What Should an Entrepreneur Know: Basic Concepts of Contract Law

What Should an Entrepreneur Know: Basic Concepts of Contract Law
 
At some point in the life of every start-up business, entrepreneurs will ask one variation or another of this question: “can I get a contract that achieves this?” Sometimes, this question is presented as an action plan, “I want to have an employment agreement!” At times, it is given as a matter of fact, “we already have a contract.” Whether a contract does exist, however, depends on whether the purported agreement meets the requisite legal elements of a contract. Since contracts proliferate every aspect of a business, entrepreneurs can benefit from understanding some basic concepts of contract law.
 
What is a contract?
While specific types of contracts are used for a variety of purposes, a contract is in essence a legally enforceable agreement between two or more parties to do something or refrain from doing something.
 
What are the essential elements of a contract?
Every contract must satisfy three elements: offer, acceptance and consideration. In all cases, courts will look at whether there was a meeting of the minds; that is, if the parties have a common understanding of the contract.

• Offer: An offer is an expression of one party’s (the offeror’s) intention to enter into a contract on certain terms. It demonstrates the offeror’s willingness to be bound if the offer is accepted by the other party (the offeree). An offer may be expressed by word or conduct, as long as such expression communicates the offer to the offeree. An offer must also contain specified terms; a vague expression of interest when the offeror is trying to test the waters is not an offer. Whether something constitutes an offer must be objectively determined in light of all the surrounding circumstances: would a reasonable person regard the particular communication or conduct as an offer?
• Acceptance: The offeree’s acceptance of the offer must be unequivocal. The acceptance must express the offeree’s unconditional willingness and unreserved assent to the terms proposed by the offeror. Any variation of the terms (such as a counter-offer) is a rejection of the offer. Acceptance can be express or implied by conduct or silence, and must in either case be communicated. Sometimes an offer may stipulate a particular method of communicating acceptance (for example, by specifically requiring a signed acceptance and rejecting other modes of communication); in such a scenario, only the prescribed method is effective for communicating acceptance. Similarly, if an offer prescribes a deadline for acceptance, acceptance must be within the time. If an offer does not prescribe a deadline, the offeree must communicate acceptance within a reasonable time.
• Consideration: Consideration is the value that the parties exchange. A common form of consideration is money paid in exchange of services, but consideration can also be given in refraining from an action. Courts generally enforce only contracts that are made under seal or supported by consideration, not gratuitous promises. Consideration has been described as “some right, interest or profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”.

 
What circumstances might vitiate a contract?
There are several scenarios under which courts may declare a contract to be void or unenforceable.

• Misrepresentation: Misrepresentation occurs one party makes a material statement of fact that turns out to be false.  The false statement must go toward a material fact, which is determined objectively: would a reasonable person be influenced by the misrepresented fact to enter into the contract? The misinformed party may be able to rescind the contract on the basis that it was induced to enter into the contract by misrepresentation.
• Mistake: Mistake can arise in different situations; there may be a mistake in assumption, a mistake as to the terms of the contract, a mistake as to the identity of the contracting party (often in the context of fraud) or a mistake in recording the parties’ agreement in the written document signed by the parties.
• Duress, Undue Influence, Unconscionable Transactions: A contract may also be void on the basis that the circumstances under which the parties entered into the contract demonstrate that one party was taking advantage of the other. Duress refers to threat that coerces the will of the party into entering the contract. Undue influence may exist where the relationship between the parties had the potential for one party to place trust and confidence in the other, and the transaction was unfair. Unconscionable transactions refer to substantially unfair bargains involving parties in unequal positions such that the stronger party could take advantage of the weaker party.

 
As always, there are exceptions to the concepts outlined above. The different considerations that must go into the formation of a contractual relationship constitute only one of many reasons that entrepreneurs should seek legal advice at the outset. This blog post canvasses only the most basic concepts of contract law concerning the validity of a contract. Stay tuned for another blog post on some common terms in a commercial contract.
 
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Tiffany Bennet is a 3rd year law student at the University of Calgary. She is enrolled in the BLG Business Venture Clinic, where she assists clients under the supervision of corporate lawyers from Borden Ladner Gervais LLP.