Features of Contracts
Explore the essential characteristics of legally enforceable agreements, including offer, acceptance, consideration, capacity, lawful object, and clarity—tailored for Canadian financial professionals.
14.1 Features of Contracts
Contracts might sound intimidating, right? In my early days as a financial planner, I remember scratching my head when a client brought me a 50-page agreement for a business partnership. I had that sinking feeling—“Um, do I really understand all of this?”—even though I had read a decent amount of law cases. Over time, though, I realized that knowing the critical features of contracts is, well, not just important but vital. After all, a contract is the building block that holds people’s finances, businesses, and personal assets together. If you’re a financial planner in Canada, or even if you’re just helping friends figure out the terms of a simple loan, it’s super helpful to ground yourself in the basics of contract law.
Below, we’ll unpack the key features that make a contract valid and legally binding in Canada. We’ll go through the typical six: (1) Offer and Acceptance, (2) Consideration, (3) Intention to Create Legal Relations, (4) Legal Capacity, (5) Lawful Object, and (6) Certainty and Clarity of Terms. Along the way, we’ll highlight practical applications—especially when you’re advising clients who might be signing or drafting contracts involving lending, investments, partnership agreements, and so forth. Let’s get started.
Why Contracts Matter for Financial Planners
Financial planners are often in a position to guide clients through big decisions that hinge on contracts: mortgage documents, partnership agreements, estate deals, investment management agreements, or even straightforward loan contracts between family members. Whether the contract focuses on business or personal finances, you’ll want to ensure that each of these six features is in place. If not, the contract might be unenforceable, risking the client’s assets and your professional reputation. Plus, as of 2025, CIRO (Canadian Investment Regulatory Organization) has guidelines to ensure such agreements follow best practices and protect consumers. So, there’s definitely a regulatory angle, too.
On that note, let’s dive into the core features.
Offer and Acceptance
Contracts often begin with an offer: “I will lend you $50,000 at 5% interest for two years.” The other side needs to accept: “I agree to those terms.”
• The Offer: An offer is a clear promise or commitment by the offeror (the party proposing the deal) to do or refrain from doing something. It must be communicated so that the offeree (the other party) can either accept, reject, or propose a counteroffer. Keep in mind that marketing material or an “invitation to treat” (like a store display) is generally not an offer. Rather, it’s an invitation for the other party to make an offer.
• The Acceptance: Acceptance is the unconditional “Yes, I’ll take that deal.” If the acceptance modifies any terms, it becomes a counteroffer and effectively rejects the original. In a financial planning scenario, you might see a client revise a term in a loan agreement—like changing the interest rate from 5% to 4.5%. That transforms acceptance into a counteroffer and reopens negotiations.
Quick Example
Let’s say your client, Alex, wants to invest in a small local business. The business owner says, “Invest $10,000, and in return, we’ll give you 10% equity.” If Alex simply says, “Yes, I’ll do it,” that’s acceptance to the specific offer. If, on the other hand, Alex replies, “I’d like 12% equity,” that’s not acceptance, that’s a counteroffer.
Consideration
No, we’re not talking about being nice and thoughtful—though that’s always good practice! In contract law, consideration is something of value that each party exchanges. It can be money, services, property, or even a promise to do (or not do) something.
• Why It Matters: Without consideration, you usually don’t have a legally enforceable contract. Gifts—unless under specific formalities such as a contract under seal—are not typically enforceable. As a financial planner, you may advise clients to ensure there is valuable exchange on both sides, so the contract stands on solid legal ground.
• Consideration in Financial Planning: Maybe your client is investing in a partnership. One side invests capital, the other invests skills or intangible “sweat equity.” If you’re not careful, you could end up in a scenario where the exchange is lopsided or indefinite, making the contract vulnerable to legal challenge.
Quick Example
Imagine Linda, one of your clients, invests capital in a friend’s artisanal bakery. Linda invests $50,000. Her friend invests time, labor, and industry know-how. Both forms of investment—capital and labor—are recognized as valid consideration so long as the arrangement is clearly stated (i.e., Linda invests the money, friend invests at least 20 hours a week babysitting ovens, etc.).
Intention to Create Legal Relations
Yes, it’s entirely possible to have an offer, acceptance, and consideration—yet still not have a legally binding contract. How? Because you need the parties to intend that their agreement is legally binding.
• Personal vs. Commercial Settings: Generally, the courts presume that in business contexts, there is an intention to create legal relations. However, in social or domestic arrangements (like me promising to babysit your cat), the assumption is the opposite, unless proven otherwise.
