In Canada, contract law is based on English common law, except for Quebec, where the civil law applies. Generally, Canadians have the freedom to enter into contracts whenever they want and for whatever reason they choose. There are some limits, however, based on restrictions found in legislation.

A contract is an agreement between two or more persons, which creates one or more legal obligations between them; to do, or not to do, something. The term ‘persons’; can include individuals, organizations, corporations and other types of legal entities.

For a contract to be legally binding, it must include the following elements:

  • Legality,
  • Mutual agreement,
  • Consideration, and
  • Capacity

Legality: For a contract to be legally binding, that is, enforceable by law, it must not create obligations to do something that is illegal. For example, an agreement to steal something cannot form the basis for a legal contract.

Mutual agreement: Mutual agreement is arrived at when one of the parties makes an offer and the other party accepts the offer. This is commonly referred to as ‘offer and acceptance’. Both the offer and the acceptance must be clear and unequivocal. In addition, the offer can be revoked (cancelled) before it is accepted, unless the offer specifically states that it will remain open for a specific time-period, and/or it has expired.

Consideration: Consideration can be a monetary payment or can also be a promise.

Capacity: In order to ensure that the parties to the contract can be held accountable under the agreement, the parties must be of sound mind, meaning that they are able to understand the full meaning and effect of the contract that they are agreeing to. A contract made by someone who is determined to be mentally incapable of entering into the agreement, generally, will not be obligated under the agreement. Mental incapacity can arise for different reasons, such as due to a disability or if the person was intoxicated.

In addition, it is advisable that both parties have reached the age of majority. If one of the parties is a minor, the contract will not be enforceable against the minor. However, if the other party is an adult, they will be obligated to the minor under the agreement.

Capacity can also relate to legal entities that are not people, such as corporations. For example, if the person who signed on behalf of the corporation did not have the authority to do so, the contract might not be enforceable.

Oral and written agreements

A contract can be either oral (spoken), or written, provided that the elements required to form a legally binding contract have been met. In some cases, however, the law requires the contract to be in writing, such as transactions for the purchase and sale of real property (land).

Wherever possible, it is advisable that important agreements be made in writing. In a written agreement the parties have the advantage of being able to clearly explain the terms and promises, such as the services or goods to be provided, the performance schedule and payment amounts. By having the components of the agreement written out, it makes it easier for both parties to understand and fulfill their obligations under the agreement.

When can a contract be cancelled?

If a contract is not enforceable, under the law, it can be set aside. To set aside a contract means to cancel or rescind the agreement. The legal reasons to cancel a contract are:

  • Misrepresentation – a false statement of fact made by one of the parties to the other for the purpose of inducing them to enter into the agreement. If the misrepresentation is of a material (important) fact, it makes the contract voidable.
  • Mistake – where one (or more) of the parties had an incorrect understanding of what the contract was concerning.
  • Duress and undue influence – when one party compels or threatens the other to enter into the agreement against their will. The injured party needs to prove that there was a threat and that that was the reason they made the contract.
  • Incapacity – those entering into an agreement must have the legal capacity with regard to age, mental capacity and authority.
  • Illegal contracts – A contract can be illegal if it violates a law. Although this can include criminal laws, it can also relate to a contract made against other provincial, territorial or federal laws.

Breach of Contract

Breach of contract occurs when one (or more) of the parties breaks a promise made under the agreement. The breach can be in relation to a minor promise, or go to the heart of the agreement. A breach can also occur where one of the parties does something different from what was expected, or only partially fulfills an obligation under the agreement.

Remedies for Breach of Contract

If a contract is broken, the injured party can allow the breach (if it is minor) and continue with the agreement, or stop performing their part of the contract and ask for compensation for the breach. The types of remedies available for breach of contract are:

  • Monetary damages. The injured party may be entitled to compensation for a loss, to put them in the place they would have been in had the contract been completed, or punitive damages (to punish the party that breached the contract),
  • Injunction, where a court orders the party that committed the breach to stop doing something, or
  • Specific performance, where the court orders the party that committed the breach to do something.

How are contracts affected by legislation?

The content and parameters of contracts are often restricted by provincial and federal statutes. For example, in Ontario, consumer contracts are subject to various rules set out in the Consumer Protection Act and the Sale of Goods Act. In an attempt to protect consumers, these Acts set out several rules, such as what must be included in the contract, what would be considered a false or misleading representation, and how agreements can be cancelled if the seller does not live-up-to the requirements set out in the legislation.