A legally
binding agreement
between two or more
capable persons for
consideration or
value, to do or not
to do some lawful
and genuinely
intended act. A
contract can contain
any number of
promises or terms to
be performed by
either party. The
underlying intention
of any contract is
that it shall be
binding on the
parties.
Persons:
While contractual
promises are
enforceable against
anyone having legal
capacity, some
persons are deemed
by law as either
incapable of
contracting or
having only limited
capacity to
contract. In cases
involving limited
capacity, the
contract is usually
considered voidable;
that is, the
contract is valid
until the individual
goes to court to
void it. As long as
the person of
limited capacity
allows the contract
to exist, it may not
be voided. Some
examples of those
with limited
capacity to enter a
contract include:
Minors
(those under the
age of
majority),
Mentally
incompetent
persons,
Intoxicated
persons or
persons
incapable of
understanding
the nature of a
contract by
virtue of
excessive use of
drugs or
chemicals, and
Illiterates
In the case of
minors, each
province has
legislation
concerning the age
at which a person is
considered an adult.
For example, in
Ontario, Manitoba,
and Saskatchewan,
the age is 18. In
Nova Scotia, persons
under 19 are
considered minors or
infants.
The capacity of
parties extends
beyond persons and
requirements may
vary by province.
The following is
provided for
descriptive purposes
only.
Corporations:
Usually has the
rights, powers, and
privileges to enter
into contracts
concerning the
purchase and sale of
real property unless
specific
restrictions are
located in the
articles of
incorporation or the
corporation has not
enacted empowering
provisions in its
by-laws. Two
important cautions
are required
concerning
corporations
involved in
acquisition or
disposition of real
estate. First, does
the corporation
exist and secondly,
does it have the
right to enter into
such contracts?
Partnership:
Normally provides
under provincial
legislation that any
partner may bind the
other partners in a
transaction during
the ordinary course
of business.
Condominiums/Co-operatives:
Permitted to enter
into contracts for
the purchase and
sale of real
property in line
with incorporation
documents or
statutory
regulations limiting
the scope of such
organizations.
Non-Profit
Organizations:
Have the rights,
powers, and
privileges to enter
into contracts for
the purchase and
sale of real
property. For
example,
incorporation
documents of a real
estate board often
specifically mention
the right to acquire
and dispose of real
estate.
If the object of
the contract is
illegal by statute
or common law, the
contract will be
void and
unenforceable in the
courts. For example,
a contract would not
be considered lawful
if the acquisition
involved criminal
activity or was a
direct violation of
competition policy
(Competition Act) or
deliberate evasion
of taxes (Income Tax
Act). In such
instances, the
contract would be
totally void.
Examples of
illegality or no
lawful object would
include contracts:
Contrary to
public policy or
good morals;
Injurious or
prejudicial to
the safety of
the state or to
the public
service;
Tending to
pervert justice
or abuse the
legal process;
In restraint of
trade such as
price fixing;
In restraint
of personal
liberty or
marriage; and
For the
commission of a
criminal offence
or civil wrong
or relating to
gambling or
wagering (unless
authorized by
means of
provincial
statutes).
Often, buyers
and sellers believe
that a sale made on
a Sunday is illegal
and void. The
Supreme Court of
Canada held that the
particular section
of the Lord’s Day
Act relating to this
issue was
unconstitutional in
view of the Canadian
Charter of Rights
and Freedoms.
What each party
receives or is to
receive in exchange
for promises to act
in a certain manner
and is something
that is given by a
promise to a
promisor to make the
promise binding. The
essence of a valid,
binding contract is
the idea of a
bargain between the
parties. The bargain
is the consideration
of a contract and
may consist of an
act in return for an
act, a promise in
return for a
promise, or an act
in return for a
promise. As a
result, each side
receives something
from the other. In
real estate
transactions,
consideration
usually takes the
form of a promise
from the seller to
sell in return for a
sum of money to be
received from the
buyer. Consideration
is best viewed in
terms of the
following four
headings.
Value:
What either party
receives must have
some value.
Interestingly, the
court does not
assess the adequacy
of this value, but
only its existence.
Sometimes,
practitioners
misunderstand the
concept of valuable
consideration. This
does not mean that
the consideration
given has some
extraordinary worth
associated with it.
The courts are only
interested that it
exists. Of course,
if the consideration
was so minimal as to
make the contract
one-sided, the
courts might act
based on the
unconscionability of
the agreement.
