Contract Contract Carousel (musical) Category="Contract law"Category="Legal documents"A contract is any legally-enforceable promise or set of promises made between parties. In the civil law, contracts are considered to be part of the general Law of obligations. This article describes the law relating to contracts in Common law jurisdictions.

Comparison of contract and tort law

The law of obligations has traditionally been divided into contractual obligations, which are voluntarily undertaken and owed to a specific person or persons, and obligations in Tort which are based on the wrongful infliction of harm to certain protected interests, primarily imposed by the law, and typically owed to a wider class of persons. Recently it has been accepted that there is a third category, restitutionary obligations, based on the unjust enrichment of the defendant at the plaintiff’s expense. Contractual liability, reflecting the constitutive function of contract, is generally for failing to make things better (by not rendering the expected performance), liability in tort is generally for action (as opposed to omission) making things worse, and liability in restitution is for unjustly taking or retaining the benefit of the plaintiff’s money or work [Beatson (1998) Anson’s Law of Contract, 27th ed. (Oxford: OUP), pg. 21].

Scope of common law contract law

Basic Common law contract law addresses four sets of issues:
  1. When and how is a contract formed?
  2. When may a party escape obligations of a contract (such as a contract formed under Duress or because of a misrepresentation)?
  3. What is the meaning and effect to be given to the terms of a contract?
  4. What is the remedy to be given for breach of a contract?

Contract formation: There must be an agreement which consists of an Offer and acceptance, Consideration (see also Consideration under English law) and contractual intention for a simple contract to exist: i.e. it is not a deed - otherwise no consideration is needed.

Subject to the sine qua non of Contract Formation, other ingredients that make up a contract include:

A contract which possesses all of the above ingredients is said to be valid. The absence of an essential element will render the contract either void, voidable or unenforceable

In some situations, a Collateral contract may exist.

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. The Parol evidence rule limits what things can be taken into account when trying to interpret a contract.

Privity: In general, only parties to a contract may sue for the breach of a contract.

Validity of contracts

For a contract to be valid, it must meet the following criteria:
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.

Written contracts

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." Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts. This is in contrast to a "non-verbal, non-oral contract," also known as "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).

In the United States, 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. Contracts that do not meet the requirements of Statute of Frauds legislation are unenforceable, but not void. However, a party unjustly enriched by an unenforceable contract may be subject to Restitution for Unjust enrichment.

In Australia, for contracts subject to legislation equivalent to the Statute of Frauds, there is no requirement for the entire contract to be in writing, although there must be a note or memorandum evidencing the contract, which may come into existence after the contract has been formed. The note or memorandum must be signed in some way, and a series of documents may be used in place of a single note or memorandum. It must contain all material terms of the contract, the subject matter and the parties to the contract.

In England and Wales, the Statute of frauds is still in force, but only for guarantees, which must be evidenced in writing, although the agreement may be made orally. Certain other kinds of contract (such as for the sale of land) must be in writing or they are void.

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. For example, in Massachusetts a contract is not enforceable if it is executed on a Sunday.

If the terms of a contract subject to Statute of Frauds legislation are to be varied, the variations must be noted in writing as well. However, the contract may be discharged orally.

If a contract is in a written form, then generally, you are bound by its terms regardless of whether you have read it or not (L'Estrange v. F Graucob Ltd [1934] 2 KB 394). However, this is tempered by the exception that if the terms of the contract are misrepresented, then the plaintiff is unable to rely on the terms of the contract; in addition, the document must be contractual in nature (Curtis v. Chemical Cleaning and Dyeing Co [1951] 1 KB 805).

Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract (see Balmain New Ferry Company Ltd v. Robertson (1906) 4 CLR 379). This includes such things as tickets issued at parking stations.

Void, voidable and unenforceable contracts

In general, there are three classifications of contracts that are not binding:

Uncertainty and incompleteness

If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price, may cause the entire contract to fail.

However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract (see Hillas v. Arcos Ltd (1932) 147 LT 503).

Courts may also look to external standards, which are either mentioned explicitly in the contract (Whitlock v. Brew (1968) 118 CLR 445) or implied by common practice in a certain field (Three Rivers Trading Co., Ltd. v. Gwinear & District Farmers, Ltd. (1967), 111 Sol. J. 831). In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique.

Severence of unenforceable clauses

If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses. The test of whether a clause is severable is an objective test - whether a reasonable person would see the contract standing even without the clauses.

Spy contracts

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. In that situation, acceptance will only occur on satisfaction of the condition (such as the finding of the offeror's dog). If the condition is something that only one party can perform, both the offeror and offeree are protected - the offeror is protected because he will only ever be contractually obliged to one of the many offerees; and the offeree is protected, because if she does perform the condition, the offeror will be contractually obliged to pay her.

In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree's performance is also treated as 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 general rule in the United States is: "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 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 and 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.

