk management. Students are not so much expected to provide substantive answers, but rather demonstrate an appreciation of the need for caution. In essence, they must realize that if they do not carefully read all contractual documents, they may be caught by surprise and bound by terms of which they were unaware. They must also realize that, in some circumstances at least, an apparent contract may not actually exist if the parties were never ad idem on the terms. That issue is further explored above under the heading of “Additional Teaching Suggestions: Battle of the Forms.”

2.

Business people can obviously avoid difficulties by carefully reading contractual documents and ensuring that the terms are expressly settled before negotiations conclude.

Business Decision 7.3 The Postal Rule 1.

There is an enforceable contract. Based on the rules governing non-instantaneous communications, the offer Maria made through the mail was effective when the offeree received it on June 5th. The acceptance letter that the offeree mailed on the same day would have been effective where and when it was mailed by the offeree. The contract was already fully formed before the offeree received notice of the revocation.

REVIEW QUESTIONS

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1.

The phrase “meeting of the minds” refers to a mutual agreement to enter into a legal transaction on a particular basis. (Lawyers often use the phrase consensus ad idem.)

A meeting of the minds is significant to the formation of contracts because it shows that the offeror and offeree agreed to enter a contract on certain terms and that they are willing to be bound to those terms. Meeting of the minds occurs through the process of offer and acceptance. Significantly, however, contract law, as usual, takes an objective approach to the issue. Consequently, while rare, a person may be bound by an agreement, even without intending to do so, as long as the reasonable person would have thought they intended to be bound.

2.

“Comfort letters” arise in connection with the requirement that the parties have an intention to create legal obligations. Just as the parties have freedom to contract, so too they have freedom not to contract. Consequently, even if the other elements of contract formation (eg offer, acceptance, consideration) are in place, a court will first ask whether, on an objective assessment, the parties intended to be legally bound by their promises. If not, then although they could have created a contract, they have chosen not to do so. A court will respect that choice.

There is a presumption that parties in a commercial setting do intend to create legal relations. That presumption may be rebutted, however, by evidence to the contrary. Such evidence may take the form of a comfort letter.

A comfort letter is only somewhat comforting in practice. It provides the writer’s promise to perform in a certain way, but it also stipulates that that promise is not legally enforceable. Notwithstanding its inability to create legally enforceable obligations, a comfort letter is valuable to the extent that the writer cares about his or her reputation. A business person who breaks a promise — even a promise that is not legally enforceable — will be a less desirable trading partner in practice. Comfort letters therefore provide some assurance that an undertaking will be honoured.

3.

Since a contract comes into existence as soon as an offer is accepted, the offeror must be careful to avoid offering more than he or she is willing or able to provide. Not only is the offeror obligated to honour the promises contained in the agreement, he or she will be unable to alter the contents of that agreement, or bring the contract to an end, without the agreement of the other party.

The courts have developed two techniques to reduce these dangers. First, judges have developed careful guidelines for deciding which statements qualify as offers. To qualify as an offer, the person making the statement must have the intention to create legal relations. This means that the offeror must have intended that the proposed agreement would be enforceable in law. The test for deciding this issue is an objective one that asks whether the reasonable person, viewing the circumstances as a whole, would believe that the parties intended that the agreement would be legally binding. The court will not take into account the subjective intentions of the parties because: (i) a person could easily lie about the matter, and (ii) one of the primary aims of contract law is to protect reasonable expectations. A court will try to protect the party who, on the basis of his reasonable

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expectations, may have made arrangements in anticipation of the contract being fulfilled.

The courts have also simplified matters by assuming that offers made in a commercial context are generally enforceable, while offers made in a family or social context generally are not. However, these presumptions may be disproved where there is evidence to the contrary.

The second way judges reduce the risks of making an offer is by placing limits on how statements can function as offers. The courts classify some statements about proposed transactions not as offers, but rather as invitations to treat. An invitation to treat is an invitation for others to make an offer and shows a willingness to receive an offer. The test for deciding whether a statement is an offer or an invitation to treat is also an objective one. The court will ask how a reasonable person would interpret a disputed statement in light of all the circumstances.

4.

“Quantum meruit” is a Latin phrase that means “as much as it is worth.” A contract requires offer and acceptance, at least one of which usually involves the payment of a price. Those elements are most easily established when the parties expressly provide offer and acceptance. Nevertheless, a contract may be created even if offer and acceptance are implied rather than express. That may happen if, for instance, a person walks into a restaurant and says simply, “A cheeseburger and a milkshake.” That statement is interpreted by the reasonable person as both a desire to receive the meal and an offer to pay for it. By filling the order, the restaurant provides its acceptance.

(Acceptance may occur earlier if the server says something like, “I’ll bring it right up.”)

Furthermore, even though neither party mentioned a price, the initial demand implied a willingness to pay a reasonable price. A court would consider all of the circumstances, especially the price list on the restaurant’s menu, in settling on a dollar figure.

5.

The objective “reasonable person” test allows the courts to create a fictional person in order to determine what the parties should have done or thought in the circumstances. The objective test provides the courts with considerable flexibility and makes it possible for a judge to equally say what a reasonable person would or would not have intended. In addition, a test based on subjective intentions would be difficult to apply for two reasons. First, a person could easily lie at trial about what his or her intentions were. Second, a primary aim of the law of contracts is to protect reasonable expectations. Since the business world could not function properly unless people were entitled to rely on outward appearances, the courts will protect the reasonable expectations and interpretations of the parties.

6.

An option is a contract in which the offeror is paid in exchange for a binding promise to hold an offer open for acceptance for a specific period. The concept is important because the offeror, as master of the offer, normally is entitled to revoke the offer anytime prior to acceptance by the offeree. That is true even if the offeror issued the offer as a “firm offer,” promising that the offeree would have a certain period of time within which to accept.

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An option consequently provides a way in which the offeree of a large offer can compel the offeror to hold that offer open as promised. The option is a separate contract. In exchange for receiving a price (usually a small, but significant, sum of money), the offeror of the large offer agrees to hold that large offer open. Because the promise to hold the large offer open is now contained within its own contract, it is enforceable.

Suppose, for instance, that the defendant offered to sell Blackacre to the plaintiff for $1 000 000. The plaintiff needs a week to think about the possibility before accepting or rejecting. The defendant, however, prima facie can revoke the sale offer at any time. To preclude that possibility, and to compel the sale offer to remain open for a week, the plaintiff may persuade the defendant to create a new contract: an option. In exchange for the plaintiff’s payment of, say, $5000, the defendant enforceably agrees to hold the sale offer open for one week.

7.

An offer is an indication of a willingness to enter into a contract on certain terms, whereas an invitation to treat is an indication of a willingness to receive an offer. The test for deciding whether a statement is an offer or an invitation to treat is an objective one.

The court will ask how a reasonable person would interpret a disputed statement in light of all the circumstances. In applying the test, the courts tend to apply certain presumptions: (i) the display of an item on a store shelf, even if marked with a price tag, is an invitation to treat, and (ii) a statement placed in a newspaper or catalogue is generally an invitation to treat. However, an advertisement may be considered an offer if a reasonable person would read it that way. For instance, an advertisement that states, “Men’s 12 speed mountain bike. $400. First come, first served” is an offer, whereas “Men’s 12-speed mountain bike. Seller will accept best offer” is an invitation to treat.

