The digital age has created a variety of new issues related to contract formation… did you know that emojis can indicate an intention to enter a contract? In a case out of Israel called Dahan v Haim, a prospective tenant communicated with a landlord about renting an apartment. He expressed this through a text message involving a smiley emoji, a dancer emoji, and a champagne emoji, amongst others. The landlord relied on the positivity of the message and believed that the tenant would indeed rent the apartment. However, the renters never signed the contract and ultimately disappeared. The landlord subsequently sued, and the judge concluded that while the emojis did not create a binding contract between the parties, they did indicate the renter’s optimism, and that their use led the landlord to believe that the renters were interested in his apartment.
While the purposes behind having a contract in place may not necessarily be complicated, understanding how a valid contract is formed can be. So how do you know if you have formed a contract?
With these concerns in mind, this blog post breaks down the essential components of an enforceable contract and highlights best practices to bear in mind when entering into one.
Contract basics
Simply put, a contract is an agreement, between two or more parties, that is legally enforceable. Generally, contracts outline the rights and responsibilities of the parties involved, any costs associated with the agreement, and processes for what happens if the contract is terminated or broken.
To create a legally enforceable contract:
- all parties to the contract must have capacity;
- there must be an exchange of an “offer” and an “acceptance”. This is usually referred to as (mutual agreement); and
- something of value must be exchanged. This is known as consideration.
Capacity
A valid contract must be entered into by two or more people who have legal capacity. For this reason, minors (those under the age of 18) and people who are mentally incapable, cannot enter into most contracts, because they do not have legal capacity.
What if someone enters into a contract while in a state of drunkenness, or while high? The Supreme Court has previously held that if that person is intoxicated to the point that they have lost capacity, the contract is not automatically void. Current case law explains that in order for the incompetent person to back out of they contract, they must show that they were incapacitated to the point that they could not understand the terms of the contract and the effect of it on their interests. They must also show that the other party to the contract knew that they were incompetent – if the other party did not know, acted in good faith, and did not take advantage of the incapable individual, the courts are not likely to interfere.
Mutual consent
If the parties have the necessary capacity and authority, then a contract is formed when one of these parties provides an offer or proposal that is accepted by the other party. The offer itself can be oral or written.
Consideration
Consideration is something of value that must be exchanged between the parties in the creation of a valid contract. Think of consideration as the benefit that each party gets, or at least expects to get, out of the contract.
Consideration can take any of the following forms:
- a monetary payment;
- a promise to do something; or
- a promise to refrain from doing something.
Recent examples of consideration in Ontario case law include:
- formation of a partnership agreement (Aly v Nader Halal Meat Inc)1;
- money, such as $1,900.00 (Marjadsingh v Walia)2. In this example, two individuals were involved in a car accident. They agreed that the guilty party would give the injured party $1,900.00, and in return, the injured party would not bring any further action in court. This was found to be an enforceable contract, with valid consideration.
The following have not been seen as valid consideration by the Ontario courts:
- A requirement for mediation and mandatory arbitration (Goberdan v Knights of Columbus)3. In this case, the contract required mandatory arbitration for disputes and prevented the person signing the contract from suing the other party. Since the loss of the right to sue was not beneficial to the signing party, it was not considered valid consideration.
- Continued employment (Theberge-Lindsay v 3395022 Canada Inc.).4 In this case, an employer required their employee to sign a contract limiting her employment rights, in order to continue to be employed in their practice. The employee did not receive anything of benefit from signing the agreement other than continued employment. This was not considered to be valid consideration.
Can a contract be made orally?
Is a contract still valid if it is agreed to orally, without actually having written down anything? Usually, yes. One exception is that the Statue of Frauds requires contracts related to transferring an interest in property, such as purchase agreements and leases, to be in writing.
If an agreement has not been made in writing, the courts will assess it to determine whether what the parties said and did actually indicates that they intended to be bound by the agreement.5 For the contract to be valid, it must be established that there was clear agreement on the essential terms of the intended contract.
Recently, the Ontario Superior Court addressed an oral agreement regarding the division of an Estate. The Court noted that when an agreement is made orally, additional factors must be present, including (a) certainty regarding the essential terms of the agreement, and (b) the intention to create a legally binding agreement.6
For the court to find that this intention was in fact present, there must be a “meeting of the minds” between the parties. A “meeting of the minds” is established when it would be clear, to a reasonable bystander, that the parties intended to contract with each other, and that the essential terms of that contact were reasonably certain.
Can a contract be signed electronically?
Yes. Ontario’s Electronic Commerce Act, 20007 provides that electronic signatures are equivalent to original signatures.8 Please note, some small exceptions do exist.
Emails and contract formation
In the modern age of digital communication, it is important to recognize how email communications can create issues related to contract formation. In 2015, in Vancouver Canucks Limited Partnership v Canon Canada Inc.,9 the British Columbia Court of Appeal found that a binding contract had been made through an exchange of emails, despite the fact that no formal contract was ever signed. The court found that the parties both held intentions to create a binding contract, the contract was not a condition precedent, and there was an agreement on all essential terms, resulting in the formation of a contract.
A similar decision was made by the Ontario Superior Court of Justice in 202010, where the court held that emailed negotiations for the purchase of shares constituted a binding and enforceable contract. No formal agreement was drafted or signed, but the parties negotiated via email, phone and a term sheet that was sent back and forth between the parties. A voicemail was also left by one of the parties, agreeing to the last terms sent to them via email. The court decided that this was enough to create a binding contract.
Best practices
When negotiating, reading, or signing a contract:
- be careful of email communications that may result in a legally binding, enforceable contract;
- be mindful of any oral communications;
- always confirm the authority and capacity of the other party to an agreement;
- carefully review the terms of any offer.
Should you have any questions about general contract formation, or more specific contract-related issues, please reach out to a member of the Siskinds’ Business Law Group.
Special thanks to Zohra Bhimani, who helped research this article.
5 Cutts v Alterra Property Groupt Ltd., 2013 CarswellBC 3229 (BCSC).
6 Spencer v Hutchings 2022 ONSC 1555 at para 34.
7 S.O. 2000, c. 17.
8 Section 11(1).
9 2015 BCCA 144.
10 Ruparell v J.H. Cochrane Investments Inc. et al., 2020 ONSC 7466.