Making a Contract

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by People's Law School in March 2017.

Every time you buy a pair of shoes, sign up for cellphone service, or call a plumber, you are making a contract. Given how common contracts are in our daily lives, it’s helpful to know something about how they are created.

How a contract is created

A contract is a legally recognized agreement made between two or more people (called “the parties”). If one of the parties fails to do what it promised, the other can ask a court to enforce the contract.

To be valid, a contract needs these three elements:

• Agreement: The parties must agree or have a “meeting of the minds” on the terms.   
• Consideration: There must be an exchange of something of value to each party.  
• Intention: Both parties must intend the agreement to be legally binding.

What is a meeting of the minds?

To form a contract, the parties must come to an agreement or a “meeting of the minds” on the essential terms. The agreement is formed by one party making an offer to another party of certain terms and the other party freely indicating their acceptance of those terms.

This can be done in a number of ways. It can be a conversation that results in an agreement. There may be an exchange of emails in which the parties agree on something. Or it can happen without any real formalities, as when you buy something from a store. By presenting the goods and your money to the store clerk, you are offering to buy the items, and by taking your money, the clerk is accepting your offer.  

The acceptance of the offer may consist of words or acts, but it must be an acceptance of the offer as made. A response to an offer that makes any material change in the terms of the offer is not an acceptance; it is a counteroffer.

What is consideration?

Making a contract involves an exchange of something of value to each party. Most often, one person pays money to another in exchange for a good or service. But money doesn’t have to be involved. As long as both parties give up something of value, they can make a valid contract. Whatever is given or paid is called consideration.

Although there must be something of value exchanged in order for a contract to be created, the exchange doesn’t need to be even. What is paid by one party need not be comparable in value to what the other party is giving. There can still be a contract, for example, when a person rents out a room in their house to a friend for a nominal amount like $10 per month. As long as there is an exchange of something of value to each party, the contract will typically be enforceable.

What does "intention" to be bound mean?

Not all agreements are contracts. For an agreement to be legally enforceable as a contract, both parties must intend to be bound by their promise.

This intention will rarely be stated explicitly but will usually be able to be inferred from the circumstances in which the agreement was made.

For example, offering a friend a ride in your car is not usually intended to create a legally binding relation. But consider if you agree with your friend to drive them to work on a regular basis in exchange for the friend paying you $20 each week towards the fuel and maintenance costs of the car. Here, the law is more likely to recognize that a contract was entered into.

Who can make a contract

Can anyone make a contract?

No. Each party to a contract must have the mental capacity to make the contract. Mental capacity means that you have to understand what is in the contract. It also means that you understand what effect the contract will have on you.

How old does someone have to be to enter into a contract?

A person of any age can enter into a contract in British Columbia. But special rules apply if a person under age 19 (called a “minor” under BC law) enters into a contract.

A contract cannot be enforced against a minor. There are some exceptions:

• if the contract provides the minor with the “necessaries” of life - services that are vital to the minor’s health or welfare,
• if on reaching age 19, the minor affirms the contract (that is, agrees to be bound by it), or
• if within one year of reaching age 19, the minor partially performs the contract or doesn’t “repudiate” the contract (that is, doesn’t reject it).  

If none of these exceptions apply, a minor isn't responsible for keeping up their end of any contract they enter.

On the other hand, a minor can enforce a contract against an adult party to the contract.

The contract itself

Does a contract have to be in writing?

In most cases, no. In fact, most of the everyday contracts we make, such as buying a ticket for a movie or going to the hairdresser, are not put in writing. If the elements of a contract are present, a verbal agreement is just as legal and binding as a written one.

Image via www.istockphoto.com

A contract is the agreement between people; a written document is usually just proof of the agreement.

However, some kinds of contracts must be in writing. For example:

• When real estate is involved, all agreements must be in writing. An agreement to buy and sell a home must be in writing, and so must the mortgage that makes the purchase possible.
• Contracts containing a guarantee must be in writing. A guarantee is an agreement where one party agrees to pay the debt of another person if that person defaults on the debt.
• A "distance sales contract" must be in writing. This kind of contract is one that is entered into not in person (for example, online or over the phone) and there is no opportunity to inspect what you are buying.
• A door-to-door sales contract, known under the law as a "direct sales contract", must be in writing.
• A payday loan agreement must be in writing. Payday loans are small, short term loans - for $1,500 or less, that must be repaid within 62 days, when the borrower receives their paycheque or other income.

Can a contract be made by email?

Yes. Agreements made in emails can be valid contracts. It makes no difference if the agreement is set out on paper or in an electronic format. As long as the elements of a contract are present, a contract can be made by email.

How can you sign a contract?

Under BC law, there are some contracts you have to sign with a handwritten signature for them to be considered enforceable. Examples are a transfer of land, a will, and a power of attorney.

But for most contracts, you don’t have to actually sign a piece of paper to “sign a contract”. You can sign most contracts by:  

• typing your name into a contract,
• inserting an electronic image of your handwritten signature, or
• clicking on a link that says you agree to the terms and conditions.

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