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This Document Contains Chapters 5 to 6 Chapter 5 An Introduction to Contracts Instructor’s Manual–Answers by Shannon O’Byrne I. Teaching Objectives After studying this chapter, students should have an understanding of • the general concept of a contract • the legal factors in the contractual relationship • the business factors influencing the formation and performance of contracts The material in this chapter is not found in the treatment of contract law in more traditional business law texts. Those texts tend to jump directly into the rules of offer and acceptance with little or no introduction to the role and objectives of contracts in business. The authors are of the opinion that once students become immersed in the rules and their exceptions, they have a difficult time stepping back to see where the rules fit. This chapter sets the context for the rules that follow in the subsequent four chapters. Chapter 5 prepares the way by introducing the concept of a contract, discussing the legal factors in a contractual relationship (from an introductory perspective), and identifying the business factors that influence it. The goal of this approach is to demonstrate how contracts facilitate business by enabling buyers and sellers to form binding commitments as the basis of their commercial relationships. Chapter 6 deals with the formation of contracts. Chapter 7 covers content (the terms). Chapter 8 addresses the variety of defects that may prevent the enforcement of a contract. Chapter 9 covers termination of contracts, including breach and remedies. II. TEACHING STRATEGIES What follows is some general commentary that the instructor could consider introducing. Introduction to Contract Law • One approach is to begin by describing and emphasizing the prevalence of contracts in our commercial and personal lives. Contracts arise in a variety of situations. They can be simple (buying a bottle of water) or complex (buying steel tracking for a roller coaster). They may be informal or formal. They may be one-time deals or part of a continuing relationship. The same rules apply to all. For the elements of a contract from an introductory perspective, see text pages 97–100. • Contracts facilitate firm and enforceable commitments. Amritha, from the Business Law in Practice scenario, absolutely requires a contract to meet the task that her employer has set. It is not enough to establish an informal understanding with a supplier. • Review how litigation is the ultimate form of dispute resolution. This ties into Question for Critical Thinking 1. Legal Factors in Their Business Context: Creating the Contract • The Business Law in Practice scenario involving Amritha, her company (Coasters), their customer (Ultimate Park), and their supplier (Trackers) can be used to illustrate most points about business context. Indeed, the opening questions are designed to highlight the key point of the chapter: contract law can help Amritha do her job and achieve her employer’s objectives, but many non legal considerations affect how this is accomplished. In other words, securing a contract with a supplier of steel tracking will not ensure the success of her project, nor does simply reading any contract that the parties might produce accurately describe their entire relationship. As well, the situation provides a background for negotiations that might lead to a contract. Rather than simply present a set of facts and decide whether a contract has been formed, this approach encourages students to begin with the business and its needs and the people involved in fulfilling those needs. • A useful starting point in such transaction as Amritha is contemplating is to identify needs and objectives. What are Coasters’ needs? Then shift gears and ask what are Trackers’ needs? The result of the classroom discussion is likely to be recognition that a contract is almost certainly useful to both the buyer and the seller in nailing down certain obligations. But with that said, there are issues such as trust and confidence in each other that a contract cannot guarantee. Communication • Begin with a discussion of the various ways in which buyers and sellers make contact. The reality is that individuals communicate with each other on behalf of their employer businesses—emphasize the importance of the objective standard test. Those who communicate or negotiate should realize that their actions may later be scrutinized in terms of their legal significance, rather than what either of them subjectively intended. Bargaining Power • Emphasize the assumption of equal bargaining power as one of the key premises of contract law. The communicators should understand that they are expected to take care of themselves in negotiations, even though there is seldom actual equality. Consider the bargaining positions of Coasters and Trackers. Who has the advantage? What are the implications? III. Student Activities Task 1: Ask students to review Situation for Discussion 3 and consider all the factors that affect performance in this example. This is a very effective way of introducing the topic of contracts since students relate very well to the hypothetical. Task 2: Ask students to devise a risk management plan (following the steps outlined in Chapter 3 of the text) for the owner of a furniture store who is thinking about hiring an independent contractor to do deliveries for him. If you would like to introduce a real-life scenario to the class on how things can go wrong for such an owner, , see Total e-com Home Delivery Inc v Smith 2008 NSSC 37. IV. Explanation of Selected Features Page 99 Case: Tal