• Implications for Planners: Whenever your client signs, say, a promissory note or a mortgage contract, the presumption is that all parties plan for it to be legally binding. If it’s a more casual arrangement—like a familial “loan” that might never be repaid—there could be a debate later about whether the parties truly meant it as a contract. Ensure your client is crystal clear: “Yes, I intend this to be a formal, legal, binding arrangement.”
Legal Capacity
Before you celebrate a big signing, ask: “Does the other party have the capacity to sign this contract?” Because, if they don’t, your contract might be null and void.
• Age of Majority: In Canada, the age of majority is usually 18 or 19, depending on the province. A minor can typically only enter into contracts for “necessities,” like food or medical services.
• Mental Capacity: The person must understand the nature and consequences of the transaction. If an individual lacks mental capacity (due to mental impairment or intoxication), the contract may be non-binding—or at least voidable.
• Corporate Entities: If you’re dealing with a corporation, that corporation must be validly incorporated and must have the legal authority to enter the contract. In your capacity as a financial planner, you might also want to double-check that the person signing on behalf of the corporation has signing authority (often established by board resolution or corporate by-laws).
Real-World Note
I once saw a scenario—admittedly a bit heartbreaking—where an older gentleman was heavily medicated after surgery, and he signed a contract to invest in a friend’s startup. Later, his family contested the contract, claiming he lacked the mental capacity at that time. The dispute got messy, which underscores the importance of verifying capacity.
Lawful Object
Even if you have a perfect business plan, if that plan is illegal or involves immoral acts, the contract is going to be a no-go—legally at least.
• Legal Purpose: Canadian courts will not enforce contracts that call for illegal acts or conflict with legislative requirements. For instance, a contract to launder money (gasp!) is not going to hold up in court.
• Moral and Public Policy Grounds: Even if an agreement doesn’t violate a specific law, the courts may decline to enforce it if it goes against public policy.
For financial planners, this might come up in scenarios where clients propose, say, questionable tax schemes or something that looks like it might contravene securities regulations. Always ensure that any agreement your clients enter meets the standard for lawful object.
Certainty and Clarity of Terms
Finally, the contract must be sufficiently clear on major terms and conditions. If the terms are ambiguous, a court may not be able to enforce them.
• Specificity: Dates, prices, quantities, obligations, responsibilities—these should be spelled out. “I’ll do some investing for you, and you’ll pay me some money in return,” is too vague.
• Avoiding Ambiguity: If your client’s contract is ambiguous, courts might fill in the gaps with typical “customary” or “reasonable” standards, but that can be unpredictable. Always push for clarity to minimize the risk of lawsuits down the road.
Example of Clarity
In an investment advisory agreement, you might define precisely the scope of services, fees, performance measurement, communication frequency, etc. This clarity prevents disputes—like the client insisting, “You said you’d only invest in Canadian bonds,” while you recall discussing a mix of bonds and equities.
Visual Representation: Steps to Form a Contract
Sometimes it’s easier to see these elements in a flowchart. Here’s a simple mermaid diagram illustrating the path from offer to a legally binding contract:
flowchart LR
A["Offer <br/>Made"] --> B["Acceptance"]
B["Acceptance"] --> C["Consideration"]
C["Consideration"] --> D["Intention & Capacity"]
D["Intention & Capacity"] --> E["Lawful <br/>Object"]
E["Lawful <br/>Object"] --> F["Certainty & Clarity"]
F["Certainty & Clarity"] --> G["Legally <br/>Binding Contract"]
• Offer starts the process.
• Acceptance matches the offer.
• Consideration cements the exchange of value.
• Intention & Capacity ensures both parties mean it and are eligible to enter the agreement.
• Lawful Object checks that the contract’s purpose is legal.
• Certainty & Clarity ensures the agreement is unambiguous.
• Result: a legally binding contract that the courts will typically uphold.
Application in Financial Planning
Financial planners might see contracts in numerous contexts:
• Loan Agreements: These often state the principal, interest rate, repayment schedule, and default provisions. Verifying that all features (offer, acceptance, consideration, etc.) are in place can shield the lender and borrower from misunderstandings.
• Service Agreements: If you’re a planner who charges for your services, your engagement letter or contract with a client is crucial. You must ensure it’s clear on fees, scope of advice, disclaimers, and who’s actually signing (the capacity part!).
• Investment Subscriptions: When clients invest in private placements or new issues, they typically sign subscription agreements that definitely must hold up legally.
• Partnership or Shareholder Agreements: When business expansions or new partnerships form, your client might need guidance on the structure of these contracts.
