Commercial Law

ADMN 1306
with
Prof. Peter Mazzacano

10/12/24 1
 Contract Law (Part
Week 3 2): Consideration
and Intention
Today’s Agenda:

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 Contract Law (Part 2)
LEARNING OBJECTIVES
To examine such questions as:

What other essential elements must be

present for a contract to exist?
What is the nature of consideration?
What is the difference between
consideration and a gratuitous promise?
What are the presumptions regarding the
intention to create a legal relationship?
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 Requirements of a Valid
Contract
Consensus (offer and acceptance)
Consideration
Intention
Capacity
Legality
Writing (if required by statute)

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 Consideration & Intention
to Create Legal Relations
The acceptance of an offer leads to an
agreement. Before an agreement is binding in
law, it must have two primary elements:
 1. Consideration
 2. Mutual intention to create legal relations

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 Consideration & Intention
to Create Legal Relations
Which of the following, if any, is a contract?
1.Betty offers to give a book to Lou. Lou
accepts.
2.Betty offers Lou the book in exchange for
Lou’s promise to pay twenty-five dollars. Lou
accepts.
3.Betty offers to give Lou the book if Lou
promises to pick it up at Betty’s house. Lou
agrees. 6
 Consideration in History
In ancient Roman law consideration was not
usually necessary when forming contracts
In most Civil Law countries (e.g., Europe,
Asia) consideration is not required
In most Common Law jurisdictions,
consideration is required

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 The Meaning of
Consideration
Consideration is the price that one party pays
for the promise of another (something for
something or a bargain)
A gratuitous promise is one without
consideration
For example, a charitable pledge
Gratuitous promises are not legally binding
under contract law
A promise of forbearance may be sufficient
consideration
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 Adequacy of
Consideration
Valid consideration must be:
Specific but not necessarily adequate
With reference to present/future promises
Not “past consideration”
A promise to pay additional money for a pre-
existing obligation is not enforceable

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 Motive vs. Consideration:
Past Consideration
Motive cannot change a gratuitous promise
into a binding contract, nor can it reduce a
binding promise into a merely voluntary
obligation.
If one person promises to reward another
who has previously done an act gratuitously
or given something of value, the promise is
not binding. That promise is gratuitous—for
“past consideration” is no consideration at
all.
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 Relation Between Existing Legal
Duty and Consideration (1 of 2)
• Where A has an existing contractual duty to B, a
later promise by B to pay A something extra to
perform that obligation is not binding.
• Performance by A is not good consideration for
the later promise because A was already
contractually bound to perform
• Possible to exact a legally enforceable promise
from a customer to pay an increased price by
delivering a paperclip (or any other item of
token value) to him/her in return for the
promise, or by insisting that the customer make
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the promise under seal
 Relation Between Existing Legal
Duty and Consideration (2 of 2)
If the second agreement resolves some
uncertainty or dispute over the entitlements
arising from the pre-existing contract,
Canadian courts will find the subsequent
contract has consideration
Clarifying an unclear term in a long-term
contract, in order to create certainty and to
avoid future costly disputes, enures to the
parties’ mutual benefit, and is something of
value that flows from and to each contracting
party. It thus serves as a functional form of
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consideration
 Break
10 minutes

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 Gratuitous Reduction of a Debt
The rule in Foaks v. Beer says that if you
agree to forego a part of someone's debt to
you, it's a gratuitous promise which isn't
binding.

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 Gratuitous Reduction of a Debt
Agreement to accept less than the amount
owning is a gratuitous promise
Binding only if:
Before the due date
Under seal
Made by a third party
Five provinces (including Ontario) have
legislation binding the creditor who accepts
lesser payment in full satisfaction of the debt
owing
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 Request for Goods or Services
A request for goods or services creates an
obligation to pay a reasonable price
Quantum meruit

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 The Use of a Seal
The use of a seal eliminates the requirement
of consideration
The seal must be placed on the document at
the time of signing
Business tender – offer under seal becomes
irrevocable like an option

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 Intent to Create Legal Relations (1
of 2)

Intention is presumed in commercial

situations
The presumption may be rebutted
Reasonable bystander test
Parties may agree to not have their
agreement enforced by the courts

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 Intent to Create Legal Relations (2
of 2)

Contract formation requires a “meeting of the

minds” on all the essential terms which means
the parties words and conduct show an
intention to contract from the view of an
objective reasonable bystander
In the commercial context, disputes over
intention often arise when negotiations are
concluded orally with a written contract to be
produced after the fact. Is there an intention
to contract at the conclusion of the oral
negotiations or not until the written document
is signed? 19
 Strategies to Manage the Legal
Risks
Parties must be clear about their intentions to
contract.
Standard form contracts may be used to
acknowledge the existence of consideration.
Out of an abundance of caution, the signature
line will have the symbol of a seal beside it and
be prefaced with the phrase “signed, sealed and
delivered”.
Businesses managers should be aware of
exemption clauses as a means of limiting
liability, and choice-of-forum clauses redirecting
the dispute away from the courts. 20
 Chapter 7, Case 3, p. 160
What arguments may be made on behalf of the
town both to keep the money paid and to
require Autotech to honour its commitment?
What do you think the decision would be?

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Questions?

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For Next Week (Week 4)
Midterm Exam 1

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