Quasi-contract

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.

Incorporation of terms

Course of dealing

If two parties have regularly conducted business on certain terms, it may be reasonable to presume that in future dealings where there is no contract, the parties wish to incorporate the terms of the previous contracts. However, if a party wishes to incorporate terms by course of dealing, the original document must have been contractual in nature, and delivery receipts may not fit this description. In Australia, there is a further requirement that the document was procured after formation.

Express and implied terms

Different types of statements

Whether a statement is a term of a contract is important because only if a promise is a term of the contract can a party sue for the breach of the contract. Statements can be split into the following types:

Factors that a court may take into account in determining the nature of a statement include:

Terms implied in fact

The Privy Council proposed a five stage test in BP Refinery Western Port v. Shire of Hastings:
  1. Reasonableness and equitableness: The implied term must be reasonable and equitable.
  2. Business efficacy: The implied term must be necessary for the business efficacy of the contract. For instance, if the term simply causes the contract to operate better, that does not fit this criterion.
  3. Obviousness: The term is so obvious that it goes without saying. Furthermore, there must be one and only one thing that would be implied by the parties. For example, in Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337, a term regarding the inability of construction company to work three shifts a day could not be implied because it was unclear what form it would have taken.
  4. Clear expression: The term must be capable of clear expression. No specific technical knowledge should be required.
  5. Consistency: The implied term may not contradict an express term.

In Australia, the High Court has ruled that the test in BP Refinery applies only to formal contracts, while the test in Byrne and Frew v. Australian Airlines Ltd (1995) 185 CLR 410 shall apply to informal contracts:

Terms implied in law

These are terms that have been implied into standardised relationships. The other difference between this and terms implied in fact is that the test is one of necessity (Liverpool City Council v. Irwin [1976] 2 WLR 562); a necessary term is one where the contract is rendered worthless or nugatory if it is without it.

Terms implied by custom or trade

You are generally bound by the custom of the industry that you are in. To imply a term due to custom or trade, you must prove the existence of the custom, which must be notorious, certain, legal and reasonable (Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226). See also Frigaliment Importing Co., Ltd., v. B.N.S. International Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (plaintiff failed to prove what he meant by "chicken") and U.C.C. § 1-205.

Agreements to negotiate

It is common for lengthy negotiations to be written into a heads of agreement document that includes a clause to the effect that the rest of the agreement is to be negotiated. Although these cases may appear to fall into the category of agreement to agree, courts nowadays (at least in Australia) will imply an obligation to negotiate in Good faith provided that certain conditions are satisfied (Coal Cliff Collieries Pty Ltd v. Sijehama Pty Ltd (1991) 24 NSWLR 1):

The test of whether one has acted in good faith is a subjective one; the cases suggest honesty, and possibly also reasonably.

"Subject to" contracts

If a contract specifies "subject to contract", it may fall into one of three categories (Masters v. Cameron (1954) 91 CLR 353):
  1. The parties are immediately bound to the bargain, but they intend to restate the deal in a formalised contract that will not have a different effect; or
  2. The parties have completely agreed to the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or
  3. It is merely an agreement to agree, and the deal will not be concluded until the formalised contract has been drawn up.

If a contract specifies "subject to finance", it imposes obligations on the purchaser (Meehan v. Jones (1982) 149 CLR 571):

Once again, there is an element of good faith involved.

This may also refer to contingent conditions, which come under two categories: condition precedent and condition subsequent. Conditions precedent are conditions that have to be complied with before performance of a contract. With conditions subsequent, parties have to perform until the condition is not met. Failure of a condition does not void the contract, it is just regarded as voidable.

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.

Remedies

Damages

Typically, the remedy for Breach of contract is an award of money Damages. Courts usually adopt one of three ways of calculating the value of damages.

The most common is to assess the sum which would 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" or "benefit-of-the-bargain" measure of damages).

When it is either not possible or desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being unjustly enriched ("Restitution").

Specific perfomance

There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. For example where an art collector purchases a rare painting and the vendor refuses to deliver, the collector's damages would be equal to the sum paid.

The court may make an order of what is called "Specific performance", requiring that the contract be performed. In some circumstances a court will order a party to perform his or her promise (an order of "Specific performance") or issue an order, known as an "injunction," that a party refrain from doing something that would breach the contract.

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance.

Procedure

In the United States, in order to obtain damages for breach of contract or to obtain specific performance, the injured party may file a civil (non-criminal) lawsuit, usually in a state court, or petition a private arbitrator to decide the contract issues presented.

Many contracts provide that all contract disputes must 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.

In England and Wales, a contract may be enforced by use of a Claim, or in urgent cases by applying for an interim injunction to prevent a breach.

Theoretical considerations

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 contract theory are found in the writings of legal realists and Critical legal studies theorists.

See also

External links