Elements of a Valid Contract
For a contract to be enforceable in Ontario, the following elements must be present: (1) offer; (2) acceptance; (3) consideration; (4) capacity; (5) certainty of terms; and (6) intention to create legal relations. The absence of any of these elements means no contract has been formed.
Offer
An offer is a clear and definite proposal made by one party (the offeror) to another (the offeree), containing all essential terms, communicated with the intention that it become binding upon acceptance.
Invitation to Treat vs Offer
An invitation to treat is not an offer — it is an invitation to make an offer. An advertisement, a price list, or a goods display in a store window is generally an invitation to treat, not an offer: Pharmaceutical Society of Great Britain v Boots Cash Chemists, [1953] 1 QB 401. The customer's act of bringing goods to the counter constitutes an offer; the retailer may accept or refuse.
Communication of Offer
An offer must be communicated to the offeree before it can be accepted. An offeree who is unaware of an offer cannot accept it — even if they act in a way that would constitute acceptance if they had known of the offer:R. v. Clarke (1927) 40 CLR 227 (High Court of Australia, widely followed in Canada).
Revocation
An offer may be revoked at any time before acceptance, even if the offeror promised to hold it open. The revocation must be communicated to the offeree. Communication through a reliable third party is sufficient: Dickinson v Dodds (1876) 2 Ch D 463. An option contract supported by consideration prevents revocation during the option period.
Lapse and Counter-Offer
An offer lapses: at the end of a stated time; after a reasonable time if no time is stated; upon the death of the offeror (in most circumstances); or upon rejection by the offeree. A counter-offer operates as a rejection of the original offer and a new offer: Hyde v Wrench (1840) 3 Beav 334.
Acceptance
Acceptance is an unconditional agreement to all the terms of the offer, communicated to the offeror. Acceptance must mirror the offer exactly — any variation constitutes a counter-offer (the "mirror image rule").
Communication of Acceptance
The general rule is that acceptance is effective when and where it is received by the offeror. For instantaneous communications — telephone, fax, and email — this means acceptance is effective when the offeror receives it, not when the acceptor sends it.
The Postal Acceptance Rule
Where the parties have communicated by post, or the offeror has expressly or impliedly authorized acceptance by post, acceptance is effective at the time and place of posting, even before the offeror receives the letter: Adams v Lindsell (1818) 1 B & Ald 681. The offeror cannot revoke after a valid postal acceptance has been posted.
Ontario courts have confirmed that the postal rule does not apply to email and other electronic communications. The Electronic Commerce Act, 2000, S.O. 2000, c. 17, s.22 provides that an electronic document is received when it enters the information system designated by the addressee or, if no system is designated, when the addressee becomes aware of the document.
Consideration
Consideration is the price for which the promise is bought — the benefit to the promisor or the detriment to the promisee: Dunlop Pneumatic Tyre Co. v Selfridge & Co., [1915] AC 847. The common law requires consideration to support a promise in order to make it enforceable (subject to the formal exception of a deed under seal).
Adequacy vs Sufficiency
The courts will not inquire into the adequacy of consideration — "a peppercorn" is valid consideration if the parties have agreed that it should be so. However, consideration must be sufficient — it must be real, certain, and have some value in the eyes of the law. Consideration may be: an act; a forbearance; or a promise to do or refrain from doing something.
Past Consideration
Past consideration — an act already performed before the promise to be enforced was made — is generally not valid consideration: Roscorla v Thomas (1842) 3 QB 234. However, courts recognize exceptions where the past act was done at the promisor's request and both parties understood it would be compensated:Pao On v Lau Yiu Long, [1980] AC 614.
Pre-Existing Duty Rule
A promise to perform an existing legal obligation is not good consideration for a new promise. However, the Supreme Court of Canada in Greater Fredericton Airport Authority Inc. v NAV Canada, 2008 NBCA 28 (applied across Canada) recognized that where a party promises additional compensation to induce a party to continue with performance under an existing contract without any duress or unfair dealing, the courts may enforce the promise if there is practical benefit to the promisor.
