Part I
UNDERSTANDING CONTRACTS
1
What Is a Contract?
Contracts have been with us since the dawn of commerce. From the Silk Road to Wall Street; from the spice trade to the stock trade; from the Hudson’s Bay Company to eBay; contracts are the universally accepted way of doing business. Yet who can say with any certainty what a contract is? Or what a contract does? Or what a contract even looks like?
The law can. Therefore, we begin our journey of learning how to write our own business contracts by looking at what the law says a contract is.
1. The Origin of the Word Contract
The word contract traces its roots in the English language to the 14th century. It is derived from a Latin word meaning “to draw together.” That may seem like a trivial point to make, but we must bear in mind that part of our goal is to take the mystery out of writing contracts. By considering the idea that gave birth to the use of the word, we can appeal to our shared understanding of what it means to draw together and use that as the basis for further investigation.
Where persons are involved, to draw together implies — indeed, requires — two or more people. One person alone cannot be drawn together, so the original users of the term contract had in mind a joint effort. They also had in mind a particular action: that of drawing. Contracting isn’t something that happens passively, by coincidence, chance, or fate. It must be actively pursued by the persons involved.
We now know that the original idea behind contracting was that of persons jointly taking active steps to bring themselves together in some respect. This is something we can all clearly grasp, intellectually. We can simply think of instances in our lives where we have taken steps to bring ourselves together with another person, perhaps by buying him or her a birthday present or agreeing to help someone move house. The possibilities are endless, of course. We fill our days with countless examples in which we bring ourselves together with others regarding some matter or another.
Are all of these instances of what the law recognizes as a contract? Before we answer that question, let us return to the notion of drawing together one more time in order to highlight another aspect of contracting.
Note how the original use of the term contract does not say or even imply anything about the way persons must draw themselves together. Specifically, note how the original use of the term contract doesn’t require anything to be necessarily written down. To put it another way, the origin of the term contract is not to draw together in writing. Nor is it to draw together on a piece of paper that has been dated and signed. This is an important point to make because a popular misconception is that a contract must be in writing to be considered a contract.
As you will learn, the law (with very few exceptions relating to interests in real estate, a topic that is beyond the scope of this book) does not require contracts to be in writing. The dated and signed piece of paper you hold in your hands is only evidence of a contract and not the contract itself, just as smoke is evidence of a fire but is not the fire itself. Still, it is the best evidence available and this is a reason why it is important to you, as a businessperson, to learn how to write contracts.
We have begun to demystify the meaning of contract by returning to the idea that gave birth to its use. We now understand that contracting means persons jointly taking active steps to bring themselves together in some respect, which does not have to be in writing (but, for our purposes, should be in writing to better ensure certainty about what is being contracted).
2. The Three Components of a Contract
Over the centuries the law has refined our understanding of contracts and distilled it down to three components that, together, define what a modern contract is at law. They are offer, acceptance, and consideration.
2.1 Offer
We said that contracting requires something being actively pursued and not simply arising as a matter of coincidence, chance, or fate. Where the law is concerned, the fulfilment of that requirement begins with an offer. An offer is the starting point of every contract that the law will recognize as a contract.
To offer means to present something for rejection or acceptance. For example, if you call your sister offering to buy her piano, you’ve fulfilled the first requirement of a contract. You have presented something to her — in this case, an offer to buy her piano — which she can either accept or reject.
The varieties of offers you can make, and the form in which you can make them, are virtually limitless. You can offer to sell some of your wares and communicate that in an email. You can go door-to-door in your neighbourhood and verbally offer to clean homeowners’ chimneys. You can write out an offer to purchase someone’s farm and deliver it through an intermediary (e.g., a real estate broker). In each case, you have taken the first step toward forming a contract.
It is not important whether an offer is made verbally, in writing, or otherwise. As long as the person making the offer (offeror) communicates the offer to the person to whom the offer is being made (offeree), the offer is valid for the purposes of creating a contract.
An offer can be shouted across a crowded and noisy room (as happens on the floor of a stock exchange), written in an email, or presented in Braille. Needless to say, an offer can also simply be written on a piece of paper.
It’s worth noting, however, that not everything that looks like an offer is an offer. Consider the following examples:
2.1a No intention to offer
There is no offer, legally speaking, if there is no intention to make an offer. For example, you might tell a friend that your car would be ideally suited to his business needs. You might tell him that it’s the right size, is easy to handle, and reliable. He might even agree. However, that does not necessarily mean that you offered to give or sell your car to that friend. In your mind, you were making a passing comment. All you were intending to communicate is that your friend might wish to acquire a car like the one you have.
Therefore, when determining whether an offer has been made, the law takes the offeror’s intention into account. To determine whether an offer actually occurred, the law considers what was actually in the offeror’s mind. Where there is no intention to offer, there is no offer at law.
2.1b Invitation to treat
Another example of something that looks like an offer but isn’t is what the law calls an invitation to treat. Some define an invitation to treat as an “offer to offer,” but a more effective way to approach the concept of an invitation to treat is to think of it as setting the stage to receive an offer.
A perfect example of an invitation to treat is a merchandise display in a store. It would be reasonable for you to think that the rows of canned goods, dairy products, and vegetables found in your local grocery store are being offered to you