The distinction helps to promote commercial activity by eliminating the offeror’s danger of being immediately bound to an unmanageable number of contracts.

8.

Revocation occurs if the party who made the offer withdraws it. The offeror is generally entitled to revoke the offer at anytime. But where the offeror promises to hold an offer open for acceptance during a certain period, special attention is required. Strictly speaking, since there is no exchange of value in return for the firm offer, the promise to hold the offer open is not enforceable in law. From a commercial viewpoint, this flexibility is important because it allows the offeror to negotiate with other potential buyers. However, from an ethical perspective, it may be in the offeror’s best interest to honour firm offers. In addition to maintaining good business relations, keeping one’s promises generates goodwill for the business.

9.

“Cross-offers” occur when two people offer each other a contract on the same terms. That would be true, for example, if you wrote a letter to me saying “I will buy your car for $5000” and I write a letter to you saying, “I will sell my car to your for $5000.” It may appear that a contract is created because you and I share the same idea at the same time. A contract, however, requires more than a coincidence of ideas. It requires a consensus ad idem—a meeting of the minds. A contract is created only if one person offers and another person accepts that offer.

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10.

The tendering process limits the revocation of offers during the period in which they are being considered and otherwise ensures a fair bidding process. The courts have found that two contracts may be formed under the tendering process. Under Contract A, the call for tenders is an offer to enter into a special contract to hold a fair tendering process in exchange for an irrevocable bid. In that context, the bid constitutes acceptance of the offer under Contract A. Under the second contract, the call for tenders serves as an invitation to treat to receive offers to enter into the larger Contract B. In that context, the bid constitutes an offer to enter into Contract B. There will be one Contract A for each party that submits a tender, but there can be only one Contract B between the party calling the tenders and the party that submits the winning bid.

11. 

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An offer may come to an end in five different ways.

Revocation If an offer has not been accepted, and if the offeror is not compelled to hold the offer open for acceptance under the terms of an option, the offeror is entitled to revoke the offer. Revocation is simply the termination of an offer. Revocation normally can be made in the same manner as the original offer (eg an offer that appeared in a newspaper may be communicated by a revocation in the same paper).

Lapse of Time Even if an offer has not been accepted or revoked, it will lapse after the passage of a reasonable time. The calculation of that reasonable period depends upon the circumstances, including the terms of the offer, the nature of the goods, the volatility of the market, and industry practice.

Death or Insanity An offer usually comes to an end if, prior to acceptance or termination buy other means, either the offeror or the offeree dies or becomes insane. At least in theory, a mind that no longer exists or that has become defective cannot contribute to a consensus ad idem (a “meeting of the minds”) and therefore cannot support the creation of a contract. In practice, however, an offer may be accepted, notwithstanding death or insanity, if performance of the proposed contract was not personal to the parties — eg if the offer was a simple offer to sell land for a monetary price, rather than a proposal to exchange the performance of a concert for the creation of a computer program. If the offeror’s and offeree’s personalities are not crucial to performance, it may be open for their estates to adopt the agreement.

Rejection An offer is terminated if it is rejected by the offeree. Once it is thereby terminated, it cannot unilaterally be revived by the offeree if that party has a change of heart. The offeree must make a new offer or hope that the offeror reiterates and recreates the original offer.

Counter-Offer A counter-offer is an attempt to accept an offer but on varied terms. Any variation of the original terms constitutes a counter-offer. And that counter-offer constitutes a rejection of the original offer and the creation of an entirely new one. The offeror and offeree thereby trade positions.

12.

The statement is not true. As a general rule, the offeree is entitled to communicate acceptance by any reasonable means. As a result, for example, a written offer may be accepted orally, or vice versa. The choice does not always lie with the offeree, however. Most importantly, the offeror is the master of the offer and therefore

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can stipulate that acceptance must be communicated in a particular manner. Furthermore, even if the offeror has not expressly required a particular form of communication, the circumstances may restrict the offeree’s options.

13.

An offer is terminated once it is rejected. This means that it cannot later be accepted if you, as the offeree, later changed your mind. The rule is set up this way to ensure that there is only one “master of the offer.” In order to revive the transaction, you could do one of two things. You could either ask the offeror to repeat the initial offer or can make an offer yourself and hope that the original offeror accepts.

14.

A counter offer occurs when an offeree responds to an offer by indicating a willingness to enter into a contract, but on different terms. A counter offer has the effect of rejecting an existing offer and creating a new one, thereby switching the parties’ roles.

Consequently, any attempt to modify the terms of the offer amounts to a counter offer.

But because the general rule regarding counter offers tends to inhibit commercial transactions, the courts sometimes characterize an offeree’s statement not as a counter offer, but rather an as inquiry (which does not kill the offer).

15.

A battle of the forms arises when each party claims to have entered into a contract on the basis of its own standard form document, but the parties’ documents incorporate different terms. From a time and cost-saving perspective, it makes sense for a business to use the same form for every transaction. A problem arises, however, where the offeree responds to the offeror with its own standard form containing terms that do not exactly match the terms of the offer. In that situation, the offeree is making a counter offer rather than an acceptance. A further difficulty occurs if the agreement is executed rather than executory. In that situation, the court must address the fact that the parties have already performed. In order to determine which contractual form will govern the transaction, a court will look at a number of factors, including: (i) the usual industry practice, (ii) past dealings between the parties, (iii) the precise sequence of events, and (iv) the forms (if any) that the parties actually signed. The battle of the forms was the subject of Additional Teaching Suggestions in an earlier part of this chapter.

16.

A bilateral contract is a contract in which a promise is exchanged for a promise. A unilateral contract is a contract in which an act is exchanged for a promise. A bilateral contract can be accepted by words or conduct, whereas a unilateral contract can only be accepted by the performance of a stipulated act.

17.

Silence, by itself, cannot amount to acceptance. The reason for this is to discourage individuals and businesses from foisting obligations upon people. If, however, the parties habitually create contracts on the basis of silence, or if the offeree does something that the reasonable person would interpret as acceptance, silence can amount to acceptance. That exception is especially important when a customer agrees to purchase goods that are sent to her unless she returns them within a stated period (as under a bookof-the-month club).

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18.

Instantaneous communication is any form of communication in which there is little or no delay in the interaction between the parties. Non-instantaneous communication involves a substantial delay between transmission and receipt. The difference in the form of communication is particularly relevant because it determines when and where the contract was formed. Acceptance by instantaneous communication is generally effective when and where received by the offeror. Acceptance by noninstantaneous communication, on the other hand, is generally effective where and when the offeree sends it.

19.

The statement is not true. As a general rule, non-instantaneous communications are governed by the postal rule. The postal rule states that a contract is formed when and where an acceptance letter is put into a mailbox or delivery system. If that rule applies, then it certainly is possible that the offeror will be bound to a contract, without knowing it, if the letter becomes lost. Significantly, however, the postal rule is merely a default rule. As master of the offer, an offeror can insist upon any form of acceptance.

Consequently, even if an offeror is willing to receive an acceptance letter by mail, it remains possible to say that the postal rule is inapplicable. (That intention may be express or implied.) If so, then the offeree is entitled to accept by post, but a contract will be formed only if, when, and where the offeror actually receives the letter.

20.

The first statement is correct; the second statement is incorrect.

A unilateral contract is an agreement under which, at the time of creation or formation, only the offeror has outstanding primary obligations to perform. The contract is “unilateral” precisely because only one party has duties to fulfill. The offeree also performs, of course, but that performance also comprises the stipulated act of acceptance.