Further, the court
might review the
adequacy of the
consideration if
undue influence,
fraud, duress, or
misrepresentation
exists.
Lawful:
The best explanation
is by example. If
the buyer and seller
knowingly agree to
transact business
based on stolen
money or goods, the
contract does not
have lawful
consideration.
Past
Consideration:
To quote an old
phrase: Old
consideration is no
consideration. For
example, the buyer
of a cottage enters
into an agreement to
purchase a cottage
for $85,000.
Subsequent to that
agreement, the
seller mentions that
he will include the
boat. No
documentation is
prepared and no
consideration is
given. At closing,
the boat has been
removed by the
seller. As
consideration does
not exist and past
consideration
($85,000) did not
include the boat,
the buyer does not
have an enforceable
contract concerning
the boat.
Seal:
A contract can be
made binding without
consideration if a
seal is used. Where
a promise is made
under seal, no
consideration is
required since the
law presumes the act
of sealing replaces
consideration.
Therefore, in the
case of an
agreement/contract,
if legal seals are
affixed at the time
of signing, no
consideration is
required. This is
only valid if the
parties are clearly
aware of the legal
effect that a seal
has on the contract.
The ancient
method of sealing by
wax and swearing a
solemn oath has been
replaced in modern
legal practice by a
variety of methods
to indicate that the
document has been
signed under seal.
Generally, the
courts will now
accept anything from
red wafers to
preprinted or hand
written seals as
long as it is clear
the parties signing
knew, or were
directed to the
fact, that they were
signing under seal.
Also, the legal seal
of a corporation
does not perform the
same function,
valuable
consideration is
still required,
unless legal seals
are also present.
While, in many
instances, the
corporate seal is
unnecessary for
signing documents,
any document signed
on behalf of a
company under its
corporate seal and
indicating the
authority of the
person signing by
inserting that
person’s position
above the signature
would be good
business practice.
If a corporate seal
is not used, the
following words
should be used:
I have the
authority to bind
the corporation.
The act of
placing a mark or
symbol on a document
is evidence and
assurance of the
intent to carry out
promises contained
therein. A sealed
document provides
added confirmation
of intent of the
parties to perform
an
agreement/contract.
Under old
conveyancing law, an
official seal was
often used as a
substitute for
consideration. Where
a promise is made
under seal, no
consideration is
required since the
law presumes that
the solemn act of
sealing replaces
consideration.
A contract is
formed when the
offer (made by the
offeror), is
accepted by the
other party (the
offeree). The
following items are
general rules
concerning basic
requirements for an
offer. The offer:
Must be
complete and
definite in its
terms.
Must be made
to one or more
persons or
corporations, or
to the public at
large.
Must remain
open for
acceptance for a
reasonable
period of time.
May be
revoked or
withdrawn prior
to acceptance,
subject to
certain
limitations.
Must be
communicated to
the offeree.
The acceptance
of the offer is
based on four
requirements. The
acceptance must be:
Unconditional.
Communicated
to the offeror.
Made in the
manner required
by the offeror.
Made within
the time
required by the
offeror.
Where the
communication of
acceptance is
permitted by mail,
telegram, or fax,
such acceptance is
deemed to be
completed upon the
letter having been
mailed, the telegram
sent, or the fax
transmitted. The
contract is binding
even if the letter,
telegram, or fax is
not received.
Further, if an offer
is made in the form
of a promise upon
the performance of a
future act, the
process of carrying
out that act can
constitute
acceptance.
The
agreement must be
genuine and give
more than the
outward appearance
of a contract. In
other words, one of
the parties may have
been induced to
enter into the
agreement by
improper means and
the document does
not express what was
intended.
Inducements by
improper means are
caused by four
different
circumstances.
Mistakes:
The term mistake is
narrowly defined for
contract purposes.
The courts will not
declare a contract
void simply because
of a mistake of the
parties. Three types
of mistakes are
normally considered:
A common
mistake in which
both parties
make the same
mistake: that
is, each is
mistaken about
some underlying
fundamental
fact;
A mutual
mistake in which
the parties
misunderstand
each other and
are at cross
purposes; and
A unilateral
mistake in which
one of the
parties is
mistaken
concerning a
fundamental
character of the
contract.