v Ontario Lottery Corporation/Lotto 6/49 OLG, 2011 ONSC 644 Critical Analysis: Do you think this case could have been settled out of court? Why or why not? It would appear unlikely that the conflict between Mr. Tal and the Ontario Lottery Corporation could have been settled out of court. A dispute over how the rules should be read is difficult to compromise on, especially because Mr. Tal’s interpretation of the rules essentially has no foundation. Beyond this, Ontario Lottery Corporation benefits from a resounding interpretation from the court as to what their rules mean. This helps to deal with individuals in the future who may decide to challenge the Ontario Lottery Corporation’s view of the rules. Page 100 Business Application of the Law: Concert Hall Cancels Alleged Contract with Maximum Fighting Inc. Critical Analysis: Is there a contract between the Winspear Foundation and MFI and, if so, what are the terms? Do you think that the Winspear Foundation has a successful defence, namely, that the booking itself was a “mistake” and the music hall was not suitable for sporting events? How can these kinds of disputes best be resolved? The litigation between Winspear and MFI has not yet seen a public resolution so facts remain sketchy. However, if the parties entered into a written contract, then the concerns that the Winspear Foundation raise presumably come too late. It is highly unlikely that any alleged lease between the parties would permit the Winspear to cancel the MFI booking based on their own venue being unsuitable. Assuming a contract has been entered into, the terms would include names of the parties, the lease term, the lease rental, deposits required, rules governing use of venue, and indemnification and insurance provisions, to name a few likely terms. According to a report by the CBC, “Maximum Fighting says it put down a $5400 deposit and had a written agreement to hold an event at the Winspear on April 9, with a verbal agreement that two more events....” See CBC News, “Fight promoter takes on Edmonton venue” (11 August 2010), online: CBC News . While Winspear offers compelling reasons as to why a concert hall is not the best venue for MFI contests, such reasons do not appear to offer a valid defence for non-performance, assuming that a contract is in place. Parties are expected to take care of themselves and can be bound by the actions of their agents and employees, even when such agents and employees have made an error. By way of contrast, if the parties were merely at the stage of negotiations and no final contract was concluded, then Winspear could walk away with impunity. Since the matter has not proceeded to court yet, there is no judicial termination to reference here. In terms of resolving such disputes, settling out of court is almost always best. Voluntarily choosing to pursue mediation or arbitration can produce results, though, of course, success is never guaranteed. For additional news stories on point, see Tony Blais, “MMA promoter sues over cancelled match,” Edmonton Sun (09 August 2010), online: Edmonton Sun and “Maximum Fighting steps into ring with Winspear,” Edmonton Journal (11 August 2011), online: Edmonton Journal . Page 101 Ethical Considerations: Is It Ethical to Bluff During Business Negotiations? Critical Analysis: What are the dangers of Carr’s approach to business ethics? What are the possible benefits? There are several dangers. First, it can be a fine line between an actionable misrepresentation (which would allow the representee to sue) and engaging in sales talk (which has no legal consequence). Second, the business person who bluffs and exaggerates may well have her morality called into question, notwithstanding Carr’s argument to the contrary. As well, those who see business as a game also risk creating a toxic corporate culture. Page 104 Business Application of the Law: Getting It in Writing Critical Analysis: Why is an oral agreement sometimes worse than having no agreement at all? When there is no agreement between the parties, parties will govern themselves accordingly. Put another way, they would not rely on there being a contract because they know that one is not in place. An oral agreement, by way of contrast, can give the parties a false sense of security—they think that all the essentials have been agreed to when in fact, they may not have. Disputes can arise because there is nothing in place to confirm the parties’ intentions and mutual promises. The process of entering into a written contract can either assist the parties in hammering out obligations or in coming to the conclusion that in fact, the parties are not in agreement. The process of writing helps to flush out where problems and misunderstandings lie. An oral agreement masks these possible problems and is arguably worse than no agreement at all because it postpones the moment of reckoning and can end up triggering expensive and unsatisfactory litigation. Page 104 Business Application of Law: Economic Breach Critical Analysis: Is Option 3 the least desirable option when one is considering economic breach? Discuss. The purpose of this example is to demonstrate that many factors are relevant to the decision to observe a contract or break it when circumstances change. Presumably, parties do not make commitments they do not intend to carry through on, but many things may change during the term of a contract—new opportunities, market conditions, ability to produce or sell. Whether a breach is economic or not can be a tricky question. Business should be cautioned against pursuing what seems to be an economic breach since it can be very difficult to predict the real cost