When acceptance is effective and the contract comes into existence, the offeree has nothing left to do. Suppose, for example, that I say to you, “I will pay you $5000 if you walk to Calgary.” There is no contract at the outset. Moreover, there will be no contract unless and until you fully perform the stipulated act — ie walking to Calgary. A contract will come into existence only if and when you take the final step into that city. At that point, you have both accepted my offer and fully performed your part of the bargain.

Only I have an outstanding obligation to perform — ie payment of $5000 to you.

A bilateral contract is an agreement under which, at the time of creation, both parties have at least some outstanding primary obligations. A bilateral contract, in other words, involves the exchange of a promise for a promise. In the classic bilateral agreement, the parties provide offer and acceptance through words. Orally or in writing, each says, in effect, “I promise ….” The promise of performance, however, also may be communicated in other ways, including the performance of some act. For example, by walking into a restaurant and saying, “A cheeseburger and a milkshake,” I not only evince a desire for the meal, but also offer to be bound to an enforceable agreement for the provision of food. My offer is implicit in my act. Likewise, acceptance may be communicated through actions If I walk into your hair salon and silently sit in a chair while you cut my hair, I implicitly have accepted your offer to cut hair for a price. (If no price is stipulated, a court will award quantum meruit or “as much as it is worth.”)

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CASES AND PROBLEMS 1.

In a business context, there is a general presumption that the parties had an intention to create legal relations.1 That presumption, however, is rebuttable by evidence to the contrary. Just as the parties have the freedom to contract, they also are free not to contract. Although there is no magic in words, the use of a phrase like “This agreement is subject to formal contract” normally indicates that, even if the other essential elements of an enforceable agreement (eg offer, acceptance, certainty of terms, consideration) are present, the parties have evinced an intention not to be legally bound. That proposition takes on additional strength when it is used, as in this case, by sophisticated business entities who understand the significance of legal enforceability.

In determining whether the parties have a created a contract, however, a court must look at all of the circumstances. The wording of a document is important, but so too are the parties’ actions. If neither party had yet performed, it is clear that Ziggy could not have compelled DJI to fill its purchase order. The document alone would govern and it would indicate that there was no intention to create legal relations. Notwithstanding the document, however, DJI did create and deliver the requested component, and Ziggy did accept the device and pay the price. Those actions require some legal explanation. The likeliest explanation is that, despite the contentious phrase, the parties did subsequently create and fulfill an enforceable agreement. Their contract arises not from their paperwork, but rather from their behaviour. That possibility acquires support from the fact that the two companies previously had done business many times on precisely the same terms. In the absence of an overarching contract, they were not obliged to do so again in the future. An objective reasonable person, however, most likely would consider all of the facts and conclude that, as in the past, the parties chose to buy and sell computer components on the usual terms.

Any hardship that that conclusion creates for DJI’s new owners must be placed at the owners’ own feet. If they truly wished to re-draft their standard form document and revise their contractual terms, they should have directed their own workers to await their instructions before filling Ziggy’s orders.

Similarly, any windfall that Ziggy may appear to enjoy is explained by the actions of CJI’s new owners. Although Ziggy initially was informed that the apparent agreement was “subject to formal contract,” it ultimately was provided—in the usual way—with the type of component that it traditionally obtained from DJI. DJI’s conduct therefore engendered Ziggy’s reasonable expectation that there was a contract that contained on the usual terms.

[Based on RTS Flexible Systems v Muller [2010] 1 WLR 753 (UK SC)] 1

Rose & Frank Co v JR Crompton & Rose Ltd [1923] 2 KB 261 (CA).

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2.

This exercise focuses on the fact that the elements of offer and acceptance are reckoned objectively rather than subjectively. Regardless of what one or both of the parties actually had in mind, a contract exists if a reasonable person would conclude so after considering the circumstances.

The parties almost certainly had a contract under which Danuta would pay WETS to both obtain a permit and remove the tree. The trial judge in the actual case upon which this exercise is based held to the contrary. As the appeal judge explained, however, the trial judge did so by erroneously focusing on the defendant’s actual state of mind. Properly analyzed, however, it does not matter that Danuta genuinely and honestly believed that WETS would only obtain the permit on her behalf. The recognition of an offer and acceptance is determined on the basis of the reasonable person test. The trial judge therefore should have asked whether a reasonable person in the parties’ position would have believed that a contract was created.

Three factors point strongly in favour of a contract. (1) Danuta wanted not only a permit, but also tree removal services. (2) Danuta was presented with a price estimate that covered both the acquisition of a permit and the removal of the tree. (3) Companies like WETS never contract merely to obtain permits on behalf of customers.

Although it occasionally may impose a contract against the wishes or beliefs of a person life Danuta, our legal system uses an objective test of contract creation. That approach protects reasonable expectations. Regardless of Danuta’s actual beliefs, she helped to create a perception that she had contractually agreed to pay WETS to remove the tree.

WETS is entitled to enforce that reasonable expectation.

[Based on West End Tree Service Inc v Stabryla 2010 ONSC 68 (Ont SCJ)] 3.

Ronaldo will not be permitted to revoke his bid. Generally speaking, the party who makes an offer is entitled to revoke it any time before it is accepted. However Ronaldo’s bid, as a response to a call for tenders, falls under a special exception to this general rule. Since Darlington City must be able to rely on the fact that any offers it receives will remain open while they are being considered, the tendering process ensures that the offers do remain open. Under Contract A, Darlington City’s call for tenders constitutes an offer to enter into a fair and irrevocable tendering process, while Ronaldo’s bid constitutes acceptance of that offer. Having reached that agreement, the parties are obliged to adhere to its terms. As a result, Ronaldo’s bid is irrevocable. Darlington City therefore is entitled to accept Ronaldo’s bid as part of the process leading up to the creation of Contract B. If Ronaldo refuses to actually create Contract B, he can be sued for breach of contract and the City will be entitled to damages.

[Based on R v Ron Engineering & Construction (Eastern) Ltd (1981) 119 DLR (3d) 267 (SCC)—discussed below in a Case Brief]

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4.

On the facts of this case, it is important to consider four rules governing acceptances of offers. First, a contract generally does not exist until the offeree has communicated acceptance to the offeror. Second, however, the postal rule states that a mailed acceptance may be effective when and where it is put into the mail, rather than when and where it is received. Third, the offeror, as master of the offer, can dictate the manner in which an acceptance must be given. And fourth, if the offeror is silent on the issue of acceptance, the offeree is entitled to use whatever means are reasonable in the circumstances.

The crucial question in this case is whether Parktown could accept Miranda’s offer by either: (i) simply signing their acceptance to her offer to purchase, or (ii) placing their acceptance into the mail system. At first glance, it would appear that the postal rule would apply and that a contract was created on October 10 when Parktown mailed its acceptance. In support of that view, Parktown could point to the fact that Miranda did not expressly exercise her authority, as master of the offer, to insist upon actual receipt of the acceptance within the time frame.

On further reflection, however, a court would likely find that, in the circumstances, there could not be a contract until Parktown actually communicated its acceptance to Miranda.

In other words, it would prefer the general rule, rather than the postal rule. It would do so because, given the highly volatile nature of the real estate market, no reasonable person would be willing to be bound to a contract without receiving actual acceptance. That was the decision reached in Beer v Townsgate I Ltd, upon which this question was based: (1997) 152 DLR (4th) 671 (Ont CA).

