Many everyday situations involve contracts. You enter into a contract when you buy a pair of shoes, hire a babysitter, or rent a car. Given how common contracts are in our daily lives, it’s helpful to know how contracts are created.
A contract needs three elements to be valid
A contract is a legally recognized agreement made between two or more people (called “the parties”). If one of the parties fails to do what it promised, the other can ask a court to enforce the contract.
To be valid, a contract needs these three elements:
- agreement: the parties must agree or have a “meeting of the minds” on the terms
- consideration: there must be an exchange of something of value to each party
- intention: both parties must intend the agreement to be legally binding
1. The parties must come to a "meeting of the minds" on the terms
To form a contract, the parties must come to an agreement or a “meeting of the minds” on the essential terms. The agreement is formed by one party making an offer to another party of certain terms and the other party freely indicating their acceptance of those terms.
This can be done in a number of ways. There can be verbal negotiations resulting in agreement. There may be an exchange of emails in which the parties agree on something. Or it can happen without any real formalities, as when you buy something from a shop. By presenting the goods and your money to the shopkeeper, you are offering to buy the items, and by taking your money, the shopkeeper is accepting your offer.
The offer must be capable of being accepted by the other party simply by indicating acceptance. A generic “for sale” sign on a used car is not an offer, as it doesn’t spell out terms that would need to be agreed to (such as price). Instead, it is an “invitation to treat”, which is an invitation to the general public to make an offer on an item.
Up until an offer is accepted, the person making it can withdraw it at any time. But if the offer is not withdrawn, it becomes binding as soon as it is accepted.
The acceptance of the offer may consist of words or acts, but it must be an acceptance of the offer as made. A response to an offer that makes any material change in the terms of the offer is not an acceptance; it is a counteroffer.
“While visiting a flea market, I saw a shirt I liked, but thought the $50 price tag seemed expensive. I made an offer to the seller to buy the shirt for $30. The seller told me the shirt was mine for $40. I said I’d take it.”
– Virginia, Salmon Arm
In the language of contracts, the $50 price tag on the shirt Virginia bought was an “invitation to treat”. In response to Virginia’s offer to buy the shirt for $30, the seller made a “counteroffer” to sell the shirt for $40. The seller’s response made a material change to Virginia’s offer, changing the price. When she accepted the seller’s counteroffer, the two had a valid contract for the sale of the shirt for $40.
2. There must be "consideration"
Making a contract involves an exchange of something of value to each party. Most often, one person pays money to another in exchange for a good or service. But money doesn’t have to be involved. As long as both parties give up something of value, they can make a valid contract. Whatever is given or paid is called consideration.
“My friend Steven was looking to sell his car. I was interested, but didn’t have the money. We agreed that in exchange for the car, I would walk Steven’s dog every day for one year. Unusual, yes, but it’s a valid contract; I’m providing something of value in exchange for the car!"
– Emily, North Vancouver
In the language of contracts, Emily was providing something of value—the service of walking Steven’s dog—in exchange for the car. They had made a valid contract.
Although there must be something of value exchanged in order for a contract to be created, the exchange doesn’t need to be even. What is paid by one party need not be comparable in value to what the other party is giving. There can still be a contract, for example, when a person rents out a room in their house to a friend for a nominal amount like $10 per month. As long as there is an exchange of something of value to each party, the contract will typically be enforceable.
If a contract is prepared by a lawyer or notary, it can be made “under seal”. A contract made under seal doesn’t need consideration to be binding. If a contract is made under seal, it can still be binding even if one party doesn’t receive anything of value. A contract is said to be sealed when the parties show an intention to sign it under seal. This might be shown by attaching a wax seal to the contract or including a clause saying that the contract is "signed, sealed and delivered by the parties".
3. Both parties must intend to be bound by the agrement
Not all agreements are contracts. For an agreement to be legally enforceable as a contract, both parties must intend to be bound by their promise.
This intention will rarely be stated explicitly but will usually be able to be inferred from the circumstances in which the agreement was made.
