Ontario Contract Law — Formation, Terms, Breach, and Remedies

Contract Formation — Offer and Acceptance

A binding contract requires: offer, acceptance, consideration, certainty of terms, intention to create legal relations, and capacity. Each element must be present; the absence of any one prevents a binding contract from arising.

Offer

An offer is a definite promise to be bound on specified terms (Carlill v Carbolic Smoke Ball Co[1893] 1 QB 256). An invitation to treat — a price list, advertisement, or display of goods — is not an offer but an invitation to make offers. The offeror may revoke the offer at any time before acceptance, provided revocation is communicated to the offeree (Byrne v Van Tienhoven(1880) 5 CPD 344). An option supported by consideration is irrevocable for the option period.

Acceptance

Acceptance must be unconditional and correspond exactly to the offer — any variation constitutes a counter-offer which destroys the original offer (Hyde v Wrench (1840) 49 ER 132). Acceptance is effective when communicated to the offeror. The postal acceptance rule — acceptance effective upon posting — applies when post is the contemplated means of communication (Household Fire Insurance v Grant (1879) 4 Ex D 216); email and electronic acceptance typically follow the instantaneous communication rule (receipt of acceptance).

Consideration

Consideration is something of value exchanged between the parties. It need not be adequate (adequate consideration is not required — only sufficient) but it must move from the promisee (Dunlop v Selfridge [1915] AC 847). Past consideration is not good consideration (Re McArdle [1951] Ch 669). A promise to perform an existing duty is not consideration unless the promisee goes beyond the existing obligation (Gilbert Steel v University Construction (1976) 12 OR (2d) 19 ONCA — established under Ontario law).

Promissory Estoppel

Where there is no consideration for a variation, promissory estoppel may prevent the promisor from resiling from a promise where the promisee has relied on it to their detriment (Central London Property Trust v High Trees House [1947] KB 130). In Ontario, promissory estoppel is a shield — a defence to an action — not a cause of action: it suspends rather than extinguishes the promisor's rights (John Burrows Ltd v Subsurface Surveys[1968] SCR 607). The Contract and Commercial Law Act reform debate aside, Ontario courts have not adopted the Australian "sword" approach from Walton Stores v Maher(1988) 164 CLR 387.

Intention to Create Legal Relations

Commercial agreements are presumed to be intended to be legally binding. Social and domestic arrangements are presumed not to be legally binding (Balfour v Balfour [1919] 2 KB 571). Each presumption is rebuttable. Comfort letters, letters of intent, and Memoranda of Understanding in commercial contexts are scrutinized carefully — language such as "subject to contract" or "this is not legally binding" generally negates contractual intent (Bawitko Investments v Kernels Popcorn (1991) 79 DLR (4th) 97 ONCA).

Terms — Classification and Interpretation

Conditions, Warranties, and Innominate Terms

Contractual terms are classified by their importance:

• Condition — a term so fundamental that breach entitles the innocent party to terminate the contract and sue for damages (Poussard v Spiers (1876) 1 QBD 410)
• Warranty — a less important term; breach gives rise only to damages, not a right to terminate (Bettini v Gye (1876) 1 QBD 183)
• Innominate (intermediate) term — a term whose classification depends on the consequences of breach; if breach deprives the innocent party of substantially the whole benefit of the contract, it has the effect of a condition (Hong Kong Fir Shipping v Kawasaki [1962] 2 QB 26). Ontario courts have adopted the innominate term analysis.

Implied Terms

Terms may be implied: (a) in fact — to give business efficacy to the contract or as an obvious inference from the contract (BP Refinery v Shire of Hastings (1977) 180 CLR 266 five-part test applied in Ontario); (b) in law — by statute (e.g., Sale of Goods ActRSO 1990 c S.1 implies conditions as to merchantable quality and fitness for purpose into contracts for the sale of goods by description); (c) by custom or usage of trade.

Exemption and Exclusion Clauses

Exemption clauses are strictly construed against the party seeking to rely on them (contra proferentem rule). Three conditions must be met for an exemption clause to be effective:

• Incorporation — the clause must be part of the contract at the time of contracting; unsigned documents require reasonable notice (Parker v South Eastern Railway(1877) 2 CPD 416; Tilden Rent-A-Car v Clendenning (1978) 18 OR (2d) 601 ONCA — unsigned documents with unusual terms require greater notice)
• Interpretation — the clause must clearly cover the breach in question; courts construe exemptions narrowly against the party relying on them
• Unconscionability and public policy — courts may refuse to enforce exemption clauses that are unconscionable or contrary to public policy

The Supreme Court in Tercon Contractors v British Columbia 2010 SCC 4 confirmed the analytical framework: first interpret the clause; second, if it applies, ask if it was unconscionable at formation; third, ask if there is overriding public policy reason to refuse enforcement.