5.

This question requires a consideration of the rules governing the acceptance or rejection of an offer. Birinder attempted to reject the offer by leaving a message on an answering machine. As a general rule, however, a rejection is effective only when and where it is received. Since the answering machine was broken, Singh’s Computer Shop did not receive the rejection.

As a general rule, an offer may be accepted by any reasonable means. In this case, Singh’s Computer Shop appears to have expected Birinder’s acceptance to be communicated by word (presumably through a phone call). At least implicitly, however, they also allowed acceptance to occur through conduct — ie Birinder’s use of the laptop.

The saleswoman specifically said that the unit could not be used until Birinder had decided to purchase it. As a corollary of that statement, she also implicitly said that if he used, he would be taken to have accepted her offer to sell.

If a court found that neither the rejection on the answering machine, nor Birinder’s acceptance through the use of the laptop, were effective, then the offer would have been killed when Birinder went to the shop and explained to the saleswoman that he did not want the computer. However, even if that was true, he would be held liable in tort for having used the computer without permission. Moreover, while the claim might lie in trespass, it would likely amount to a conversion. If so, then the remedy is, in effect, a

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forced sale. Birinder would have to pay the market value of the computer, and in exchange, he would receive title to the unit. The end result would therefore be the same.

6.

Ahmad’s promise was a firm offer, but not an option. A firm offer is a gratuitous promise to hold open an offer. Since it is gratuitous, in the sense that it is not supported by consideration, it is not enforceable. Ahmad therefore was entitled to revoke his firm offer prior to acceptance. The situation would have been different if Ahmad had given his promise in exchange for consideration. In that situation, Felicity would have effectively purchased an option – that is, the right to accept the offer within the promised period of time. Ahmad therefore would not have been entitled to revoke his offer to sell the land.

And since he sold the land to a third party, he would have breached his contractual promise to hold the offer open for Felicity’s acceptance.

Felicity nevertheless could argue that while Ahmad was legally entitled to revoke his offer, he did not do so in a timely manner. An offer is susceptible to acceptance (and hence to the creation of a contract) as long as it has not been terminated. Ahmad did not effectively terminate the offer by revocation prior to Felicity’s acceptance because he did not reasonably draw that fact to her attention. She faxed her acceptance letter to him before he informed her of the sale to the third party. In response, Ahmad would argue that, regardless of revocation, his offer naturally terminated through the lapse of time. An offeror can stipulate the length of time during which an offer is open. But even if he does not do so, the law states that an offer is only open for a reasonable length of time. The issue of reasonableness depends upon all of the circumstances, including: (i) the nature of the contract, (ii) the stability of the market, and (iii) the usual industry practice. The question probably does not contain enough information for students to arrive at a conclusive answer. They would, nevertheless, be expected to identify the relevant factors.

To succeed in her claim, Felicity would have to overcome Dickinson v Dodds (which was discussed in Ethical Perspective 7.1). The facts of this case may be distinguishable from those in Dickinson because Felicity faxed her letter of acceptance to Ahmad before learning that the property had been sold to a third party. In Dickinson, in contrast, the offeree knew of the third party sale before actually providing the purported acceptance.

Finally, whether or not Felicity succeeds in her action against Ahmad, students should appreciate that while firm offers are not legally enforceable, they generally should be honoured. A business person’s reputation will be damaged to the extent that promises – even gratuitous promises – are broken.

7.

Following the case upon which this exercise is based, Mack Darin probably is not guilty of any crime. Granted, any sensible lay person would say that Darin had offered a switchblade for sale. As a general rule, however, an advertisement or a store display constitutes not an offer, but rather an invitation to treat. The offer instead is made by the customer, who offers to buy an item. The store is then free to accept or reject that offer.

The rule is designed to protect business from becoming over-exposed to liability. If every advertisement and display constituted an offer, then a storekeeper might receive

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acceptances than out-numbered existing stock and thereby become liable for breach of contract.

[Based on Fisher v Bell [1961] 1 QB 394 (CA)] 8.

Simone’s acceptance of Olaf’s offer on October 21st by mail formed a valid and enforceable contract governed by the laws of British Columbia. Even though Simone likely received Olaf’s revocation before he received her acceptance, the rules governing non-instantaneous communication state that an offer and a revocation of an offer are only effective when and where they are received. An acceptance, in contrast, generally is effective when and where it is sent. Because Simone sent her acceptance prior to receiving Olaf’s revocation, a contract was formed before Olaf purportedly (and ineffectively) withdrew his offer.

[Based on Byrne v Van Tienhoven (1880) 5 CPD 344.]

9.

The courts generally assume that an agreement reached in a commercial context is legally enforceable, whereas one reached between family members is not. These presumptions can be disproved with evidence to the contrary. Since Edgar offered to transfer the clear title to Tina and Hussein, it appears that he intended for the agreement to be legally binding.

Edgar’s offer may be interpreted as pertaining to a unilateral contract. In exchange for Tina and Hussein’s payment of the monthly mortgage instalments, Edgar promised that they could live in the house and that he would transfer the title into their name.

Acceptance of a unilateral contract is not effective until the stipulated act is complete.

Normally, the offeror is entitled to revoke his offer any time before acceptance. In this type of case, however, the court would want to protect Tina and Hussein’s reasonable expectations. It might do so by finding two unilateral contracts. The primary contract would involve Edgar’s promise to transfer the title to Tina and Hussein if they fully paid the mortgage. The secondary contract would involve Edgar’s promise to not revoke his offer once Tina and Hussein began paying. As such, Edgar would not be entitled to revoke his offer. Since an offeree does not have any obligations under a unilateral contract, Tina and Hussein would not have to pay the full mortgage once they began making instalment payments.

Because of the difficulties associated with the revocation of an offer to create a unilateral contract, courts often prefer to find an offer of a bilateral contract instead. On that view, at the outset, Edgar promised to eventually transfer title to the house, while Tina and Hussein promised to pay the mortgage. Although the preference for a bilateral contract is often appropriate, it would create its own difficulties in this situation. It would mean that Tina and Hussein were contractually obliged to pay the mortgage. They might well prefer a flexible approach to a unilateral contract that allowed them to pay the mortgage and obtain the house, but that did not require them to do so. (Although the courts enjoy some flexibility in interpreting the facts, the choice between a unilateral contract and a bilateral contract technically turns upon the offeror’s intention.)

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[Based on Errington v Errington [1952] 1 KB 290 (CA) and Dawson v Helicopter Exploration Co [1955] 5 DLR 404 (SCC)—discussed below in Case Briefs] 10.

For Arvid’s letter to qualify as an offer, he must have intended that the proposed agreement would be enforceable in law. The test for determining whether there was an intention to create legal relations is whether a reasonable person, viewing the circumstances as a whole, would believe that the parties intended that the agreement would be legally binding. In addition, the courts usually assume that an agreement reached in a commercial context is legally enforceable, whereas one reached in a social context is not. Despite their past intimacy and Arvid’s secret desires for a future romance, viewed objectively, it is likely that a court would consider the offer to be a business arrangement that was intended to be legally binding.

Even though both Dora and Arvid firmly believed that they had formed a valid and enforceable agreement, coincidental beliefs are not enough to form a binding contract.