For example, offering a friend a ride in your car is not usually intended to create a legally binding relation. But consider if you agree with your friend to drive them to work on a regular basis in exchange for the friend paying you $20 each week towards the fuel and maintenance costs of the car. Here, the law is more likely to recognize that a contract was entered into.
Who can make a contract
Can anyone make a contract?
No. Each party to a contract must have the mental capacity to make the contract. Mental capacity means that you have to understand what is in the contract. It also means that you understand what effect the contract will have on you.
Can a company make a contract?
Yes. A party to a contract can be an individual or an incorporated entity (like a company or a society). In law, "person" includes incorporated entities in addition to individuals. If a party to a written contract is an incorporated entity, like a company, the company’s name must be written correctly in the contract:
- at the top where the parties are named,
- throughout the contract where the things each party is agreeing to do are described, and
- at the end where the parties sign.
For example, if you have a company for your website design work, it is your company and not you personally that would enter into contracts to design websites.
How old you have to be to enter into a contract
A person of any age can enter into a contract in British Columbia. But special rules apply if a person under age 19 (called a “minor” under BC law) enters into a contract.
A contract cannot be enforced against a minor. There are some exceptions:
- if the contract provides the minor with the “necessaries” of life—services that are vital to the minor’s health or welfare,
- if on reaching age 19, the minor affirms the contract (that is, agrees to be bound by it), or
- if within one year of reaching age 19, the minor partially performs the contract or doesn’t “repudiate” the contract (that is, doesn’t reject it).
If none of these exceptions apply, a minor isn't responsible for keeping up their end of any contract they enter.
On the other hand, a minor can enforce a contract against an adult party to the contract.
“I agreed to paint my neighbour Harold’s fence this summer for $200. Then my family organized a big summer trip to Europe. My dad told me that because I’m 17, I could get out of the contract to paint the fence without any penalty. Because I’m a minor, I could enforce the contract against Harold, but he can’t enforce the contract against me."
– Jordan, Chilliwack
Jordan’s dad is right. The contract between Jordan and his neighbour Harold is legal. It is enforceable by Jordan against Harold; if Harold later changed his mind and said he didn’t want Jordan to paint the fence, Jordan could insist that Harold honour their contract.
But because Jordan is a minor, the contract is not enforceable by his neighbour Harold. Jordan can later change his mind and say he doesn’t want to paint the fence, and the contract would be cancelled. (Note that Harold would not have to pay Jordan any money if Jordan had not started on the painting at the time he cancelled the contract.)
Most contracts don't have to be in writing
In most cases, a contract doesn't have to be in writing to be valid. In fact, most of the everyday contracts we make, such as buying a ticket for a movie or going to the hairdresser, are not put in writing. If the elements of a contract are present, a verbal agreement is just as legal and binding as a written one.
A contract is the agreement between people; a written document is usually just proof of the agreement.
However, some kinds of contracts must be in writing. For example:
- When real estate is involved, all agreements must be in writing. An agreement to buy and sell a home must be in writing, and so must the mortgage that makes the purchase possible.
- Contracts containing a guarantee must be in writing. A guarantee is an agreement where one party agrees to pay the debt of another person if that person defaults on the debt.
- A “distance sales contract” must be in writing. This kind of contract is one that is entered into not in person (for example, online or over the phone) and there is no opportunity to inspect what you are buying.
- A door-to-door sales contract, known under the law as a “direct sales contract”, must be in writing.
- A payday loan agreement must be in writing. Payday loans are small, short term loans—for $1,500 or less, that must be repaid within 62 days, when the borrower receives their paycheque or other income.
A contract can be made by email
Agreements made in emails can be valid contracts. It makes no difference if the agreement is set out on paper or in an electronic format. As long as the elements of a contract are present, a contract can be made by email.
Step 1. Do your research
Before making a contract, gather information from credible sources on the product or service involved. For example, if you’re buying a car, try the Canadian Black Book or AutoTrader.ca to learn the average price of the vehicle models you are considering.
Read reviews from trustworthy sources. Consumer Reports is an independent, non-profit source of product reviews.
If you’re hiring a service provider such as a contractor or tradesperson, ask for the names and phone numbers of people they have worked for in the past. Phone these references and ask them: what was the quality of the work, was it done on time, and was it within budget?
