A Guide to Contract Law
Contracts stand at the heart of business law, encompassing among all legal concepts the one most businesses encounter on a daily basis. They introduce the clarity of law to otherwise uncertain relationships, defining the rights, and duties, and remedies for non-performance among businesses and their customers, suppliers, subcontractors, creditors, employees and other constituencies.
Defining Contracts. The Uniform Commercial Code defines a contract as "the total legal obligation resulting from the parties’ agreement" (U.C.C. § 1-201(11)). Traditionally, a contract requires both an offer (an indication of willingness to enter a deal) and acceptance of the deal from the other party on the terms proposed (Restatement (Second) of Contracts § 24).
Essential Elements of a Contract. The Restatement (Second) of Contracts § 17(1) identifies the essential elements of a contract as "(a) a bargain in which there is a manifestation of mutual assent to the exchange of promises and (b) a consideration." Black’s Law Dictionary broadly defines consideration as, "anything of value or detriment traded by the contracting parties to enter into a legally enforceable agreement."
Purposes of Contracts . Contracts serve five primary purposes, each of which constitutes a distinct area of the law: contracts of sale, contracts that transfer intellectual property, contracts for employment, contracts for real estate and contracts for insurance. In fact, the "Contract" section of the UCC consists entirely of Article 2, entitled "Sales," and Article 2A, entitled "Leases," "Article 3" of the UCC covers "Negotiable Instruments," and "Article 9" addresses the topic of "Secured Transactions." The remainder of the UCC covers the particular legal issues that arise out of the actual sale of goods, transfers of personal property through bailment transactions and issuance of checks. Contracts involving the sale of real property typically fall under state law, while contracts for the purchase of insurance are governed both by the common law and by statutes (the UCC preempts state law on sales contracts for goods).
Contract law, therefore, may be viewed as the core of business law, governing the legal obligations and remedies that fulfill the core purposes of business relationships. Once a contract is formed, the parties rely on the certainty that the contract will be honored. In some cases, however, the primary contract purpose — completion of performance according to the contract terms — may fail to occur, and then the parties must look to contract law for one of its primary functions: a remedy for breach.
Foundational Legal Theories in Contract Law
Contract law has evolved alongside the shifting interaction between the state and the individual. Once viewed primarily as a mechanism of private self-help, the last two centuries have seen the increasing involvement of the state in the theory and practice of contract law. The state has attempted in multiple ways to influence the outcome of individual contractual agreements. Contract law’s relationships with consumer protection, unfair terms, antitrust, environmental regulation, and the workers’ rights movements carry this influence forward into the modern age. In the nineteenth century, scholars sought to justify the newly expanded role played by the courts in fashioning the substantive content of contractual obligations. H.L.A. Hart and Tony Honoré explained that every society has standard norms for its members’ day-to-day interactions. Norms are dictated by social custom and thus do not rest on the conscious selection of a social group. The evolution of these norms creates dynamic standards of behavior that constrain each individual’s options in interactions. To agree to a deal is to commit oneself to behaving in a manner preferred by the community. Courts adopt the communities’ preferences in narrowly adjudicating disputes over breaches, while in the broader realm they should leave unwritten contractual norms undisturbed. Karl Llewellyn objected that this judicial restraint is impossible. Norms are rarely clear-cut, and the preferences of communities are often in conflict with one another. The process of granting substantive power to the courts must itself be grounded in conscious community choice. While Llewellyn accepted the notion of a gap between subjective intention and judicial construction of contracts, he insisted that judges must always strive to reduce this gap. He offered a ‘realist’ theory of contract law that rejected the doctrine of freedom of contract in favor of an interpretive model more influenced by economics. Successful contracts need to survive in the market or they lose their effect. Therefore, Llewellyn believed that judges should give the principles of contract law ‘life’ by allowing the most economically sound interpretation of a contract to prevail. Robert Gordon countered that Llewellyn’s realism cannot provide an effective method for coherent adjudications. A judge cannot just decide "what makes the best economic sense." Substantive doctrines and judicial rules of construction must be used. Furthermore, limits must be put upon the doctrine of unconscionability for coherence to be achieved. Otherwise, too many constructive constructions will escape the notice of the adjudicating judge, and ad hoc decisions will be a substitute for reasoned, consistent interpretations. Judge Richard Posner has stated that "[i]t is easy to applaud Llewellyn’s ideal of the legal realist judge, but in the end he remains an idol, a symbol of a regrettably extinct conservative ethic. What may help to resuscitate him is a scientific approach to the problem of legal interpretation." He argues that the relationship between contract law and economics should be much closer. For instance, the language of contracts should be read as economic units, not as lengthier words or phrases. The judgment of the courts should be guided by optimal conduct for a contracting party. The application of contracts law is a social process and therefore economic theory must be inserted as a means of limiting the uncertainty inherent in community norms and judicial deference to them.