The offeree must actually communicate acceptance to the offeror. In this case, since Dora never told Arvid of her intention to join his company, the parties did not form an enforceable agreement. Moreover, the courts have developed the rule that silence, by itself, is not acceptance. Arvid will not be able to show that he and Dora habitually did business in this way, or that Dora did anything that the reasonable person would interpret as acceptance. Arvid, then, is incorrect to insist that a contract had been created and that Dora was his employee.

[Based on Felthouse v Bindley (1862) 142 ER 1037 (Exch)—discussed below in a Case Brief] 11.

In this case, a judge must consider two broad issues to determine whether Ekaterina’s counter offer was still open when Rasheed purported to accept it. First, a judge must consider the effect of Naima’s involvement. Since Naima was not authorized to act for Rasheed, her communications with Ekaterina are irrelevant. In any event, Naima did not purport to accept or reject Ekaterina’s counter offer. Moreover, although Naima suggested that the deal would not have to be closed immediately given Rasheed’s planned use of the property, it is doubtful that that statement would constitute a counter offer by introducing a new term of the agreement. Naima’s statement is not inconsistent with Ekaterina’s desire to close the deal quickly. There could be a lag between closing of the sale and commencement of farming.

The second broad issue that a judge must consider is whether Ekaterina left her counter offer open for a reasonable period. An offeror is entitled to limit the life span of an offer, for example by stipulating that acceptance must occur within a certain period. If no specific time period is expressly stated, as is the case here, an offer is only open for a reasonable period. In determining whether 10 days amounts to a reasonable period, a judge will look at: (i) the nature of the proposed contract, (ii) the volatility of the market, and (iii) the usual practice in the industry. On balance, the following factors will outweigh the fact that the rural Saskatchewan farm market had not been particularly

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active in recent years: (i) Ekaterina asked Rasheed to respond without delay, (ii) there was another interested party, and (iii) Rasheed’s original offer asked that she quickly reply by fax or telegram, which shows that, even though he did not require the land until March, he too wanted to complete the transaction quickly. Since a reasonable period would have lapsed, Ekaterina’s counter offer was no longer open when Rasheed purported to accept it.

[Based on Barrick v Clark [1950] 4 DLR 529 (SCC)—discussed below in a Case Brief] 12.

This case turns on the applicability of the postal rule. The postal rule states that an offer (of a new contract or renewal of an old contract) occurs when and where an acceptance is placed into a mailbox. If that is true in this instance, then the insurance policy was renewed as soon as SRB placed its envelope into a mailbox. MLA is liable even though it never received that letter.

The postal rule, however, is merely a default rule. It does not always apply to posted acceptances. And in this case, the terms of the insurance indicate that acceptance, through payment of the premium, is effective only if and when it actually reaches MLA’s Head Office in Halifax. Since SRB’s letter was lost in the mail, there was no acceptance and hence no renewal of the contract. MLA therefore is no required to pay a benefit to Connie Fikowski upon her husband’s death.

[Based on Saskatchewan River Bungalows Ltd v Maritime Life Assurance Co (1994) 115 DLR (4th) 478 (SCC).]

CASE BRIEFS Balfour v Balfour [1919] 2 KB 571 (CA)—note 5 The parties were a married couple. The husband was required to from England to Ceylon for work. On medical advice, the wife decided to stay behind. Before leaving, the husband promised to pay £30 per month to the wife. At the time of that agreement, the relationship was in good order and both parties expected that she would join him in Ceylon a short while later. After the husband went abroad, however, the marriage deteriorated and the parties formally separated. The wife then tried to enforce the husband’s promise. The Court of Appeal refused. It held that within a family context, there is a presumption that the parties did not intend to create legal relations. In support of that view, it suggested that the enforcement of promises within a domestic relationship would both open the floodgates to litigation and improperly interfere with “private” matters. Interestingly, the courts have held that the general presumption does not apply with respect to an agreement that a married couple creates after separating: Merritt v Merritt [1970] 2 All ER 760 (CA). In that situation, the parties are considered adverse to each other’s interests. It is also interesting to note that Canadian courts have extended the general presumption to same sex couples: Luoma v Anderson (1986) 50 RFL (2d) 127 (BC SC). The rule is based on the nature of the relationship, rather than the parties’ sexual orientation.

Rose & Frank Co v JR Crompton & Rose Ltd [1923] 2 KB 261 (CA)—note 6

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The parties were sophisticated businesses. They entered into a series of contracts for the purchase and sale of paper products. Their last agreement contained a clause that expressly said: “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts.” The defendant supplied some of the product that the plaintiff ordered, but refused to deliver the rest. The plaintiff sued for breach of contract. The trial judge held that the agreement was a contract and therefore was capable of supporting an action for breach. He said that the quoted clause was repugnant to the rest of the document, which clearly created an enforceable agreement. On appeal, Scrutton LJ held that there is a general presumption in commercial matters that the parties did intend to create legal relations. However, he also held, in light of the key clause, that that presumption was rebutted on the evidence. Even commercial parties are entitled to enter into an agreement that is binding only in conscience and that cannot be enforced in the courts.

Jones v Padavatton [1969] 2 All ER 616 (CA)—note 7 A woman persuaded her daughter to become a law student by promising to support her during her studies. The daughter agreed. The mother then bought a house in the city where the daughter was studying and promised the daughter that she could: (i) live rentfree, and (ii) collect rent from other tenants in the building. Subsequently, however, the mother tried to claim possession of the property while the daughter was still studying.

The issue was whether the parties had created an enforceable contract. If so, the daughter was entitled to enforce it by remaining in occupation of the premises. The court held that both parties had given consideration – the mother by promising to let the daughter use the house and the daughter by promising to study for the bar. It also held that family members can create enforceable agreements. The general rule in Balfour v Balfour is rebuttable. On the facts, however, the court concluded that the parties intended that the agreement would be binding in conscience only. The mother therefore was entitled to assert possession of the building despite her (unenforceable) promise to the contrary.

Toronto-Dominion Bank v Leigh Instruments Ltd (Trustee of) (1999) 178 DLR (4th) 634 (Ont CA)—note 8 Plessey Company plc had a subsidiary company named Leigh Instruments Ltd. Leigh wished to obtain a line of credit from the Toronto-Dominion Bank for $45 000 000.

Worried that Leigh may not be able to repay the loan, TD asked Plessey to provide a guarantee. Plessey repeatedly refused to assume a legal obligation for Leigh’s debt. It did, however, provide the bank with a series of documents that contained the disputed sentence It is our policy that our wholly owned subsidiaries, including [Leigh] be managed in such a way as to be always in a position to meet their financial obligations….

Leigh subsequently ran into financial difficulties and defaulted on repayment of the line of credit. TD then demanded repayment from Plessey. The dispute turned on the proper interpretation of the quoted sentence. Plessey insisted that it merely provided comfort letters and that the relevant sense meant that it was Plessey’s policy that Leigh be managed by Leigh itself so as to be able to meet its own obligations. TD, in contrast, argued that the letters constituted an enforceable agreement under which Plessey’s policy

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was that Plessey would ensure that Leigh was managed in such a way as to repay its debts. The bank buttressed that argument by saying that the letters would be pointless if they did not create legal obligations, and that Plessey cannot be believed to have engaged in a pointless exercise.