Contact the Better Business Bureau serving your area to find out what they know of the service provider or company you’re thinking of doing business with.
See what other people are saying about the service provider or company by searching online for their name and the word "reviews" or "complaints".
Step 2. Negotiate with confidence
When you make an offer to the seller or other party, say it with confidence. Be polite and reasonable, but firm.
It’s common for the parties to go back and forth with changes to an agreement until they are both satisfied with what is in it.
Step 3. Have a written contract
Even when the law doesn’t say that you have to have a written contract, you should have one if you are exchanging something that is worth a substantial amount of money. For example, a written contract is a good idea if you are:
- buying or selling a car
- hiring someone to do home improvements
- buying or selling an electronic device
If a problem arises, you can go back to the written contract rather than argue over “who said what” when the agreement was reached.
A contract doesn’t have to be pages long and full of legal terminology. In fact, it’s better if the contract is concise and in language all parties understand. See our tips on how to write a legal contract.
Step 4. Read and understand any contract
Read the fine print on any contract before you sign. Don’t take the signing of this document lightly.
- Go over every section of the document, including any text on the reverse side of printed pages.
- Ask the other party to explain what things in the agreement mean if you don’t understand them.
- Fill in all areas of the document or put a line through them if there are blank spaces.
Step 5. Don't rush the decision
If the other party makes a counteroffer to your original offer and you’d like to think about it, that’s OK. You can simply stop the deal if you feel like you’re being pressured into paying too much or buying additional features.
My friend promised to give me a $100 gift. Is this an enforceable contract?
Usually not. The general rule is that a promise to give something in exchange for nothing would be considered a gift under the law. The legal principle of consideration requires both parties to an agreement to give up something of value for the agreement to be enforceable. Your friend agreed to give up $100, but you have not agreed to do anything in return. As a result, your friend’s promise is unenforceable.
However, if you relied on your friend’s promise to your detriment, then you might be able to enforce your friend’s promise. For example, let’s say your friend promised to give you a $100 gift so that you could buy a cellphone, and you relied on the promise, went to the store and bought a $100 cellphone. You might be entitled to enforce your friend’s promise, as you relied to your detriment on his promise in just the way your friend should have foreseen.
Does a counteroffer cancel out the previous offer?
Yes, a counteroffer cancels out the previous offer. It is then up to the other person whether they want to accept the counteroffer, making a contract, or not.
Let’s say a car dealer offers to sell you a used car for $12,000. You say yes, but only if the car passes an independent inspection. You have made a counteroffer. If the car dealer rejects your counteroffer, there is no contract. The previous offer made by the dealer to sell you the car for $12,000 without the inspection no longer exists. It is not available to be accepted, unless the dealer makes it again.
Is an estimate a binding contract?
It depends. An estimate is a business’ best guess as to how much certain work will cost. Whether an estimate is a binding contract depends on the intention of the parties and whether the estimate is reasonable.
Relevant factors to determine the parties’ intention include:
- whether cost is of overriding importance to the party receiving the estimate
- whether the party receiving the estimate relied on it
- the relative expertise of the parties
When an estimate is found to be a binding contract, there is recognition that estimates are a best guess and not precise. A margin of error of 10% to 20% is commonly applied. In other words, if a contractor estimated a home renovation would cost $10,000, the margin of error could see the contractor invoice $11,000 or even $12,000 and stay within the margin of error.
Note that regardless of whether an estimate is considered to be a binding contract, it is an unfair practice for a business to provide an estimate that is materially less than the final bill—unless you agree to the higher price before the work is done.
An estimate is a business’ best guess as to how much certain work will cost. The end price could be less—or more. Whether an estimate is a binding contract depends on the intention of the parties and whether the estimate is reasonable. When an estimate is found to be binding, a margin of error of 10% to 20% is commonly accepted.
A quote is when a business promises to do work at an agreed price. If you accept a quote, the business can’t charge you more than the agreed price. It is a legally binding contract.
Can people make a contract to do something illegal?
No. A contract that is for an unlawful purpose or is prohibited by law is not enforceable. For example, a contract made with the intent of harming someone is not enforceable.