Misrepresentation:
A false statement or
assertion made by
one party to the
other, before or at
the time of
contracting, with
regard to some
existing fact,
matter, or
circumstance
affecting the
contract.
Misrepresentations
are viewed as
innocent,
fraudulent, or
negligent.
Duress
or Undue Influence:
Duress occurs when a
person does not act
with his/her free
will, but instead
through fear of
personal suffering.
Undue influence is
the improper use of
one person’s power
over another to
induce that person
into a contract.
Following are
selected examples
that might fall
under undue
influence.
One party
is knowledgeable
and experienced
while the other
is ill-informed
and
inexperienced.
A gift is
made by a child
to an adult,
guardian, or
ward; a
beneficiary to a
trustee; a
patient to a
doctor; a person
to a spiritual
advisor; or, a
client to a
solicitor.
A real
estate
salesperson
purchases
property from
his/her client.
The person
appearing to have
exerted undue
influence must prove
that the transaction
was reasonable and
fair and that no
advantage was gained
due to his/her
position. The fact
that the person
claiming undue
influence received
independent legal
advice or valuation
of a property is
valid to establish
that a reasonable
transaction
occurred.
Failure
to Disclose:
The non-disclosure
of latent defects
might invalidate a
contract. A latent
defect is generally
described as a
defect that is
unknown to the buyer
but is material to
the enjoyment of the
property. The buyer
might not have
entered into the
contract had he/she
been aware of the
defect. An example
could be the
presence of ground
contamination
because of a prior
owner’s use and
spillage/seepage of
hazardous product.
The terms of an
agreement must be
definite and clear
and if the essential
terms have not been
agreed upon, a
binding contact does
not exist. However,
this does not mean
that the terms have
to be decided. A
term of a contract
can be established
through arbitration
by a third party.
Some terms of a
contract will, if
necessary, be
implied by law. A
contract in which no
date was specified
for possession might
be held to be
invalid for lack of
certainty,
particularly if the
phrase time is of
the essence is
contained in the
agreement. If the
terms, conditions,
and other provisions
of the agreement
establish with
reasonable certainty
that the parties
intended possession
to occur within
reasonable time
limits, then the
court might
interpret the
contract so as to
give effect to the
intent of the
parties as
determined from the
additional
circumstances.
A frequent cause
of uncertainty is
the agreement to
negotiate some time
in the future. A
sale at a price to
be fixed by
arbitration through
a third party is one
thing, but a sale at
a price to be fixed
by subsequent
negotiations between
seller and buyer is
not a concluded
contract until these
negotiations have
resulted in an
agreed price. This
problem frequently
arises with a right
to renew a lease, or
with a right given
to a tenant to
purchase property
during or at the end
of a lease. If the
rent or price is
simply left to be
agreed upon, no
agreement exists.
In summary, if a
vital and material
condition of the
contract is
undetermined, no
contract exists, but
merely an
undertaking to seek
a contract at a
future time.
Typically refer
to the preprinted
agreement/contract
forms along with
necessary schedules
and addenda relating
to that specific
agreement.
Contract
documents apply to
the agreement of
purchase and sale as
well as leases. In
residential real
estate, contract
documents for the
purchase of a new
home might include
drawings,
specifications,
plans, schedules,
descriptions, and
warranties, that
substantiate the
terms of the
contract. In
commercial real
estate, contract
documents normally
consist of the
agreement/contract
along with drawings,
specifications,
survey, buyer and
seller covenants,
conditions,
additional contract
terms, and
assumption of
mortgage. In the
case of a lease, the
documents would
include the
preprinted offer to
lease together with
the layout of the
demised premises,
landlord’s and
tenant’s work,
conditions, and
additional lease
details.
Contract
documents also
include any
modifications
following agreement
of the parties.
Modifications are
generally documented
by way of
amendments.
When a
dispute
arises as to
a contract’s
meaning or
the rights
under it,
the courts
apply varied
legal rules
of evidence
and
interpretation
to discover
what the
parties to
the contract
intended.
One
important
rule is the
parol
evidence
rule which
provides
that a
completed
written
contract may
not be
altered,
varied, or
amended
except in
writing and
may not be
explained or
added to by
verbal
agreement or
evidence as
to the
intention of
the parties.
Exceptions
exist, but
the general
rule must be
considered
significant
in the
drafting of
agreements
so that
every term,
warranty,
condition,
or
representation
on which one
or other of
the parties
relies will
be
incorporated
into the
written
document.
