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What Makes a Contract Enforceable?

It’s your average Saturday night in the big city. A woman meets a man at a bar. He offers to buy her a drink. She happily accepts and they exchange phone numbers. The next morning, the woman receives an unexpected text message from the man: he is asking her to e-transfer him the money he spent on her drink.

jarmoluk / Pixabay 

She quickly agrees and transfers the money, but takes the question to social media—should she have repaid him? The responses come flooding in, with 17% of people saying she should have paid him and 83% saying she should not have.

This is not the first time people have reported such incidents. There are numerous stories that can be found on the Internet about people requesting to be reimbursed for coffee or a drink upon being turned down for a second date.

While these are light-hearted examples of slightly eccentric dating behaviour, the stories are actually a real-world manifestation of a legal issue—namely, when is a contract valid and enforceable? The short answer to the above scenario is that no, there was no obligation to reimburse those stingy daters because there was no valid and enforceable contract between the parties. In order to understand why, we need to look at the purpose of contract law and the core elements that make a contract valid and therefore enforceable against a breaching party.

 

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Why do we enter into contracts?

There are a number of reasons for which we voluntarily choose to enter into contracts that, in effect, act as constraints on the choices we can make. Broadly stated, we enter into contracts in order to enforce promises. More specifically, we enter into contracts to bring clarity to the terms of an agreement, to set up a framework for an agreement, and to both fulfill and protect our reasonable expectations. This is certainly not an exhaustive list of the functions of contract law, but rather is a list of some basic things to consider when entering into a contract.

What are the elements of a valid and enforceable contract?

There are six elements to a valid contract:

  • There must be an intention to form a legal relationship. The question to be asked here is whether a reasonable person in the circumstances would have intended to form a legal relationship.
  • There must be consideration provided by both parties. This requires that each party provide something of value.
  • There must be an offer made and a corresponding acceptance of that offer.

 

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  • There must be a meeting of the minds. In making an offer and accepting the offer, the parties must be “of one mind” when it comes to understanding the agreement.

    The terms of the agreement (namely the parties, price, property, and particulars—also known as the “Four P’s”) must be certain.

  • The contract should be evidenced in writing and executed. As the great Stevie Wonder has forever engrained in our minds, the contract should be “signed, sealed, delivered.” It is important to note that only a limited number of agreements are actually required, by law, to be drafted in writing. It is, however, prudent to do so whenever possible.
  • As an overarching requirement, the parties to the contract must have capacity to enter into the contract. This means that they must not be (i) mentally impaired, (ii) intoxicated or under the influence of any substance, or (iii) a minor.

So, take our daters from the scenarios outlined above. There was no intention to form a legal relationship, consideration was provided by only one party, there was no meeting of the minds, there is no evidence of the agreement in writing, and, depending on the intoxication level of the parties, there may be questions regarding capacity. All in all, unlikely to be a valid and enforceable arrangement.

 

Catkin - Pixbay - agree-1728448_640

Catkin / Pixabay

 

Helpful contractual clauses

In order to help ensure that your contracts are upheld as valid and enforceable, there are certain clauses that can be included in any agreement. A Validity Clause, for example, states that the parties agree that the contract is valid. A Capacity Clause states that the parties have the capacity to enter into the contract. Other standard contractual language can be included, such as an explanation of the purpose of the agreement, recital language about the consideration to be provided, and detailed clauses outlining the Four P’s.

To see examples of a variety of standard contracts, visit our Small Business Law Library!

 

By: Samita Pachai, Articling Student at Cobalt Lawyers, and Farrah Rahman, Knowledge Content Manager at Clausehound.com

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Tips and Tricks: How to Compensate a New Team Member in Equity

Start-up companies often struggle with the valuation calculation, and how to determine the number of shares to issue to a new team member.

A good place to start when thinking about this are the Khan Academy’s Raising Money for a Startup, and Getting a seed round from a VC videos for an excellent and thorough discussion on how to value founder equity vs. new investment.  Where the investor is investing cash – think of the new cash as the “sweat equity” provided by your new team member.

Suggested viewing:

1.  https://www.khanacademy.org/science/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/raising-money-for-a-startup (gets interesting around the 1 minute mark)

2.  https://www.khanacademy.org/science/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/getting-a-seed-round-from-a-vc  (relevant to almost the 6 minute mark).

Once you have had a chance to view the videos, consider that the principles of valuation of time vs.

money can be extended to new “sweat” investors by adding additional boxes of value to the table, and issuing a corresponding number of shares to match.  Think of the sweat and cash in the company prior to adding on the new founder as the pre-money valuation, and the additional value added by the new investor as post-money valuation.

You may wish to “drip” out the vesting of shares over time.  Several instruments can be used for compensating the new team member, including a consulting agreement or option agreement, or both, combined.

Be sure to consult your accountant to discuss the form and value of new shares issued (vs. for example options), as there may be a Canada Revenue Agency revenue amount triggered, if this share issuance is treated as compensation or company earnings and not an investment.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Entering Into a Term Sheet is Hard Enough, Getting Out of One Can be Even Harder

As a company entering into a possible investment, when accepting an investor term sheet, consider the provisions relating to termination of that term sheet.  There’s nothing worse than being stuck in an unlimited holding pattern while trying to raise funds.

Here are some tips to make sure that your interests are protected.

  1. Set an automatic termination date (30 days, 60 days) that will provide sufficient time for due diligence and receiving and reviewing legal documentation.

     (The termination date can be extended after that day by written approval).

  2. Make sure that the termination provision is in writing (can be in a non-binding term sheet with certain binding provisions, including the termination mechanism).
  3. Avoid a term that requires the company to pay legal fees, unless the deal successfully closes.
  4. Honour the “no-shop/break fees” clause (if any) i.e. do not start shopping the deal around, or you may be on the hook for paying the agreed-upon break fees.
  5. Don’t start performing as if the deal has closed until it actually closes i.e. until funds are transferred, documents are signed, and so on.  The court has looked at “non-binding” deals in which the parties starting to work together, co-market and so on, and in some cases has considered that the deal had actually closed based on such (and other) performance by both parties.

     In doing so, the court has found that a “non-binding” term sheet is therefore binding.

Reviewing multiple term sheets can be tricky.  In some cases the investors will welcome co-investors, and will agree that a lead investor can protect their interest, can be responsible for management decisions, and so on.  In other cases, the investors will consider themselves competing.  When faced with multiple term sheets you as a company should consider the long term strategic relationship that you are looking to develop, trust your instincts, and make sure that you consult with your trusted advisors and legal counsel before selecting your investor.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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