of breach and what the new contract must be worth to offset that loss. Chapter 6 Forming Contractual Relationships Instructor’s Manual–Answers by Shannon O’Byrne I. Teaching Objectives After studying this chapter, students should have an understanding of • how negotiations lead to a contractual relationship • · how negotiations can be terminated • the legal ingredients of a contract • how contracts can be amended or changed The purpose of this chapter is to introduce the essential building blocks of a contract: offer, acceptance, consideration, and intention to create legal relations. As such, the chapter is formalist and technical at times but unavoidably so. Businesspeople require a basic understanding of • the point at which negotiations start to have legal consequences, that is, when the “moment of responsibility” has occurred • what the courts are looking for when they unravel negotiations to determine whether the constituent parts of a contract are in place The Business Law in Practice scenario provides the opportunity to contextualize. The scenario is intentionally straightforward to help students see how the rules of contract formation might actually apply to commercial negotiations. The teaching objectives of this chapter are to help students understand • the rules that govern contract formation • how these rules can sometimes be difficult to apply • perhaps most importantly, that these rules can be facilitative—they can provide a reliable means by which business commitments are defined, secured, and enforced II. Teaching Strategies Offer/Acceptance/Certainty The Business Law in Practice scenario has been classroom-tested to provide a helpful context for analyzing contractual constituents. The first two paragraphs of the Business Law in Practice narrative, along with the first two questions, provide a solid foundation for the first lecture. The instructor can lead discussion as to • how negotiations feed into contract formation. This makes the point that until an offer is made, there are no legal obligations of any kind. At the same time, once an offer is made, it can immediately be accepted, resulting in a contract that obligates both parties. • why Jason’s offer is complete and therefore capable of acceptance. To help students understand the role of negotiations in contract formation, consider having students work on the Student Activities in this Instructor’s Manual. Flow charts are particularly useful when approaching the area of offer and acceptance. Suggested models are shown in Figure A and Figure B on the next two pages. In concluding the section on offer and acceptance, the instructor may want to emphasize that the way contracts are negotiated does not always resemble the formalist model given in textbooks. This is Nicholas Seddon’s point in “The Decline of Offer and Acceptance”: It is quite possible for parties negotiating a commercial venture to “drift” into contract so that at some stage a court can say that a contract has been formed, even though it is not possible to say precisely when or even what constituted an identifiable offer or acceptance. It usually does not matter precisely when the contract was formed; it is enough to say that by the time the dispute arose the contract was formed. See Nicholas Seddon, “The Decline of Offer and Acceptance,” Contract Law Information Network: http://www.anu.edu.au/law/pub/edinst/anu/contract/articles/TheDeclineOfOfferAndAccept.html. Figure A This flow chart analyzes potential contract situations. Assume a valid acceptance (see Figure B). The status of the offer is at issue. Figure B This flow chart sets out alternatives in the context of a valid offer. Consideration The Business Law in Practice scenario contains a classic consideration problem, based on Gilbert Steel Ltd v University Construction Ltd, [1976], 12 OR (2d) 19 (CA), a case that is summarized in the text on page 129. Variation, unsupported by consideration, is also the subject of the third question following the scenario. The Gilbert Steel example was chosen because it provides a straightforward instance of how a business understanding may fall apart, leaving the innocent party without a remedy. Although there may be compelling business reasons and moral imperatives to keep a promise, gratuitous promises are—subject to the reach of the recent case of Greater Fredericton Airport Authority Inc v NAV Canada discussed on page 130 of the text—generally not legally enforceable, even when seriously made. This part of the chapter ends with a discussion of promises that are enforceable without consideration. As well, it devotes some time to the legal ramifications of settling a bad debt, a common business situation. This area provides a focus for debate as to why some legislatures have chosen to intervene with legislation, thereby altering the common law, while others have not. For instructors who want to devote further time to the doctrine of consideration, a fruitful area relates to forbearance to sue. It is presented as a one-page handout on the next page so that it can be copied and distributed to the class. Forbearance to Sue Most contractual disputes settle out of court, in part because of the expense and uncertainty of litigation. To make such a settlement binding, however, it must be supported by consideration or be under seal. Considered generically, a settlement simply involves one party promising not to sue—or discontinuing an existing action—in exchange for a payment of money from the other party. Provided that the party gives up its cause of action honestly and in good faith, that is good consideration for payment by the other side—even if the claim