Principles of a Legally Binding Contract
A valid contract consists of four essential elements, which must be satisfied for the contract to be enforceable. The four elements are offer, acceptance, consideration, and mutual consent.
The first element, an offer, requires that one party to the contract propose some type of deal to the other party. This deal can be an offer for a product or service, and a quote or proposal submitted for consideration does not constitute a binding offer. There must be a clear offer with specific terms stated.
Acceptance is the second element. Acceptance requires that the offeree agrees to the terms of the offer. The acceptance can be verbal or written, but must clearly and unambiguously indicate agreement with the offer.
The third element of consideration requires that both parties to the contract exchange something of value. In most of these types of transactions, the consideration is money paid for a good or service of equal value. Consideration can be something minor, even, but as long as its value is apparent, the contract will be upheld.
The fourth element is mutual consent, which involves an understanding by both parties of the agreement. A contract cannot exist if one party does not know of it or deliberately avoids learning about it.
There are a number of pitfalls in this process that may render a contract invalid. If one of the parties is a minor, generally a contract will be voidable. Additionally, if one of the parties is mentally incompetent, the contract is voidable. When one party executes the contract based on duress or as the result of misrepresentation or fraud, that contract can be overridden by a court.
Case Examples: Notable Cases in Contract Law
Adams v Lindsell (1816) 1 Beast 681
In this case, the Court of King’s Bench held that a contract had been formed when a letter was posted. The defendant wrote a letter to the claimant offering to sell sheep. The letter was posted to the claimant but due to a mistake, the letter was delivered to the claimant 12 days after it was posted. The claimant posted a letter of acceptance which was received by the defendant the day after it was posted. The Court held that there must be an agreement put into effect before the claimant could accept the offer and the fact that the letter was delayed did not prevent the contract coming into effect upon posting. When accepted, the acceptance took effect immediately while in the case of a counter offer, the acceptance became effective by the acceptance of the counter offer.
Hyde v Wrench (1840) 49 ER 132
This case considers the question of an offer and acceptance. The defendant made an offer to sell land to the claimant for the sum of £1,000. The claimant offered to buy the land for £1,200. The defendant refused and stated that he would only sell the land for £1,1,000. The claimant then offered £1,000 for the property which was refused. It was held that the offer was rejected when the offer was changed from £1,000 to £1,200. A counter offer destroys the first offer; as a result, the claimant could not accept the defendant’s old terms.
Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3
The parties were communicating by telex (a telecommunications system). Four telex communications were exchanged between the parties. The claimant sent the telex from London and the defendant received the telex in Amsterdam. The telex sent from Holland was received on Monday morning in England and the offer was accepted on Sunday night. The Court held that an offer is only accepted when it is communicated to the offeror. The contract is completed when notice of the acceptance is given to the offeror.
Felthouse v Bindley (1886) 55 ER 960
The claimant negotiated the sale of a horse with the defendant. The defendant was the nephew and agent of the claimant. The claimant stated to the defendant that if the horse was as described, he would purchase it for the sum of £30. The offer also stated that ‘if I hear no more about it, I consider the horse as mine at £30.’ The defendant failed to communicate the offer to his nephew. Later on, the claimant told his nephew that he considered the horse to belong to him. The defendant’s nephew sold the horse to someone else and the claimant brought action against him. The Court held that the offer was not accepted and therefore there was no consensus ad idem (meeting of the minds). There was no valid contract between the parties, and the defendant was not liable for conversion. Silence cannot be taken to be the acceptance of an offer.
Contractual Provisions and Their Interpretation
Agreements between parties create a range of binding obligations which are so important that the law employs the technical language of "contract" and "contractual terms" to refer to them. When parties enter a contract, they usually agree expressly about the contents and effect of that document. However, contracts are also made up of implied terms, which come into play without being stated in the contract. Express terms are those, the content of which is clear from the face of the contract, while implied terms are those which are inferred by the court as being the assumed intention of the parties. The Law of England and Wales distinguishes between a different class of terms, based on their effect and importance in the contract, namely conditions, warranties and innominate terms. The breach of a "condition" allows the innocent party to terminate the contract and sue for damages. In case of a "warranty", however, the innocent party’s remedy is limited to claiming damages. An innominate term lies in between the two. It refers to an act, the effect of which has to be analysed in context , to see if it deprives the innocent party of substantially all of the benefit. If that is the case (and the court is more likely to find that in case of a serious breach where it will be very difficult to put the parties back in the position in which the contract had found them), the contract can be terminated and damages claimed. English courts interpret the terms in the contract, including any implied terms. There is a presumption that the words in a contract should be given their ordinary meaning, but there is an exception to that rule. In deciding on the meaning of the contractual terms, English law also employs the doctrine of "reasonable expectations". That means that the interpretation of the contract must not go against common sense or the reasonable expectations of the parties. This eliminates absurd results such as breach of warranty entitling the innocent party to terminate the contract or an express provision allowing one party to avoid its obligations under the contract. In further defining the approach of the English courts to contractual construction, three key principles have been espoused, namely: The approach to interpretation will dictate the effect of the contractual terms and can alter the remedies available to the parties in case of a breach.
