October 27th, 2020

Signed, Sealed and Delivered

What is a Contract?
A legal contract is an agreement between two parties that involves an exchange of rights and obligations enforceable in court[1]. The law recognizes the autonomy of individuals to create a sort of private law between themselves to regulate their own conduct in the free market. Originally, this meant upholding “freedom of contract” and the intent of the parties, regardless of imbalances in bargaining powers or external notions of fairness. The powers that be quickly realized that humans are not quite robots, and as such, this strict interpretive approach did not endure. In modern times, contracts are interpreted using several doctrines and depending on the facts of a particular case, different weights will be given to a particular doctrine. It can sometimes be a challenge to predict the outcome of this more holistic approach to interpretation, which is why “legalese” is often employed in the drafting of contracts. These are not mere magic incantations, but instead an attempt by competent solicitors to establish greater certainty in the agreement while also respecting the limitations imposed by law and public policy.
 
Elements of a Contract
In a nutshell, a contract roughly consists of five core elements: Offer, Acceptance, Consideration, Legality, and Capacity. An offer is one person’s communication to another of a willingness to enter into a legally binding agreement under specific terms[2]. Acceptance is a final, unqualified expression of assent to terms of an offer[3]. Consideration refers to the fact that promises under contract need to be “bought” or “bargained for” by an act or promise of the other party[4], ensuring an exchange of value. Alternatively, a contract signed under seal may not require consideration[5]. Legality means that a contract made for an illegal purpose or otherwise forbidden by statute will be void even if it conforms to the other elements[6]. Finally, capacity refers to the legal and mental ability to execute a contract, such as not being a minor[7].
 
Some Key Doctrines

Reasonable Person: A time tested tool for “objective” interpretation. The standard of a reasonable person is often used in different areas of law to analyse a dispute through some level of objectivity. A reasonable person is a mythical creature of the law who is not too prudent but also not reckless, is more careful than most people (and hence more careful than the average person), and consciously makes decisions accounting for the consequences of their actions[8]. It is used to determine the objective intent of contracting parties and other objective factors in a dispute.
 
Privity: The general rule from English common law is that a person who is not a party to a contract cannot have obligations or liabilities imposed on them. This part is rather uncontroversial. However, the general rule also provides that a person who is not a party to a contract cannot acquire enforceable rights under said contract. In an employment context, this second part has led to some harsh consequences, and as a result, an exception was made allowing employees to benefit from an immunity or limitation of liability granted to an employer if certain conditions are satisfied[9].
 
Honest Performance: All contracts have an implied duty of honest performance. This means that parties should not act in bad faith when performing under the contract. It does not necessarily mean acting in good faith. Respect for freedom of contract and the pursuit of economic self-interest must be weighed against the merits of judicial intervention. It is not the role of the judge to scrutinize the motives of contracting parties and enforce ad-hoc morality. Therefore, honest performance must be anchored to something objective for the court to assess[10]. This doctrine is especially relevant in employee termination, and insurance contracts.
 
Short Application[11]
Take Ursula’s contract with Ariel in the Disney rendition of The Little Mermaid. As you can imagine, there are several issues with its enforceability, but only a few need to be highlighted to make the invalid in its entirety.
 
Capacity: Ariel was a minor at the time, meaning that terms are unlikely to be enforced on her
Legality: One cannot make a contract that could lead to eternal servitude of an individual
Honest Performance: Clear attempts to undermine the performance of a counterparty to achieve a certain result under the contract would fall foul of the duty of honest performance
 
Conclusion: This contract is not enforceable in Canada. The fact that it was enforceable in Atlantica raises serious doubts about Sebastian’s confident remark that life is indeed “better down where it’s wetter… under the sea”. Don’t be like Ursula, draft proper contracts for your business venture.

Author: João Victor Lima is member of the BLG Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.

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[1] CED (online), Contracts I.1, Contracts | I — Basis of Contract | 1 — Contract Defined, §1
[2] Strench v. Strench (2002), 2002 CarswellBC 695 (B.C.S.C.)
[3] CED (online), Contracts II.3, Contracts | II — Formation of Contract | 3 — Acceptance, §50
[4] CED (online), Contracts III.1, Contracts | III — Consideration for Contract | 1 — General, §102
[5] CED (online), Contracts III.1, Contracts | III — Consideration for Contract | 1 — General, §103
[6] CED (online), Contracts VIII.1, Contracts | VIII — Substantive Illegality in Contract Law | 1 — Illegality, §434
[7] CED (online), Contracts IV.2.(a).(iii), Contracts | IV — Parties to a Contract | 2 — Capacity to Contract | (a) — Natural Persons | (iii) — Infants (Minors) — Provinces Other than British Columbia
[8] Vaughan v Menlove (1837) 132 ER 490 (CP)
[9] London Drugs Ltd v Kuehne & Nagel International Ltd [1992] 3 SCR 299
[10] Bhasin v Hrynew 2014 SCC 71
[11] Clements, R., & Musker, J. (Directors). (1989). The Little mermaid [Motion picture]. United States: Buena Vista Pictures Distribution, Inc.