itself turns out to be worthless and clearly invalid. The following example illustrates how forbearance to sue operates in practice: ABC Ltd. (ABC) sued XYZ Ltd. (XYZ) for breach of contract, alleging that a product XYZ supplied is substandard. In response, XYZ offered to pay ABC $2000 in exchange for ABC dropping its legal action. As the president of XYZ said to the president of ABC during settlement negotiations, “We don’t believe that our product is substandard, and we are confident that your action against us will fail. However, in the interests of continuing good relations between our companies, I will send you a cheque for $2000 and we’ll put this matter behind us.” The president of ABC was agreeable, replying, “I don’t have any more interest in spending my time in court than you do. Cut me the cheque, and I will arrange for my lawyers to discontinue the action we have brought against your company and have the appropriate releases signed.” ABC and XYZ are now in a new contractual relationship. XYZ has offered to pay ABC $2000 in exchange for ABC agreeing to discontinue its action. ABC has accepted this offer. Clearly, there is consideration supporting the contract: ABC is purchasing XYZ’s promise to pay it $2000 by promising to discontinue its legal action. XYZ is purchasing ABC’s promise to discontinue its action by agreeing to pay it $2000. ABC’s promise—though not in monetary form—is still a benefit in the eyes of the law. Note that this benefit counts as consideration even if ABC’s prospects of winning its action against XYZ are acknowledged to be weak. XYZ is getting something for its money since there is a possibility that ABC would be successful in court, and XYZ would be liable to pay damages. The termination of this possibility is what XYZ is paying the $2000 for. Note that even giving up the right to sue on an invalid claim—that is, one that has absolutely no prospect of success—is good consideration, provided the party forbearing was acting in good faith and reasonably believed the claim to be valid. III. Student Activities Task 1: What follows is a suggestion for a comprehensive, multipart study assignment that students would complete over the entire contracts section of the text. If the instructor also intends to teach the employment chapters, this assignment can easily be postponed until after that. The assignment is introduced here so that instructors have an opportunity to address commentary toward the assignment as the contracts part of the course is taught. The purpose of the assignment is to help students realize the following: • Contract law is an integrated whole. • There is a critical connection between the conduct of negotiations and being able to properly express in written form the agreement that has emerged. • It is important to expressly address risk and assign it in the contract. This emphasizes the planning function of contract law. The following assignment is based on Marlene Barken, “Integrating contract and property fundamentals with negotiation skills: A teaching methodology,” (1990) 9 Journal of Legal Studies Education 73. Since each part of the assignment is free standing, the instructor can scale it back—eliminating whole sections—if that would better suit the needs of the students. Part 1: Negotiate a Contract Divide the class into employers and potential employees, and have them negotiate a contract of employment. These negotiations would occur outside of class time. For background on employment law, students can review Chapters 21 and 22. To give the exercise more precise content, the instructor can provide a biography of each party in as simple or as complex a fashion as is appropriate for the class (e.g., the employee could be seeking a job at McDonalds or the position of CEO of a large corporation). In this way, the instructor can evaluate students not only on whether all the contract elements were included but also on whether all issues raised in the negotiation received adequate treatment. Regardless of the detail provided, the instructor should ask students to keep notes during negotiations, describing their negotiations in terms of offer, counteroffer, lapse of offer, revocation, and so on. In short, have them indicate the process by which their negotiations culminated into a contract. It is also helpful to ask the students to operationalize the idea that a contract is a business tool for managing risk. Ask them to identify the risks associated with an employment relationship (for both employer and employee) and what clauses could be used to address or assign those risks. Page 2: Draft a Contract Direct students to draft an employment contract based on their negotiations, using plain language and avoiding legal jargon. The essentials of an employment contract are set out in Figure 20.2 of Chapter 20, which is reproduced on the next page for ease of reference. Part 3: Prepare an Essay In the essay, ask students to provide • a description of the negotiations • a review of the contract, including an account of how each element of a valid contract had been met • what obligations each side has • conditions that might excuse performance • in the event of breach, what the innocent party could seek by way of remedy The Barken article on which this task is based, asks students to negotiate and draft a purchase agreement for residential real estate. This is a relatively complicated task, which students in an introductory course may find too challenging. Instructors of an advanced law class who are interested in such an approach should review Barken’s article, since she also provides a factual profile for the proposed land transaction. Task 