The
general rule
is that only
parties to
the contract
can enforce
it or be
bound by it.
If A employs
B to do work
on C’s house
in return
for payment,
A and B have
certain
rights
against each
other that
can be
enforced at
law, but C
has no legal
rights
against B
for
non-performance
of the work
because
he/she is
not a party
to or privy
to the
contract
between A
and B. (C
does have
legal rights
against A
for
non-performance
of the work
because of
the contract
between C
and A.)
Similarly, a
broker (or
salesperson)
is only a
witness to
the signing
of a
contract for
a property
sale.
Therefore,
if a breach
of the
contract
occurs, the
seller can
only sue the
buyer and
vice versa.
The
brokerage,
acting on
the seller’s
behalf,
cannot be
sued by
either of
the
contracting
parties
under the
terms of the
contract
since he/she
is not privy
to the
contract.
However, the
brokerage
may be sued
independent
of the
contract if
he/she
encouraged
the seller
or the buyer
to enter
into the
contract by
the
provision of
misleading
information
or as a
consequence
of
negligence
or error.
Only the
brokerage,
not the
salesperson,
can sue the
seller for a
real estate
commission
as the
salesperson
is not a
party to the
contract—he/she
is only
representing
the
brokerage.
An
assumed but
invalid
exception is
the case of
a contract
entered into
by a broker
who makes it
known to the
other party
that he/she
was in fact
acting on
behalf of an
undisclosed
principal.
The
principal
can step in
and enforce
the contract
since,
according to
the law of
agency,
he/she was
really a
party to the
contract and
the broker
(or agent)
was a mere
extension of
the
principal.
Failure
to fulfill
an
obligation
under a
contract.
Breach, of a
contract by
one of the
parties,
results in
the
imposition
of a new
obligation
in place of
the broken
one by
conferring a
right of
legal action
on the party
injured by
the breach.
A breach may
discharge
the injured
party from
further
obligations
to perform
his/her side
of the
bargain.
Breach may
occur
through an
express
refusal to
perform the
contract,
making it
impossible
to perform
through
one’s own
act, or
through the
failure to
perform.
If a
breach goes
to the root
of a
contract,
the injured
party has
the option
to either
accept the
breach and
treat
himself/herself
as relieved
or
discharged
from
performance,
or to treat
the contract
as
subsisting
and, if
available,
seek other
remedies
such as
specific
performance.
If the
breach does
not go to
the root of
the
contract, it
will give
rise only to
a right of
the other
party to sue
for damages,
not to an
option to
discharge
the
contract.
If there
are several
promises,
only some of
which are
broken, or
if there is
only a
partial
failure to
perform or
complete the
contract, a
question may
arise as to
whether the
other party
can put an
end to the
contract or
sue for
damages. The
answer will
depend on
the
expressed or
implied
intention of
the parties,
and whether
the breach
was
substantial
enough to go
to the root
of the
contract.
Example
of
Contract–Breach
Despite
warnings
from his
real estate
brokerage
and lawyer,
Buyer Jones
insisted
that the
salesperson
present an
unconditional
offer on a
large home
owned by
Smith. Jones
was
confident
that his
present home
would sell
before the
July closing
of the new
residence.
By July,
Jones was
unable to
sell his
home and was
declined
interim
financing to
close the
purchase.
Smith sued
for breach
of contract
and received
damages to
compensate
for losses
incurred in
placing the
property
back on the
market to
secure
another
buyer.
Set
aside the
contract,
e.g., buyer
requests the
court to set
aside a
contract
because the
builder has
encountered
financial
difficulties,
has only
begun
renovation
work, and is
apparently
unable to
complete the
job.
Compensation
for losses
incurred.
The most
common
remedy is
monetary
damages
awarded by a
court to
recompense
an injured
party for a
loss
suffered by
reason of a
breach.
Every breach
gives rise
to a right
to this
remedy and
the measure
of damages
recoverable
is the
amount that
may fairly
and
reasonably
be
considered
either:
Arising
naturally,
(i.e.,
according
to the
usual
course
of
events
occurring
from
such
breach
of
contract
itself);
or
As
may
reasonably
be
supposed
to have
been in
the
contemplation
of the
parties
at the
time the
contract
was made.