The Ontario Court of Appeal held in favour of Plessey. The circumstances amply demonstrated that Plessey was not willing to assume legal liability for Leigh’s debt. All of the parties were sophisticated commercial actors who knew the difference between legal and moral obligations. Finally, to find in favour of Plessey was not to render the letters pointless. Though not legally enforceable, comfort letters are practically significant because they import moral obligations. A reputation for honesty and for fulfilling undertakings—both legal and moral—is very important in the business world. A comfort letter accordingly increases the likelihood that the drafter will act as promised.

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (CA)—note 9 Stores in England traditionally did not operate on a self-serve basis. A customer would not pick up items from the shelves and bring them to the cashier. Instead, a sales representative would provide requested items to the customer from behind a counter.

After the war, however, an increasing number of self-serve stores began to open. This case demonstrates the occasional need for the law to take account of new ways of doing business. It also demonstrates that changes in society, and changes in the way that business is done, often create competing interests.

Under legislation, certain types of drugs could only be sold under a pharmacist’s supervision. The defendant’s drug store operated on a self-serve basis. Customers were allowed to wander the aisles, pick up items off the shelves, and proceed to the cashier.

The cashier’s station was within sight of the pharmacist, who supervised all drug sales.

The plaintiff was a national pharmaceutical organization that was opposed to the proliferation of self-serve drug stores, primarily on the basis that such operations detrimentally affected the commercial opportunities that were available to its members.

The seemingly simple question was: when is a contract of sale created? The plaintiff argued that the display of an item on a shelf is an offer and that a customer accepts that offer by placing the item in a shopping basket. If that was true, then the defendant was in breach of the legislation because the contract was not created under a pharmacist’s supervision, but rather in the store’s aisles. The defendant, on the contrary, argued that the display of an item on a shelf is merely an invitation to treat. The customer makes an offer to purchase by taking the item to the cashier, who then either accepts or rejects the offer. If that was true, then the statute was not breached because the sale took place at the cashier’s station, which was located next to the pharmacist.

The court adopted the defendant’s view and held that the statute had not been breached.

On policy grounds, the court was motivated by a desire to support the proliferation of self-serve stores, which were much more convenient for customers. And on practical grounds, the court said if the plaintiff’s view prevailed, such that a contract was created

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as soon as a customer placed an item in a shopping basket, then the customer would later be prevented from changing his or her mind by returning the item to the shelf. After all, once a contract is created, it cannot be unilaterally terminated.

Blair v Western Mutual Benefit Association [1972] 4 WWR 284 (BC CA)—note 11 The essential facts are provided in the text accompanying note 11.

R v Ron Engineering & Construction (Eastern) Ltd (1981) 119 DLR (3d) 267 (SCC)— note 16 The defendant wanted a building project completed. It therefore called for bids or tenders from interested construction companies. That call carried certain stipulations: (i) it required bids to be accompanied by a $150 000 “deposit” cheque, (ii) it said that all bids were irrevocable after the close of tenders – ie after the deadline for receiving bids, (iii) it said that a “deposit” cheque would be forfeited if a bidder withdrew its tender within 60 days after the close of tenders, and (iv) it said that the successful bidder would be required to create a contract for the actual construction project within 7 days of being notified that it submitted the winning bid.

The plaintiff submitted a bid and a deposit cheque. A short time later, after tenders had closed, it realized that it had made a mistake when it calculated the expected costs of completing the construction project. As a result, its bid was substantially lower than it should have been. The plaintiff claimed that the defendant therefore could not accept the erroneous bid. (The plaintiff did not purport to revoke or withdraw its offer, for fear of forfeiting its deposit.) The defendant refused to disregard the bid and, in fact, later announced that the plaintiff had submitted the winning bid. When the plaintiff refused to create a contract for the building project within 7 days, the defendant relied on the terms of the call for tenders and refused to return the plaintiff’s cheque for $150 000.

The question was whether the plaintiff company was bound by the stipulations and rules that the defendant set out in its call for tenders. There were at least two possible views.

On the first view, the defendant’s call for bids was merely an invitation to treat. The plaintiff’s submission of a bid was an offer. The defendant accepted that offer when it announced that the plaintiff’s bid was the lowest one received. However, if that is correct, then no contract came into existence until the defendant accepted the plaintiff’s bid. And if that is true, then following the general rule, the plaintiff should have been entitled to revoke its offer any time before acceptance. Hence, there would not actually have been any contract.

That approach is unacceptable, however, because, depending upon the circumstances, it could expose both parties to an unreasonable risk. Generally speaking, a company that submits a bid wants some assurance that the selection process will be fair. It certainly would not want to incur the substantial expense of preparing a bid, only to later learn that the party that made the call for tenders did not even follow its own rules regarding the acceptance of winning bids. At the same time, the party that calls for tenders wants some assurance that it will have a proper opportunity to consider all of the bids. It does not want to be exposed to the risk that bidders will withdraw part way through the process.

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For those reasons, Estey J in the SCC formulated the rules regarding Contract A and Contract B that are discussed in the text. That approach is not invariably applied. It does, however, provide a mechanism through which all parties have some assurance that the bids will be considered fairly and in accordance with the rules announced by the party that called for tenders.

MJB Enterprises v Defence Construction (1999) 170 DLR (4th) 577 (SCC)—note 16 The defendant issued a call for tenders. The call documents stated that (1) each bidder must state a single price, and (2) as a result of a privilege clause, the defendant was not required to accept the lowest price.

The plaintiff submitted the lowest single price bid. The defendant, however, selected another bid, in which the price was stated in terms of a formula, rather than a single price.

When the plaintiff sued for breach of Contract A, the defendant invoked the privilege clause and argued that it was not required to accept the lowest bid.

The Supreme Court of Canada held in favour of the plaintiff. It reached that conclusion on the basis of several propositions. First, just as Contract A may arise expressly or by implication, so too it is possible for a court to imply certain terms into a Contract A that does arise.

In this case, the Contact A contained an implied term that only compliant bids would be accepted. No reasonable business would go the trouble and expense of creating a bid without an assurance that everyone was playing by the same rules. In this case, that meant that the defendant could accept only a bid that stated a single price.

The court reconciled that finding with the privilege clause that the defendant expressly included in its call for tenders. The privilege clause stated that the defendant need not select the lowest price. The objective purpose of that clause is to allow the defendant to consider factors beyond a simple price (eg a bidder’s reputation for reliability, a bidder’s experience). That clause is necessary because the defendant would no want to be locked into a low bid if it had reasonable grounds to believe that the bidder might not be able to complete the project at the promised price.

Turning to the facts, the court held that the defendant did breach Contract A by selecting a non-compliant bid (ie a bid that was not stated as a single price). It further held that the privilege clause was irrelevant to the dispute because that clause could not transform a non-compliant bid into a compliant bid.

Butler Machine Tool Co v Ex-cell-O Corp [1979] 1 All ER 695 (CA)—note 19 The defendant wanted to buy equipment from the plaintiff. The plaintiff sent a document that quoted a price of £75 000. Writing on the back of that document said that the sale was subject to the plaintiff’s own standard terms. Those terms included a price escalation clause (ie although the price was stated to be £75 000, it would be increased if, before delivery, the plaintiff’s own costs increased). The defendant received that document and

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replied with its own document. The defendant’s document said that the sale was subject to its own standard terms. Those standard terms did not include a price escalation clause.

The defendant’s document also contained a tear-away slip that the plaintiff was asked to sign and return to the defendant. The plaintiff signed and returned the slip. At the same time, it sent a letter that reiterated its original price of £75 000, but that did not refer to the escalation clause. The plaintiff later delivered the equipment and then claimed an additional payment under the price escalation clause. The defendant, in response, said that that clause was not part of the contract.