2: An alternative task is to ask students to negotiate a move back home with their parents, dividing the class into parents and adult children. The object would be to negotiate and then draft a contract governing their relationship, along the lines suggested above. Instructors are referred to Sharlene McEvoy, “A contract writing exercise,” (1996) 14 Journal of Legal Studies in Education 81. In this article, a profile of the parent and adult child is provided, as well as their contractual expectations. As noted earlier, this gives the instructor an opportunity to grade student both on whether all the elements of a contract are in place and on whether all issues raised in the negotiation received adequate treatment. IV. Explanation of selected Features Page 113 Business Application of the Law: Spamming Critical Analysis: Do you believe that the anti-spam legislation imposes provisions that are proportionate to the problems caused by spam? Why not leave the problem of spam to the marketplace to resolve? There is a very strong argument that spamming is unethical and tremendously costly to the unwilling recipients. Spam commandeers the time and resources of recipients without their permission and without compensation. It also compromises the reputation of legitimate e-marketers and interferes with functionality. From this perspective, legislation (as recommended by the 2005 National Task Force on Spam) is essential. The other perspective would argue that commercial email is an important, perhaps essential, way for a business to communicate with potential customers. All recipients have to do is press the delete button if they aren’t interested. For anti-spamming websites and related links, see • http://www.cauce.org • http://spam.abuse.net • http://www.ftc.gov/spam Page 115 Photo caption: Why is spam objectionable? Spam is objectionable because it wastes the time and resources of others without compensation and without permission. It compromises the reputation of legitimate e-marketers. As well, it can interfere with the operation of the Internet. Page 116 Photo caption: What factors will determine whether a contract will be the result of lengthy negotiations or will be easily and quickly concluded? Inexpensive, generic, consumer-type purchases (such as for a pair of scissors or a box of paper clips) will obviously involve no bargaining at all. The consumer will pay for the purchase and leave. Where standard form contracts are involved, there is likewise no bargaining. The consumer is essentially told to take it or leave it. Even more expensive but generic items (like a personal computer) do not typically involve bargaining. The store will make a sale easily and quickly if the store can supply a computer within the consumer’s price range and quality specifications. It is the larger commercial transactions, often involving customized product (as in the Trackers–Coasters contract) that will generally involve protracted bargaining over quality, cost, warranties, and the like. The larger, more expensive, and customized the transaction is, the longer the negotiations will probably take. Page 117 Case: Bigg v Boyd Gibbins Ltd, [1971] 2 All ER 183 (CA) Critical Analysis: Who is the offeror and who is the offeree in this case? Do you agree with the court that a contract was in place? Should courts hold parties to the meaning of the exact words they use or should words be interpreted in their larger context? The plaintiff-vendor is the offeror. The defendant-purchaser is the offeree. The court’s decision seems reasonable based on the correspondence between the parties, as assessed by the objective test. This case also illustrates that courts refuse to be overly formulaic in such disputes. The fact that in the last letter, “price” was used, as opposed to “offer” did not sway the judge given the overall sense of the transaction. This is much preferable and a more just approach than reverting to literal-minded interpretation. Contractual negotiations take place in the business world, not in an idealized, legal vacuum. Page 118 Landmark Case: Dickinson v Dodds, [1876] 2 Ch D 463 (CA) Critical Analysis: Being guided primarily by legal principles is certainly an acceptable way of doing business. However, what might be the impact on your business reputation of going back on your word and revoking an offer sooner than you had promised you would? Do you think that the method used by Dodds for revocation (i.e., relying on the fact that Dickinson had learned that Dodds was selling to someone else) is the usual way of revoking an offer? What would be a more certain way and reliable way of effecting revocation? This question provides an opportunity for the class to step back from what the law says is permissible and instead asks students to consider their choices from a business perspective and an ethical one. There is little doubt that people who revoke firm offers are legally entitled to do so, but they also jeopardize their reputation for reliability and trustworthiness. Though this case is old (1876), it represents an tremendously durable common law rule about the revocability of a firm offer, thereby making a very important point about the conservative nature of the law. Indeed, many modern courts have considered and interpreted Dickinson, but its two central principles remain unchanged. Note: There has never been serious challenge to the Dickinson propositions that, first, an offer can be revoked, even when the offeror promises to keep it open for a specified period of time and, second, that an offer cannot be accepted when the offeree knows—either directly or from a reliable third party source—that