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A contract is any legally-enforceable promise or set of promises made by one party to another. The contract may be express (either written or oral) or may be implied from circumstances. Contracts may be enforced by filing a civil (non-criminal) lawsuit, usually in a state court, or by petitioning a private arbitrator to decide the contract issues presented. Many contracts provide that all contract disputes will be arbitrated by the parties to the contract, rather than litigated in courts. By law, some contracts, including most securities brokerage contracts, must be arbitrated; other contracts are referred by courts as a matter of local law or policy. Arbitrated judgements are generally enforced and appealed in the same manner as ordinary court judgements; a majority of states have adopted the Uniform Arbitration Act to facilitate the enforcement of arbitrated judgements.
Typically, the remedy for breach of contract is an award of money damages intended to restore the injured party to the economic position that he or she expected from performance of the promise or promises (known as an "expectation measure " of damages). Occasionally, a court will order a party to perform his or her promise (an order of "specific performance") or to compensate for the value bestowed ("quantum meruit" or unjust enrichment), but these remedies are unusual. In the civil law, contracts are considered to be part of the general law of obligations.
Contract claims (where the parties have defined their own legal relationship) are usually distinguished from tort claims (where the relationship between the parties is defined by law or custom).
Scope of common law contract law
Basic common law contract law addresses four sets of issues:
- When and how is a contract formed?
- When may a party escape obligations of a contract (such as a contract formed under duress or because of a misrepresentation)?
- What is the meaning and effect to be given to the terms of a contract?
- What is the remedy to be given for breach of a contract?
Contract formation: Generally, formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration (see also consideration under English law).
Escape from contract: A party may in some cases escape obligations established by a contract for one of the following reasons:
- Mutual or unilateral mistake as to a basic assumption upon which the contract was made
- Misrepresentation of facts inducing one of the parties to enter the contract
- Duress inducing one of the parties to enter the contract
- Lack of capacity to contract (such as infancy, influence of drugs, alcohol or mental illness)
- Violation of a public policy
- Absence of a writing evidencing formation of the contract if the Statute of Frauds requires such a writing
- Performance of the contract becomes impossible or extremely difficult or costly by virtue of events occurring after the contract is formed
- The principal purpose of the contract is substantially frustrated by virtue of events occurring after the contract is formed
Meaning and effect of contract terms: Many contract disputes involve a disagreement between the parties about what terms in the contract require each party to do or refrain from doing. Hence, many rules of contract law pertain to interpretation of terms of a contract that are vague or ambiguous.
Remedy for breach of contract: If one party breaches (i.e. fails to perform) his or her obligations under a contract, the party injured by the breach typically may recover money damages as compensation for the breach. In addition, if the breach of contract is "material," the injured party may be excused from performing any of its remaining obligations under the contract. In a relatively small number of cases, an injured party may either obtain a court order requiring that the breaching party perform his or her obligations under the contract ("an order of specific performance") or refrain from further breach ("an injunction").
Validity of contracts
For a contract to be valid, it must meet the following criteria:
Mutual agreement - (offer and acceptance): There must be an express or implied agreement. In modern practice, whether there has been an agreement is determined objectively, not subjectively. Thus, it is no defense to an action based on a contract for the defendant to claim that he never intended to be bound by the agreement if under all the circumstances it is shown at trial that his conduct was such that it communicated to the other party or parties that the defendant had in fact agreed. Signing of a contract is one way a party may show his assent. Alternatively, an offer consisting of a promise to pay someone if the latter performs certain acts which the latter would not otherwise do (such as paint a house) may be accepted by the requested conduct instead of a promise to do the act. The performance of the requested act indicates objectively the party's assent to the terms of the offer.
The essential requirement is that there be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent. This manifestation of assent theory of contract formation may be contrasted with older theories, in which it was sometimes argued that a contract required the parties to have a true meeting of the minds between the parties. Under the "meeting of the minds" theory of contract, a party could resist a claim of breach by proving that although it may have appeared objectively that he intended to be bound by the agreement, he had never truly intended to be bound. This is unsatisfactory, as the other parties have no means of knowing their counterparts' undisclosed intentions or understandings. They can only act upon what a party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required.
- A contract will be formed [assuming the other requirements are met] when the parties give objective manifestation of an intent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making by one party of an offer to be bound upon certain terms, and the other parties' acceptance of the offer on the same terms. The acceptance of an offer may be either a statement of agreement, or, if the offer invites acceptance in this way, a performance of an act requested in the terms of the offer. For instance, if one tells a neighbor kid that if the kid mows the offeror's lawn, the offeror will pay $20.00, and the kid does mow the lawn, the act of mowing constitutes the manifestation of the kid's assent. For a contract based on offer and acceptance to be enforced, the terms must be capable of determination in a way that it is clear that the parties assent was given to the same terms. The terms, like the manifestation of assent itself, are determined objectively. They may be written, or sometimes oral, although some kinds of contracts require a writing as evidence of the agreement to be enforced.
Consideration: There must be consideration(see also consideration under English law) given by all the parties, meaning that every party is conferring a benefit on the other party or himself sustaining a recognizable detriment, such as a reduction of the party's alternative courses of action where the party would otherwise be free to act with respect to the subject matter without any limitation.
Competent, Adult (Sui Juris ) Parties: Both parties must have the capacity to understand the terms of the contract they are entering into, and the consequences of the promises they make. For example, animals, minor children, and mentally disabled individuals do not have the capacity to form a contract, and any contracts with them will be considered void or voidable . Although corporations are technically legal fictions, they are considered persons under the law, and thus fit to engage in contracts.