The question was whether a contract was completed on the plaintiff’s terms, the defendant’s terms, or neither. The majority of the Court of Appeal adopted a traditional approach and held that a contract is created only if one party’s acceptance mirrors the other party’s offer. On that view, the plaintiff made an offer that contained a price and an escalation clause. The defendant replied with a counter offer that included a price, but not an escalation clause. The plaintiff accepted that offer by returning the signed strip and by referring to the price, but not the escalation clause. The parties were therefore ad idem on the issue of price.

Lord Denning MR concurred, but on more flexible grounds. He said that the courts have a strong desire to find a valid contract, especially if an agreement has already been performed. He also said that the proper approach depends upon all of the circumstances.

In some situations, the party who fires the last shot wins. In other words, the contractual terms are the last ones that are proposed. In other situations, the party who fires the first shot wins. That might be true if the subsequent shots contain terms that are unusual or substantially different. In such circumstances, the subsequent party’s terms do not prevail unless they are specifically drawn to the initial party’s attention. And finally, it is sometimes appropriate to formulate the terms on the basis of all of the shots taken together. And if that fails to produce an answer, the court may be entitled to simply impose reasonable terms.

Tekdata Interconnection Ltd v Amphenol Ltd [2010] 1 Lloyd’s Rep 357 (CA)—note 19 Rolls-Royce required a certain widget for the manufacture of jet engines. It acquired those widgets through a supply chain. Rolls-Royce purchased from Goodrich, Goodrich purchased from the plaintiff, and the plaintiff purchased from the defendant. Although the various parties could have done so, they did not create an overarching, multi-party agreement. Instead, the supply chain consisted of a series of individual contracts between each set of parties. That system worked well enough for many years. It eventually broke down, however, when the plaintiff became dissatisfied with a widget that it obtained from the defendant.

Rolls-Royce informed Goodrich that it required another widget. Goodrich contacted the plaintiff. The plaintiff contacted the defendant by, as usual, sending a “Purchase Order.”

That document stated (1) certain terms, favourable to the plaintiff, regarding delivery date and quality of goods, and (2) that the terms of the Purchase Order governed the contract.

After receiving the Purchase Order, the defendant responded with its own standard form document, entitled an “Acknowledgement.” The defendant’s document did not reflect the

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plaintiff’s terms. Instead, it stated that (1) the defendant was entitled to the protection of a broad exclusion clause, and (2) the defendant’s terms governed the contract.

Some time later, the defendant shipped the widget to the plaintiff. The plaintiff accepted the goods, but later complained that delivery was late and that the widget was defective.

A dispute then arose between the parties. Neither party argued that there was no contract.

Each instead argued for a contract on its own terms. There was a “battle of the forms.”

The trial judge recognized that the orthodox approach states that there is no contract unless the parties to agree to the same terms. However, the judge also said that, in appropriate circumstances, it was possible to adopt Lord Denning’s view in Butler and to simply formulate the best conclusion after considering all of the facts. The trial judge then decided, for two primary reasons, that the parties ought to be treated as having created a contract on the plaintiff’s terms. First, the plaintiff’s terms were preferable because they required the widget to meet certain high standards. Because the widget was to be used in a jet engine, public safety favoured the terms that offered protection.

Second, the trial judge was substantially influenced by the fact that the defendant did not immediately argue that its own terms should prevail. It instead made that argument only when it served its Statement of Defence upon the plaintiff. The trial judge accordingly held that the parties could not be treated as having agreed to the defendant’s terms.

The Court of Appeal strongly disagreed. Most importantly, it rejected Lord Denning’s broad and flexible approach to the creation of a contract in the context of a battle of the forms. Almost without exception, the orthodox rules of offer and acceptance govern, even in a battle of the forms. Some other, more flexible approach is possible only if the parties — by means of their documents and conduct — demonstrate that they are willing to depart from the orthodox rules. There was no such evidence on the facts.

The Court of Appeal accordingly held that a contract had been created on the defendant’s terms. The trial judge erred in creating the contract that would have been desirable, rather than recognizing the contract that the parties actually created. It was irrelevant that the public would be better protected under the plaintiff’s terms. The parties themselves, by words and conduct, showed that they were agreed upon the defendant’s terms.

Finally, the Court of Appeal was unimpressed with the fact that the defendant did not make the technical legal argument (that its own terms prevailed) until its lawyers drafted the pleadings. Very often, Longmore LJ explained, business people respond to a dispute by trying to find a business solution. The search for a legal solution arises only if, business negotiations having failed, lawyers become involved.

Prior to Tekdata, Canadian courts not infrequently relied upon Lord Denning’s analysis in Butler in order to find a contract. Of course, Butler was not binding precedent. Neither is Tekdata. It therefore remains open to Canadian judges to follow Lord Denning notwithstanding the English Court of Appeal’s criticisms of the holistic approach to the recognition of a consensus ad idem. A Supreme Court of Canada judgment is needed on

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point, either to re-affirm the orthodox approach (along the lines of Tekdata) or to authoritatively allow recourse to Lord Denning’s looser model.

Felthouse v Bindley (1862) 142 ER 1037 (Ex Ch)—note 21 A misunderstanding arose during negotiations for the sale of a horse. The plaintiff, who wished to buy the animal, thought that the price was £30. The defendant, who wished to sell the animal, though that the price was 30 guineas. (Prior to the decimalization of the pound sterling in 1970, a guinea was equal to one pound plus one shilling. Today, it would be equal to £1.05.) The plaintiff offered to split the difference. He wrote a letter to the defendant saying, “If I hear no more about him, I’ll consider the horse mine at £30 15s.” The defendant did not respond to that offer, and it later sold the horse to another person. The plaintiff then sued the defendant in conversion claiming that he had already bought the horse. The court disagreed. It held that a contract cannot be foisted upon an offeree and that mere silence does not constitute acceptance.

Rolling v Willann Investments Ltd (1989) 63 DLR (4th) 760 (Ont CA)—note 23 An agreement created in 1974 stated that Willann enjoyed “the first right to meet any offer to purchase that [Rolling] may receive” on a certain property. It further said that Willann “shall have 72 hours from the date such offer is delivered to it by [Rolling] within which to exercise this option by submitting ... an offer on terms identical to those contained in the first mentioned offer. Failing which this option shall terminate and [Rolling] may accept such first mentioned offer.”

In 1989, Rolling sent a fax to Willann that contained an offer received form a third party.

More than 100 hours later, Willann submitted an identical offer to Rolling. An issue arose as to whether Rolling was obliged to sell the property to Willann. Willann admitted that while its offer was not received within 72 hours, as required by the agreement. It argued, however, that Rolling had not complied with the terms of the agreement either because he had delivered the third party’s offer by way of fax — a form of communication that the parties had not contemplated in 1974.

The Ontario Court of Appeal held that Rolling was entitled to rely on a faxed communication. Consequently, since Rolling had complied with the option agreement, he was entitled to insist upon a timely reply by Willann. And since Willann did not respond within 72 hours, Rolling was not obliged to sell the property to him. Robins JA explained: While it is true that the parties to the option agreement could not have anticipated delivery of a facsimile of the offer by means of a telephone transmission at the time the agreement was executed, they did not limit or restrict or, indeed, specify the way in which delivery was to be made for the purposes of their agreement.