Promissory Estoppel
Promissory estoppel operates to prevent a party from resiling from a clear and unequivocal promise not to enforce strict legal rights where the other party has relied on that promise. The doctrine was articulated in Central London Property Trust Ltd v High Trees House Ltd, [1947] KB 130 (Denning J) and has been applied in Ontario.
The requirements are: (1) a clear and unequivocal representation that the promisor will not enforce their strict legal rights; (2) reliance on that representation by the promisee; and (3) it would be inequitable for the promisor to resile. Promissory estoppel generally suspends rather than extinguishes the legal right, and the promisor may resile upon giving reasonable notice.
In Ontario, promissory estoppel operates as a shield, not a sword — it may be used as a defence but not as an independent cause of action in the absence of pre-existing legal relations: John Burrows Ltd v Subsurface Surveys Ltd, [1968] SCR 607.
Capacity to Contract
Parties to a contract must have capacity. The principal categories of persons with limited capacity are:
- Minors: In Ontario, persons under 18 years of age have limited capacity. A minor's contract for necessaries (food, clothing, shelter, and other goods and services appropriate to their station in life) is enforceable. Other contracts are voidable at the minor's option: the minor may ratify the contract upon reaching majority.
- Mental incapacity: A contract entered into by a person who lacked capacity due to mental illness or impairment at the time of contracting is voidable (not void) if the other party knew or should have known of the incapacity.
- Corporations: A corporation may only contract within its capacity as defined by its constating documents and the Business Corporations Act or Canada Business Corporations Act. Ultra vires contracts may be unenforceable.
Certainty of Terms
A contract must be certain and complete to be enforceable. Where essential terms are missing or too vague to be given effect, the court may decline to enforce the agreement. However, courts prefer to give effect to commercial agreements where possible and will use implied terms, trade usage, and prior dealings to fill gaps rather than strike down an otherwise binding agreement.
An "agreement to agree" — where parties agree to negotiate essential terms in the future — is generally unenforceable as it lacks certainty. However, an "agreement to negotiate in good faith" may be enforceable in limited commercial contexts: Empress Towers Ltd v Bank of Nova Scotia, 1991 BCCA.
Vitiating Factors
Misrepresentation
A misrepresentation is a false statement of existing fact that induces the other party to enter the contract. Where a misrepresentation is fraudulent, the innocent party may rescind the contract and claim damages in tort. Where the misrepresentation is negligent or innocent, rescission is available but damages depend on whether the representor owed a duty of care or the contract contains a warranty.
The leading Ontario authority on negligent misrepresentation is Queen v Cognos Inc., [1993] 1 SCR 87, which applied the Hedley Byrne principle to pre-contractual representations in an employment context.
Mistake
Common mistake — where both parties contract under a shared mistaken assumption — may render a contract void at common law (where the mistake goes to the root of the subject matter) or voidable in equity. The common law test from Bell v Lever Brothers Ltd, [1932] AC 161 sets a high threshold: the mistake must render performance fundamentally different from what the parties believed it to be.
Duress and Undue Influence
A contract is voidable for duress where it was induced by an illegitimate threat — including economic duress where a party exploits another's vulnerability to extract contractual modifications. Undue influence arises where one party exerts such pressure or dominance over the other that the latter's will is overborne. Both doctrines allow rescission of the contract.
Practice Points for Ontario Commercial Lawyers
- Advise clients that an agreement to agree on essential terms is unenforceable — all material terms must be agreed before a binding contract is formed.
- Where using email to communicate offers and acceptances, confirm whether the Electronic Commerce Act requirements have been met and specify in the offer when and how acceptance becomes effective.
- For contracts that modify existing obligations (e.g., post-formation price increases), ensure the modification is supported by fresh consideration or is documented as a deed to avoid the pre-existing duty problem.
- Require independent legal advice certificates for guarantees and contracts where undue influence may be an issue (e.g., intra-family transactions, guarantees by non-business-connected parties).
- Where pre-contractual representations have been made, include an entire agreement clause and a representations clause confirming the representee has not relied on any representations outside the written contract.