- For adults, most jurisdictions have statutes declaring that the capacity of parties to a contract is presumed, so that one resisting enforcement of a contract on grounds that a party lacked the capacity to be bound bears the burden of persuasion on the issue of capacity.
- Proper Subject Matter: The contract must have a lawful purpose . A contract to commit murder in exchange for money will not be enforced by the courts. It is void ab initio, meaning "from the beginning."
- Mutual Right to Remedy: Both parties must have an equal right to remedy upon breach of the terms by the other party
- Mutual Obligation to Perform: Both Parties must have some obligation to fulfill to the other. This can be distinct from consideration, which may be an initial inducement into the contract.
Need for a writing?
Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract is often called an "oral contract", not a "verbal contract." A verbal contract is simply a contract that uses words. All oral contracts and written contracts are verbal contracts. Contracts that are created without the use of words are called "non-verbal, non-oral contracts" or "a contract implied by the acts of the parties."
Courts in the United States have generally ruled that if the parties have a meeting of the minds, and act as though there was a formal, written and signed contract, then a contract exists. However, most jurisdictions require a signed writing for certain kinds of contracts (like real estate transactions). A law setting out such requirements is typically called the Statute of Frauds; the name originates from an English statute that was for "the prevention of frauds." The point of the Statute of Frauds is to prevent false allegations of the existence of contracts that were never made, by requiring formal (i.e. written) evidence of the contract.
Furthermore, the existence of a written contract does not necessarily ensure its enforceability or validity. A contract can be deemed unenforceable if it requires a party to undertake an illegal act, if it was signed under duress or while intoxicated, if the disparity in knowledge between the parties is extreme and the weaker party was given onerous terms, etc.
Void, voidable and unenforceable contracts
There are three classifications of contracts that are not binding. A contract is void if it is based on an illegal purpose or contrary to public policy; the classic example is a contract with a hit man. It will not be recognized by a court, and cannot be enforced by either party. A contract is voidable if one of the parties has the option to terminate the contract. Contracts with minors are examples of voidable contracts.
Finally, a contract is unenforceable if it violates the Statute of frauds. An example of the above is an oral contract for the sale of a motorcycle for US$5,000 (in the USA any contract for the sale of goods over US$500 must be in writing to be enforceable).
In the U.S., one unusual type of unenforceable contract is a personal employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government's secrets during his lawsuit).
Bilateral v. unilateral contracts
Contracts may be bilateral or unilateral. The more common of the two, a bilateral contract, is an agreement in which each of the parties to the contract makes a promise or promises to the other party. For example, in a contract for the sale of a home, the buyer promises to pay the seller £200,000 in exchange for the seller's promise to deliver title to the property. In a unilateral contract only one party to the contract makes a promise. A typical example is the reward contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog. In this example, the finding of the dog is a condition precedent to A's obligation to pay. An offer of a unilateral contract may often be made to many people (or 'to the world') by means of an advertisement: acceptance will only occur on satisfaction of the condition (such as the finding of the offeror's dog) and if the condition is something that only one party can perform, both the offeror and offeree are protected; the offeror because he will only ever be contractually obliged to one of the many offerees, and the offeree because if she does perform the condition the offeror will be contractually obliged to pay her. In such cases the requirement that acceptance be communicated to the offeror is waived: the offeree accepts by performing the condition (which performance is also the price, or consideration, for the offeror's promise).
The most common type of unilateral contract is the insurance contract. The insurance company promises to pay the insured a stated amount of money on the happening of an event if the insured pays premiums; note that the insured does not make any promise to pay the premiums.
Courts generally favor bilateral contracts. The black letter law states "In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses." Restatement (Second) of Contracts § 32 (1981) (emphasis added). Here the law attempts to provide some protection from the risk of revocation in a unilateral contract to the offeree. Note that if the offer for contract specifically requests performance rather than a promise, a unilateral contract will exist. See option contracts for more information on protection given to the offeree in a unilateral contract.
Express contracts v. implied contracts
A contract can be either an express contract or an implied contract. An express contract is one in which the terms are expressed verbally, either orally or in writing. An implied contract is one in which some of the terms are not expressed in words.
Implied in fact or implied in law
An implied contract can either be implied in fact or implied in law. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a physical, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he has breached a contract implied in fact.
A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. For example, an unconscious patient treated by a doctor at the scene of an accident has not agreed (either expressly or by implication) to pay the doctor for emergency services, but the patient would be unjustly enriched by the doctor's services were the patient not required to compensate the doctor.
Statutory law applicable to contracts
The rules by which many contracts are governed are provided in specialized statutes that deal with particular subjects. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions and trade practices . For example, most American states have adopted Article 2 of the Uniform Commercial Code, which regulates contracts for the sale of goods.
There are also many acts around the world which deal with specific types of transactions and businesses. For example, the states of California and New York in the U.S. have statutes that govern the provision of services to customers by health studios, and the UK has the Sale of Goods Act 1979 which governs the contracts between sellers and buyers.
Contract theory is the body of legal theory that addresses normative and conceptual questions in contract law. One of the most important questions asked in contract theory is why contracts are enforced. One prominent answer to this question focuses on the economic benefits of enforcing bargains. Another approach, associated with Charles Fried, maintains that the purpose of contract law is to enforce promises. This theory is developed in Fried's book, Contract as Promise. Other approaches to contact theory are found in the writings of legal realists and critical legal studies theorists.
Last updated: 09-12-2005 02:39:13