Breach of Contract

A breach occurs when a party fails to perform a contractual obligation or repudiates the contract before performance is due (anticipatory breach). Anticipatory breach entitles the innocent party to treat the contract as discharged and sue immediately for damages, or to wait until performance is due and risk the contract being frustrated in the interim (Hochster v De la Tour(1853) 118 ER 922).

Whether a breach is repudiatory (going to the root of the contract and entitling termination) or merely a breach giving rise to damages depends on the classification of the term breached or the seriousness of the consequences of breach under the innominate term analysis. An innocent party who affirms the contract after a repudiatory breach loses the right to terminate.

Frustration

Frustration at common law discharges a contract where a supervening event, not caused by either party's default, makes performance radically different from what the parties contemplated at the time of contracting (Davis Contractors v Fareham UDC [1956] AC 696). The doctrine is narrow: increased difficulty or economic hardship does not frustrate a contract. Frustrating events include supervening illegality, destruction of the subject matter, and occurrence of an event that was the basis of the contract.

In Ontario, the Frustrated Contracts Act RSO 1990 c F.34 governs the consequences of frustration: money paid before frustration is recoverable; money payable before frustration ceases to be payable; expenses incurred may be recovered up to the amount of the prepayment or payable sum; if one party has obtained a valuable benefit before frustration, a just sum is payable for it. The Act does not apply to contracts for sale of specific goods under the Sale of Goods Act or to insurance contracts.

Remedies for Breach of Contract

Damages

The general principle is that damages place the innocent party in the position they would have been in had the contract been performed — expectation loss or "benefit of the bargain" (Robinson v Harman (1848) 154 ER 363). Reliance damages — expenditures made in performance of the contract — are also recoverable as an alternative.

Two limitations apply to recovery of damages:

• Remoteness — damages must be the natural consequence of the breach in the ordinary course of things, or within the reasonable contemplation of the parties at the time of contracting as a serious possibility (Hadley v Baxendale (1854) 156 ER 145; two-limb test confirmed in Victoria Laundry v Newman Industries [1949] 2 KB 528)
• Mitigation — the innocent party must take reasonable steps to mitigate loss; failure to mitigate reduces the recoverable damages

Specific Performance

Specific performance is an equitable remedy ordering the defendant to perform the contract. It is available where damages are an inadequate remedy — typically for contracts involving unique property (real estate, unique chattels, shares in a private company).Semelhago v Paramadevan [1996] 2 SCR 415 confirmed that specific performance remains available for real estate contracts in Ontario where the property is truly unique to the purchaser. Specific performance will not be ordered for contracts requiring personal services or where constant supervision would be required.

Injunction

A prohibitory injunction restrains breach of a negative covenant. In employment and commercial contexts, restrictive covenants (non-competition, non-solicitation) are enforced by injunction if reasonably limited in scope, geographic area, and duration. The interlocutory injunction test from RJR-MacDonald [1994] 1 SCR 311 applies.

Unjust Enrichment and Restitution

Where a contract is void, frustrated, or not yet concluded, a party who has conferred a benefit on the other without juristic reason may claim in unjust enrichment (Garland v Consumers Gas 2004 SCC 25). The three-part test: (1) defendant enriched; (2) plaintiff correspondingly deprived; (3) no juristic reason for the enrichment. The remedy is restitution — restoration of the benefit conferred — not expectation damages.

Consumer Contracts and the Consumer Protection Act

The Consumer Protection Act SO 2002 c 30 Sch A (CPA) provides additional protections for consumers beyond common law. Key protections include:

• Unfair practices (s.17): false, misleading, or unconscionable representations give rise to a right of rescission and damages regardless of intent
• Internet agreements (s.38): cooling-off period 7 days; consumer may cancel if required information not provided
• Future performance agreements (s.22): must contain prescribed information; 1-year cooling-off if information absent
• Limitation of liability clauses (s.9): any term that waives or limits rights under the CPA is void; any term that waives rights that arise from a breach of the CPA is void