Dazed and Contracting: Entering into Contracts While Intoxicated

By Alexander J Friedl

General Formal Requirements of a Contract

A contract is a legally binding agreement between two or more parties that creates mutual obligations, granting the non-breaching party specific rights and remedies in the event of a breach.

Amongst other fundamental elements being present, such as mutual assent (offer and acceptance) and value being exchanged between the parties (known as consideration), for a contract to be valid in Ontario, the parties must also have the capacity or ability to understand the nature, terms and consequences of entering into the contract. As such, it is possible for a contract to be found void if one of the contracting parties is intoxicated at the time of agreement.

Entering into Contracts While Intoxicated

Intoxication, in the context of contract law, commonly refers to being under the influence of alcohol or drugs (whether prescribed, legal, or illegal) which affect a contracting party’s mental capacity. However, it may come as a surprise that entering into a contract while intoxicated does not automatically mean that the intoxicated party lacked the capacity to enter into the agreement. 

Under common law principles, contracts formed while intoxicated are considered voidable rather than automatically void, thereby remaining legally binding unless the intoxicated party proves a legal basis for setting the contract aside using the two-part test outlined below.[1] Notably, the intoxicated party also has an obligation to immediately rescind the contract upon becoming sober and gaining full knowledge of the contract.[2]

As such, a person who was intoxicated at the time they entered into the contract may either not be considered legally incapacitated or they may inadvertently ratify the contract through their subsequent conduct by failing to promptly rescind the agreement. What constitutes an unreasonable amount of time to rescind the contract will be fact-specific, however, the intoxicated party cannot wait and see if the contract will be beneficial for them before taking steps to rescind it.[1]

The Common Law Test

In order for a contracting party to void their contractual obligations due to intoxication, they will need to satisfy both elements of a two-part test,[2] as outlined below:

1. Intoxication Threshold:

   The Ontario Courts will consider the intoxication level of the intoxicated party at the time they entered into the contract to judge whether they had legal capacity to enter into the agreement. To satisfy this threshold, showing mere intoxication is insufficient. Rather, the intoxication must be shown to have been so severe that the party was incapable of understanding the essential characteristics of the agreement, the obligations which were assumed, or its resulting legal consequences. When reviewing the intoxication threshold, the court will consider evidence demonstrating the intoxication, such as witness testimony and historical alcohol/drug use.

2. Knowledge Threshold:

   The Ontario Courts will also consider whether the other contracting party was aware that the party was intoxicated. To fulfill the second branch, a Judge will examine whether the other contracting party exploited the inebriated party’s intoxication or proceeded with the contract despite obvious signs of their lack of capacity. 

In summary, Ontario Courts will apply this test cautiously and carefully to prevent attempts to avoid one’s contractual obligations, resulting in a very high threshold to be met to have a contract set aside. If a party is intoxicated to the point that they have little awareness of their actions and were entirely unable to understand the nature and consequences of the transaction, and if the other party in the transaction knew they were intoxicated, the courts may deem the contract unenforceable.

If you require assistance navigating your legal rights under a contract you signed while intoxicated or simply have questions, contact Alexander Friedl (afriedl@sorbaralaw.com) of SorbaraLAW today.