CIRO Considerations and Regulatory Compliance
The Canadian Investment Regulatory Organization (CIRO) is Canada’s national self-regulatory organization overseeing investment dealers, mutual fund dealers, and related marketplaces. For financial planners, aligning your conduct and agreements with CIRO’s best practices is essential. Although MFDA and IIROC served as separate regulators in the past, they’re now merged into CIRO.
• Clear Disclosure: A major emphasis is ensuring clients are aware of fees, risks, and conflicts of interest. In contract form, that means the terms should be spelled out clearly.
• Best Interest Standards: Under CIRO rules, advisors must act in the best interests of clients. If a contract tries to circumvent these obligations or hide them, it may not just be unenforceable but could also result in regulatory penalties.
• Compliance with Regulatory Regimes: For example, if you’re signing a contract with a client to manage investments, you have to ensure compliance with Canadian securities laws, particularly around know-your-client (KYC) and know-your-product (KYP) rules.
Common Pitfalls and Best Practices
• Pitfall: Assuming a handshake agreement is enough. In most commercial contexts, a handshake alone often lacks written clarity, which can lead to big-time misunderstandings.
• Pitfall: Failing to check capacity. You might feel awkward asking a family to confirm the mental well-being of an 80-year-old matriarch, but it’s in everyone’s interest to be sure she fully understands the nature of her decisions.
• Best Practice: Put everything in plain language. Even if you love legalese, remember your client might not. Also, plain language helps avoid confusion in court disputes.
• Best Practice: Seek legal counsel for complex transactions. As a financial planner, your role is different from that of a lawyer. Complex or high-stakes contracts warrant specialized legal advice.
• Best Practice: Keep records. If a dispute arises, having email threads and meeting notes showing each step of the offer, acceptance, and changes in terms can be a lifesaver.
Case Study: The Unclear Loan Agreement
Picture this scenario: You have a client, Eva, who loans $100,000 to her friend’s startup. They wrote a two-line note: “I, [Friend], will repay $100,000 plus 5% interest whenever the business can afford it.”
• Missing Pieces: No timeline, no security/collateral, no clarity about how “afford” is defined, no consideration of capacity or whether conditions for default exist.
• Potential Result: This note might be valid as a contract—there’s offer, acceptance, and consideration—but it’s dangerously vague. If the business never becomes profitable, Eva might never see her money.
• Lesson: As a financial planner, you’d encourage Eva to define a repayment period, possibly some collateral if the risk is high, interest calculation details, and clear triggers for default. That’s how you ensure clarity and reduce the risk of a never-ending legal tangle.
Additional Resources
Below are a few helpful references for anyone looking to explore Canadian contract law more deeply:
- Government of Canada (Department of Justice) – Contract Law Basics
- Canada Business Corporations Act (CBCA) – for legislative context regarding corporate obligations.
- CIRO – for the latest regulatory guidelines and compliance resources in the investment sector.
- CanLII (Canadian Legal Information Institute) – open repository of Canadian case law, including contract disputes and court rulings.
- “Canadian Business and the Law” by Dorothy DuPlessis et al. – for thorough coverage of business legal concepts.
- Online Course: “Introduction to Canadian Law” (Coursera or edX) – good overviews which often include a module on contract law.
Glossary of Terms
• Contract: A legally enforceable agreement between two or more parties.
• Offer: A statement of willingness to enter into a contract on the outlined terms.
• Acceptance: Unconditional agreement to the terms of the offer.
• Consideration: The “something of value” exchanged between parties.
• Capacity: The legal competence of a party to enter into an agreement (age of majority, mental ability, corporate authority, etc.).
• Lawful Object: The requirement that the contract’s subject matter must be neither illegal nor contrary to public policy.
• CIRO: The Canadian Investment Regulatory Organization, the current self-regulatory organization overseeing investment dealers and mutual fund dealers in Canada.
Conclusion
Understanding the features of contracts is a crucial skill for financial planners in Canada. Whether it’s a simple loan agreement, a partnership arrangement, or a complex investment subscription, each contract must have (1) a clear offer and acceptance, (2) valid consideration, (3) intent to create legal relations, (4) capacity, (5) a lawful object, and (6) certainty of terms. Missing any one of these, you’re likely dealing with an unenforceable or voidable contract.
Anyway, once you grasp these fundamentals—plus a healthy dose of caution around capacity and clarity—you’ll be well on your way to guiding your clients more confidently. At the end of the day, that’s what good financial planning is about: helping clients avoid pitfalls and plan for a secure financial future.
Now, how about a little quiz to see if these concepts have sunk in?