it is no longer open. As for how to revoke an offer, this case nonetheless provides an approach fraught with danger. It is preferable to expressly revoke offers rather than to hope a revocation might be passed along to the offeree by a reliable third-party source. Page 121 Photo caption: Why might a business decide to accept an offer by conduct instead of formally communicating acceptance to the other side? What are the risks of doing so? If the parties regularly have done business in this way, a business might decide to accept by conduct since the risk of misunderstanding is small. Another reason why a business might accept by conduct is to try to shoehorn itself into a better contract than had been negotiated to date, as illustrated by the Lowe case (page 121 of the text). The risk of accepting by conduct is that the parties may conclude a contract on terms not actually intended. This was the outcome in Lowe. The supplier of the crane ended up in an undesirable contract because his conduct of sending over the crane was classified by the court as acceptance of the lessee’s offer, not a fresh offer that the lessee accepted by retaining the crane without complaint. Page 121 Case: Lowe (DJ) (1980) Ltd v Upper Clements Family Theme Park Ltd (1990), 95 NSR (2d) 397 (SCTD) Critical Analysis: How can a business avoid unwanted obligations when there is insufficient time to properly negotiate a contract? Is it reasonable for the judge to decide the case based on the terms of one letter? The only sure way to avoid unwanted obligations is to walk away from a business opportunity that time constraints prevent from being encapsulated into an acceptable contract. Although business can—and does—take the chance that, in the end, an acceptable contract will emerge, it must also be willing to risk that matters will not conclude positively at all, as occurred in Lowe case. In essence, the manager of Lowe (D.J.) Ltd. gambled that he could acquiesce to terms proposed by the other side and, later, negotiate his way out of that contract into a more favourable one. This gamble did not pay off. While it is true that the court relied on only one letter in defining the terms and conditions of the contract, this was the intention of the letter, objectively assessed. To the extent that Lowe (D.J.) Ltd. did not like those terms, it should have counteroffered. Instead, it simply delivered the crane and thereby sealed a contract on the precise basis recited in the letter. This case makes the important point that contracts can sometimes arise simply through conduct and do not always follow the formalist approach of this chapter. Note that the court in this case never does fully identify the nature of Buxton’s letter. (Was it an acceptance or a counteroffer?) In the end, the letter sets out the terms and conditions of the contract and the court is not unduly concerned as to how that happened. Page 123 Landmark Case: Carlill v Carbolic Smoke Ball Co, [1893] 1 QB 256 (Eng CA) This case is an example of an offer of a unilateral contract, though the court did not expressly identify it as such. Through such an offer, the offeror promises to pay the offeree a sum of money if the offeree performs the requested act. For example, a company might offer a $200 reward to anyone who finds a missing laptop computer. Unlike the ordinary business contract, where both parties have obligations, in the unilateral contract, only the offeror is bound because the offeree can perform the requested act—find the laptop—or not. He has no obligation even to try. If he does find the computer and returns it, the contract is complete, and the offeror is contractually required to pay. For obvious reasons, this kind of offer typically does not require people who decide to look for the computer to tell the company of their intention to do so. From the company’s perspective, it is enough to hear from the person who actually finds the computer. A.W.B. Simpson, “Quackery and contract law: The case of the carbolic smoke ball,” (1985) 14 J of Leg Stud 345, provides interesting historical information and illustrations, including patent sketches of the smoke ball and a copy of the actual ad that ran in the Pall Mall Gazette on November 13, 1891. Page 125 Technology and the Law: Electronic Contracting Critical Analysis: Legislation has removed some of the uncertainty about online contracting. However, questions still remain concerning whether communications on a website are an offer or invitation to do business and whether an electronic acceptance is effective on sending or receipt. What risks do these uncertainties pose for business? What steps can a business take to minimize these risks and avoid contractual disputes? The general approach of the common law has been to treat most advertisements made in catalogues, newspapers, and the like as invitations to do business. This approach has been justified on the basis that merchants have a limited stock and a limited manufacturing capability and therefore could not reasonably be understood to be making offers. That said, advertisements can, in some situations, constitute offers if they are clear, definite, explicit, and leave nothing to negotiation, as per Carlill (cited in the text on page 123) and Lefkowitz (cited in the text in footnote 1). This could be relevant to Internet sites that indicate not only the price but also whether the item is in stock. Thus, online advertisements and other promotional materials should be carefully drafted to ensure that viewers interpret them as invitations, not as offers. Businesses should use express statements or online disclaimers to clarify the effect of the online