Damages
are given as
financial
compensation
and not as a
punishment
for the
breach or
for the
motive or
manner of
the breach,
and so the
plaintiff in
a damage
action must
prove the
actual
amount of
the damages.
The
plaintiff
also has a
duty to
mitigate
those
damages by
taking any
reasonable
steps
available
following
the breach
in order to
reduce the
extent of
the loss.
A
determination
by the
courts of a
reasonable
sum of money
for work or
services
performed.
If a
contract has
been
discharged
by breach
after the
injured
party has
done part
but not all
of what was
promised
under the
contract,
that person
is entitled
to the
reasonable
value
(quantum
meruit) of
what was
done from
the party
who
committed
the breach.
Takes
the form of
a decree or
order of the
court that
the party in
breach must
do the
specific
thing that
was
promised.
This is a
discretionary
remedy and
not an
absolute
right. It
will be
awarded only
where
damages are
not an
adequate
remedy, the
contract is
fair and
just, and
the injured
party acts
promptly and
fairly in
claiming a
right to
specific
performance.
Example of
Specific
Performance
Buyer
Jones has a
binding
contract to
purchase
adjacent
lands to his
property for
the purpose
of expanding
his business
enterprise.
The
acquisition
of this
property is
vital to
meet local
zoning
regulations
and
environmental
requirements.
Prior to
closing,
Jones has
already
started
expansion/renovation
work in
anticipation
of the
closing. The
owner of the
land refuses
to close and
lacks any
substantive
reason for
doing so.
Jones sues
for specific
performance.
Where
the broken
promise was
to refrain
from doing
something,
the court
may award an
injunction
to restrain
the
offending
party from
doing that
act. More
simply put,
an
injunction
is a court
order
stopping a
party from
continuing a
breach.
The
court will
not compel
the
performance
of a
contract for
personal
service or
employment,
but may
award an
injunction
to prevent
the
offending
party from
serving or
performing
elsewhere.
The granting
of an
injunction,
also a
discretionary
remedy, will
be subject
to the same
conditions
as in the
case of
specific
performance.
A common
case
involves the
breach of a
covenant not
to use the
premises in
a particular
manner. A
case might
involve the
tenant in a
shopping
plaza who
agrees under
the lease
not to offer
a specific
service
within the
plaza and
then
proceeds to
breach the
agreement by
offering
that
service.
Another
instance
might
involve a
tenant in a
large
industrial
building who
has
specifically
agreed not
to store,
process, or
otherwise
handle
certain
hazardous
waste
products on
the premises
and then
breaches
that
agreement
following
occupancy.
In
discussing
remedies for
breach of
contract,
the issues
of costs and
interest
frequently
arise. The
successful
litigant may
be awarded
interest on
the amounts
given. That
interest may
be
calculated
from the
date of the
breach and
can vary
depending on
the prime
rate. The
court can
also award
costs that
normally
involve all
disbursements
paid to
court
officials
and others
involved in
the
litigation,
and a
proportion
of the costs
that are
payable to
the
litigant’s
own lawyer.
The award
will vary
with the
amount of
the claim
and the
particular
court
jurisdiction.
In rare
situations,
the judge
can order
full
compensation
of all
costs.
There
are five
common
methods to
terminate a
contract
involving
real
property.
By
Mutual
Agreement:
A
contract
may be
discharged
by
mutual
agreement
of the
parties
that it
shall no
longer
bind
them, or
that it
shall be
replaced
by
another
contract
in
altered
terms,
which
are
substituted
for
discharge
within
itself.
By
Performance:
A
contract
may be
discharged
by
performance
or
tender
of
performance
of the
contract,
in which
case the
obligations
of the
performing
party
are
fulfilled
and the
rights
of the
other
party
are
satisfied.
By
Impossibility
of
Performance:
A
contract
may be
discharged
because
of the
impossibility
of
performance,
or
frustration,
whereby
supervening
and
unanticipated
circumstances
arising
after
the
making
of the
contract
are held
to
absolve
the
parties
from
their
obligations.
By
Operation
of Law:
A
contract
may be
discharged
by
operation
of law,
e.g.,
discharge
from
bankruptcy,
alteration
by one
party
without
consent
of the
other.
By
Breach:
Breach
or the
breaking
of the
contract
by one
of the
parties,
results
in the
imposition
of a new
obligation
by
conferring
a right
of legal
action
on the
party
injured
by the
breach.
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