Issues in Enforcing a Contract
Challenges in enforcing contracts, including an examination of incapacity, duress, and undue influence as applied by the courts
As with any other area of the law, challenges often arise in contract disputes that can make enforcing a given agreement difficult. One of the more common issues is a dispute over contract terms. This does not necessarily arise from actual ambiguity of how a particular term was supposed to be interpreted, but instead may arise from one party simply being unwilling or unable to comply with a provision of the contract. In this case, it may be necessary to take legal action to enforce the agreement, whether that be in the form of a demand letter, formal counseling or filing a lawsuit.
In other situations, a contract is simply not enforceable because the person who signed it did not have the capacity to do so. For example, a minor cannot be held to a contract that they signed, as they do not have the legal right to do so. Likewise, an individual who has been declared mentally incompetent will not be able to enter into a contract. In some cases, intoxication can be a factor that leads to a lack of capacity, although this will depend largely on how intoxicated the person was and how that intoxication affected their ability to understand the terms of the contract they were signing. It’s also important to note that even if the intoxication was sufficient to create a lack of capacity to sign a contract, that may not affect the remaining parties’ ability to enforce the contract against the other parties that have sufficient capacity to sign.
In some respects, this issue overlaps with that of duress. A contract may be void or voidable if duress can be established, meaning that a contract entered into under threat of physical harm or other coercive tactics to force one party into it will be unenforceable in court. This topic is fairly black-and-white, so it’s fairly easy to determine whether or not a contract is voidable due to duress. Undue influence, however, is a bit more nuanced. For example, undue influence may apply to contracts in some situations involving the granting of power of attorney. Courts are generally more likely to rule a contract enforceable in situations where undue influence is claimed if the party alleging undue influence had an opportunity to read the contract before signing, if the person who was ultimately harmed as a result of the contract had the capacity to understand it, or if the person who committed the undue influence was not in a position of trust or authority to the victim of such influence. Courts analyze undue influence on a case-by-case basis, so it is always advisable to consult a contract attorney to determine your options.
Importance of Contract Law to Business Transactions
Contract law is integral to the success of business transactions. By having clear, binding agreements in place, businesses know exactly what their legal obligations are and what they can expect from others when they enter a contract. It also protects each party and ensures that everyone fulfills their end of the deal. If these contracts were not legally binding, there would be no way to hold a company accountable for its dealings with other organizations.
Contracts exist everywhere in business, in forms such as:
Without these agreements, there would be rampant confusion, as well as shady business organization. Because each business enters into contracts with the expectation of legally protecting itself, contract law upholds professional integrity by ensuring that the contracts are relatively free of surprises, so to speak, seeing as all parties know beforehand what they are required to do.
Without contract law, businesses would be much more reckless, cheating the "system" by pushing the limits of what can be agreed upon. However, courts have better things to do than entertain cases that deal with extremely outlandish and unfair dealings. This means that only when absolutely necessary do businesses end up in court over breach of contract cases.
Contract law eliminates problems that arise from fighting between businesses – in fact, it eliminates problems entirely. Businesses should understand that contracts are a necessary part of dealing with other organizations. Without them, there would be widespread chaos. That being said, however, businesses should understand that even if its contracts are strong, breaking them is still possible. Whether a business breaks its contracts or has contracts broken by others, these things happen. But without proper contract law, there wouldn’t be any fair legal recourse or even any idea on how to handle such things when they arise.
Upcoming Developments in Contract Law
The advent of technology in contract law has brought about significant changes to how contracts are formed, enforced, and interpreted. One of the most significant technological advancements in recent years is the use of blockchain to create "smart contracts." A smart contract is a self-executing contract with the terms of the agreement directly written into code. This technology has the potential to automate much of the contract formation and execution process, reducing the need for third-party intermediaries and the potential for human error.
However, the use of blockchain raises a number of legal questions, including how to determine the validity of a smart contract, how to resolve disputes that arise within the context of a smart contract , and how to enforce the terms of a smart contract when one party refuses to comply with them. These issues are further complicated by the fact that many of the laws and regulations governing traditional contracts were not designed with this new technology in mind.
Another emerging trend in contract law is the use of artificial intelligence (AI) in contract analysis and drafting. AI can be used to assist lawyers in identifying potential risks and ambiguities in contracts, as well as in suggesting alternative provisions or restructuring the content to make it clearer. While the use of AI in contract law has the potential to save time and reduce costs, it also presents a number of challenges, such as the risk that important legal issues may be missed or overlooked, or that the reliance on AI could lead to a devaluation of the role of human lawyers.
Overall, the use of blockchain and AI in contract law presents both opportunities and challenges. Legal systems and practitioners will need to adapt to these changes and find ways to address the novel legal issues that they present.