advertisements. The law distinguishes between instantaneous and non-instantaneous means of communications. Where the communications is by instantaneous means of communication (telephone, telex, fax), the acceptance is effective when it is communicated to the offeror (i.e., when the offeror hears or receives it). Non-instantaneous means (mail, telegrams, couriers) the acceptance is effective on sending, provided this means of communication was in the contemplation of the parties. Are electronic communications instantaneous? Electronic communications often exhibit characteristics of both instantaneous and non-instantaneous communications. Email is a lot like regular mail in that it is often sent through the electronic equivalent of the post office (an Internet service provider), and it is not always possible to immediately verify whether the recipient received the message. However, communications on the World Wide Web can in interactive and in real time—thus exhibiting characteristics closer to instantaneous means of communications. It is unclear whether the instantaneous or the non-instantaneous rule will apply to electronic communications. An online merchant can overcome this uncertainty by specifying when the acceptance becomes effective (i.e., the merchant may specify that an acceptance is effective when it enters a specified computer in a form readable by the online merchant). The rules regarding the effectiveness of an acceptance can be overridden. (Source: Barry Sookman Computer, Internet, and Electronic Commerce Terms, 2002 ed. (Toronto: Thompson, Carswell, 2002) at 10-14 to 10-28.) Page 125 Photo caption: How does electronic business benefit from a standardized set of legislative rules? There is little doubt that courts would eventually have come to view electronic contracts in the way contemplated by UECA-based legislation, including that offers and acceptances can be expressed electronically. The advantage of a legislative approach, however, is that a coherent and systematic set of rules comes into being all at once and certainly more quickly than could be accomplished by the slow pace of the common law. Page 126 Business and the Law: Lottery ticket with winning numbers purchased too late Critical Analysis: Do you agree with the Court of Appeal’s analysis of when the contract was formed? Is it relevant to the case that the store owner offered Ifergan the chance to reject the second ticket because it was not for the draw that he had wanted? Assuming that Loto Quebec made the offer (which is what the Court of Appeal held), acceptance must come from Ifergan. Was his acceptance complete when he ordered the two lottery tickets or when the electronic order was received by Loto Quebec on its system? The general rule is that acceptance is complete when communicated and therefore the Quebec Court of Appeal is on solid ground to conclude communication was complete when registered or received on Loto Quebec’s main computer. Likewise, an email acceptance would presumably be complete when received in the in-box of the offeree (or possibly at some later moment depending on the facts) but very unlikely to be regarded as complete when the acceptor hits the “send” button on her computer. Hitting “send” begins the process of communication but the communication is not fully in place at that point. It might indeed take some minutes (or even days if there is a router problem) for the email to reach the offeror’s inbox. It almost certainly does not matter that Ifergan had the chance to reject the second ticket though this fact has the practical effect of making Loto Quebec a more sympathetic litigant. Ifergan’s contract with Loto Quebec is formed once his acceptance is communicated and what happens after that moment cannot impact what has already occurred. Whether Ifergan had complained upon learning that his ticket would be in a later draw or acquiescence, as he did on the facts, matters not. There either is or is not a contract by the time in question. It was a good piece of customer relations by the owner, however, to offer Ifergan the option of rejecting the second ticket. Page 129 Case: Gilbert Steel Ltd v University Construction Ltd, [1976] 12 OR (2d) 19 (CA) Critical Analysis: Does this rule concerning performance of a pre-existing legal duty reflect the reasonable expectations of both the parties involved and the broader business community? Businesspeople might well be surprised by the rule in Gilbert Steel, reasoning that if a party agrees to a concession voluntarily, the party should be bound. However, this assumption fails to address the continuing importance of the doctrine of consideration in the law of contracts. Note too that a properly motivated court can avoid the rule in Gilbert Steel through a variety of methods, as noted by Boyle and Percy, Contracts: Cases and Commentaries (Scarborough: Carswell, 1999) at 206: The courts have developed various techniques to avoid the pre-existing duty rule such as: finding consideration, albeit nominal; finding that the circumstances have so changed that the plaintiff’s later promise to do exactly what was agreed before is consideration for a promise of more from the defendant; enforcing a modification under seal; enforcing the modification if the parties have rescinded the original agreement and substituted a new one, rather than merely varying the original agreement; or finding a compromise. The use of such devices, however, may lead to arbitrary and unjust results. Page 132 Photo caption: What is the purpose of placing a seal on a document? A seal replaces the need for consideration. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
