Law Beat

What is a contract?

A contract is an agreement between 2 or more parties which the parties intend to be binding at law setting out the promises and responsibilities of each party to the contract.

Let us look more closely at this definition:

1. A contract is an agreement. This agreement can be in writing or verbal. A written contract is preferred because proof of its terms can be established by looking at its terms. Some contracts in some legal jurisdictions must be in writing and will be of no effect if not in writing. For example, in many jurisdictions, to transfer ownership of land, requires a written deed, failing which land cannot be transferred or sold to the purchaser.

   While oral contracts might be valid, in case of any disagreement as to the terms, there is great difficulty in establishing the terms where only the recollections and interpretations of each party are the only evidence absent any witness or written proof.

2. The parties must intend that the contract be binding at law. If the parties are not serious about whether the contract can be enforced, then a court will not give effect to its terms because it was never intended to be binding at law. Contracts between close family members can fall into this category in some legal jurisdictions.

   Many letters of comfort or letters of understanding attempt not to be binding at law by adding to the end of the letter phrases such as "this letter of understanding is not intended to be binding at law".

3. A contract sets out promises and responsibilities of each party. For contracts to be binding, there must be consideration flowing between the parties. Consideration means that each party is getting something from the other party. This can be the exchange of mutual promises to do something or to get something from the other party. For instance, in a contract to buy land, the vendor is promising to sell his or her land and the buyer is promising to purchase the land for a price.

   In some jurisdictions, legal fictions are used to represent consideration being delivered from one party to the other. That is why in some contracts you will see one party giving the other the sum of one ($1.00) in consideration of entering into the contract. In some jurisdictions, this is valuable and sufficient consideration to establish a binding contract. If there is no consideration flowing from one party to another then an enforceable contract is not established in law. As such, if one person promises to give to the other something and the purchaser is not paying for it or giving something in return, the purchaser might not be able to enforce the sale in court because of lack of consideration flowing from the purchaser to the vendor.

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In Part 2, we will look at the notions of offer and acceptance; two very important components of contract law, especially as it relates to online auctions.

The principles of law presented in these articles are based on Canadian law. However, the information provided by the Fraud Bureau in this Law Beat series is not legal advice nor conveyed in the course of an solicitor/attorney-client relationship, but is intended merely as general information related to common legal issues. Your access to this article is subject to the Terms of Use and Disclaimer. You are not to rely upon this article for the basis of any decision you wish to make. If you have specific legal problem or question, please contract your legal advisor for specific legal advice relating to your question or problem.