If they sign and breach it, I can sue them for the $1, right?
Yes. (Caveat - there are probably some courts in some Canadian province with a minimum dollar threshold, but this just goes to the proper forum and not the right to some somewhere to enforce a small dollar claim.)
- do I understand the way this works correctly?
Sounds like it.
- what this situation is called?
Sometimes a lawsuit like this one is called a lawsuit for nominal damages. The majority rule is that damages is not an element of a suit for breach of contract, so even if you suffer no economic harm, you can sue the breaching party for $1 of nominal damages.
There are a variety of good reasons to sue to enforce a contract in a case where there are no money damages or only nominal money damages. For example:
You may care more about injunctive relief (e.g. a contract to not change the color of your house which would look ugly if they changed it).
You may have a strategic interest in showing people that there are consequences for a breach that keeps everyone else following the terms of the contract. If a lawsuit costs $1000 to bring, but 90% of people will breach the contract if you never sue, while only 1 in 100,000 will breach if you sometimes bring high profile lawsuits, it could make strategic sense to sue in a small dollar case even though the individual lawsuit isn't a profit center. This is essentially why stores prosecute shoplifters (which while subsidized by the government, still costs them considerable time and expense for their employees).
There may be a need to establish a precedent that can be used in a future dispute with higher stakes.
- how I can tell when a contract is too small to be worth writing(in Canada)? is there such a thing?
People enter into small dollar value contracts all of the time, and it can be economical to do so (consider parking meters, road tolls, Netflix, vending machines, grocery store check out line candy, and library fines), all of which involve tiny transaction values and yet are widely used. Whole industries rise and fall on transactions worth less than $20 each.
In my experience lawsuits are not consistently a good economic investment at less than $75,000 U.S., but in limited jurisdiction courts the process is much cheaper, the vast majority of lawsuits are resolved with defaults, and in any almost any written contract it is possible to insure that the prevailing party will be awarded attorneys' fees and court costs in addition to the damages awarded (this is the default rule in England and many other countries, but not in the U.S.A.).
The key is to structure the transaction in such a way that there aren't good systemic ways to abuse the system, ideally, with some form of non-judicial enforcement.
- Am I still allowed to sue them even if it costs more to sue them out of principle?