The purport of the agreement is that Willann is to be placed in receipt of a copy of the offer and is to exercise his option within a specified time following receipt.

The manner in which delivery is to be made in order to place Willann in receipt of the document is of no real importance. What is important is whether and when

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Willann was in fact put in receipt of the offer or, put another way, whether and when the document was in fact delivered to him.

Where technological advances have been made which facilitate communications and expedite the transmission of documents we see no reason why they should not be utilized. Indeed, they should be encouraged and approved. Nothing is to be gained in the circumstances of this case in requiring an attendance at Willann’s offices to deliver the documents, and Willann suffered no prejudice by reason of the procedure followed. In our opinion, the transmission of a facsimile of the offer for the purpose of effecting delivery is not in violation of the option agreement. It follows that Willann properly received delivery of the offer. For whatever reason, the company failed to exercise its option within the strict time period granted by the option agreement and, consequently, has no existing rights under that agreement.

Nova Scotia v Weymouth Sea Products Ltd (1983) 149 DLR (3d) 637, aff’d 4 DLR (4th) 314 (NS CA)—note 24 Under the Instalment Payment Contracts Act RSNS 1967, c 147, a seller had to be licenced in order to enter into contracts made “within the province” of Nova Scotia. An offer for the sale of property in Nova Scotia was sent by courier to an offeree outside of the province. The offeree sent an acceptance back by way of courier. The question was whether the contract was made “within the province” and therefore was caught by the statute. The court said that the postal rule for acceptance applies equally to regular mail and to letters sent by courier. Consequently, the contract was formed when and where the offeree sent an acceptance by courier – outside of Nova Scotia. The legislation did not apply.

Saskatchewan River Bungalows Ltd v Maritime Life Assurance Co (1994) 115 DLR (4th) 478 (SCC)—note 26 The plaintiff company was owned by Mr and Mrs Fikowski. That company obtained an insurance policy of Mr Fikowski’s life. The terms of the policy stated that annual renewal could be achieved by payment to the defendant insurance company’s head office in Halifax by July 26. An envelope, containing a cheque and a request for renewal, was placed into a mailbox in a timely manner. Unfortunately, that letter never reached its destination. The insurance company sent several “late payment due” notices, but because the Fikowskis did not check their mailbox on a regular basis, they were ignorant of the problem for many months. When the Fikowskis finally appreciated the circumstances, they attempted to tender payment, a year late, in order to renew their policy. By that time, however, Mr Fikowski had been diagnosed with a terminal disease. He died a short time later. Mrs Fikowski and the plaintiff company then sued the insurer, demanding payment of a benefit under the policy.

The dispute largely turned on the doctrine of waiver or promissory estoppel. (Mrs Fikowski unsuccessfully argued that the insurance company was barred from complaining about the late payment of the premium.) The root of the dispute, however, turned on the fact that the postal rule did not apply in the circumstances. Although the

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insurance company was willing to receive acceptance by post, it was not willing to bear the risk of lost acceptances. It therefore displaced the presumptive postal rule by stipulating that acceptance was effective only if and when it arrived at its head office in Halifax.

R v Clarke (1927) 40 CLR 227 (HCA)—note 27 Two police officers were murdered. The state of Western Australia offered a reward of £1000 for information leading to the arrest and conviction of the culprits. Clarke heard of the offer. However, by the time that he later provided information to the police, he had forgotten about the reward. He had been motivated to contact the police not by the promise of money, but rather by a desire to clear his own name. When the actual culprits were subsequently apprehended, Clarke tried to claim the reward. The court refused because, inter alia, there was no consensus ad idem at the relevant time. Clarke had not acted with the intention of accepting the offer, about which he had forgotten.

Dawson v Helicopter Exploration Co [1955] 5 DLR 404 (SCC)—note 28 The plaintiff was a prospector who had information regarding a potential claim in northern BC. He disclosed that information to the defendant, an exploration company.

The defendant replied with a letter that offered to pay the plaintiff a 10 percent interest in any claim that he helped the defendant to find. The plaintiff agreed to that arrangement.

Some time later, the defendant said that it could not go through with the plan. At an even later date, however, the defendant explored the area in question and staked a claim exclusively for itself. The plaintiff then claimed damages for breach of contract. In response, the defendant argued that its offer was for a unilateral contract, rather than a bilateral contract. And on that view, no contract was ever created because the plaintiff never actually performed the requisite act of acceptance by helping the defendant to find a claim.

The SCC held in favour of the plaintiff. The court said that there is a presumption in favour of bilateral contracts, rather than unilateral contracts. It based that decision on policy grounds. Technically speaking, a unilateral offer can be revoked any time before the offeree fully accepts. Consequently, while the offeror’s position is protected, the offeree is vulnerable to being frustrated after partially completing an act of acceptance. In contrast, a bilateral contract equally protects both parties. Since the contract is created immediately upon the exchange of promises, neither party can unilaterally withdraw from the arrangement. On the facts, the court said that the presumption applied and that the defendant’s offer was for a bilateral contract. Moreover, the plaintiff had accepted that offer. Although the plaintiff had not expressly said words to that effect, the situation was “instinct with obligation.” The plaintiff effectively promised to try to guide the defendant to a claim and the defendant effectively promised to pay a 10 percent interest in any claims that were found. The defendant breached that contract by refusing to cooperate in the performance of the agreement.

Errington v Errington [1952] 1 KB 290 (CA)—note 29 A man bought a house on credit. He paid £250 and promised to pay the remainder of the price over time under a mortgage. He then promised the plaintiff, his daughter-in-law,

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that she would be entitled to the house if she met the mortgage payments. The plaintiff regularly made the payments. However, after the man died, the defendant, his widow, purported to revoke her husband’s offer and evict the plaintiff. The widow argued that a unilateral contract is not created until the stipulated act of acceptance has been fully performed. And since the plaintiff had not yet paid the entire mortgage, she had not yet fully accepted the deceased’s offer. The court disagreed with that approach. It held that the plaintiff was not required under the unilateral contract to actually make the payments.

However, it also said that the deceased’s offer could not be revoked while the plaintiff was in the process of accepting. An offeree of a unilateral contract must allow the offeree the opportunity to fully perform.

Ayerswood Development Corp v Hydro One Networks Inc (2004) 39 CLR (3d) 288 (Ont SCJ)—note 30 The defendant announced a program that was designed to conserve energy. It offered to pay a certain amount of money to contractors who constructed new buildings that contained certain energy-saving features. The offer was said to expire on 31 March 1993.

As the defendant realized, a contractor would not be in a position to apply for the program until it had completed its design plans for a building. And as the defendant also knew, the drafting of such plans is an expensive exercise.

The plaintiff intended to apply to the program and therefore incurred the cost of drafting building plans that met the defendant’s specifications. Before the plaintiff could actually file its application, however, the defendant purportedly cancelled the program. The plaintiff ignored that purported cancellation and filed its application before 31 March 1993. It then demanded payment.

The court held that the defendant had offered a unilateral contract. The defendant argued that, as offeror, it was entitled to revoke its offer anytime before complete acceptance — ie anytime before a contractor actually submitted an application. The court rejected that argument. It held that the offeror of a unilateral offer cannot frustrate an attempt at acceptance by withdrawing the offer while an offeree was in the process of accepting.

The court did not, however, specifically explain how or why that obligation arose.

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