Contracts

A contract is any promise or set of promises made by one party toanother for the breach of which the law provides a remedy . The promise or promises maybe express (either written or oral) or may be implied from circumstances.

Typically, the remedy for breach of contract is an award ofmoney damages intended to restore the injured party to the economic position that heor she expected from performance of the promise or promises (known as an " expectation measure " ofdamages).

Occasionally a court will order a party to perform his or her promise (an order of " specific performance " or " quantummeruit "), but this remedy is unusual. In the civil law , contracts areconsidered to be part of the general law of obligations .

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 contractformed 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: Generally, formation of a contract requires that parties mutually assent to a bargain and a consideration orconsideration substitute.

Escape from contract: A party may in some cases escape obligations established by a contract for one of thefollowing reasons:

• Mutual or unilateral mistake as to a basic assumption upon which the contract wasmade
• 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 ormental illness)
• Unconscionability
• Violation of a public policy or illegality
• Absence of a writing evidencing formation of the contract
• Impossibility or unwillingness to perform the contract (" repudiation ")
• Misleading or deceptive conduct by one of the parties (the tort of deceit),and
• Frustration of purpose of the contract without default of eitherparty.

Many contract disputes involve a disagreement between the parties about what the contract requires. Hence, many rules ofcontract law pertain to interpretation of terms of a contract that are vague or ambiguous.

Validity of contracts

For a contract to be valid , it must meet thefollowing 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, notsubjectively. Thus, it is no defense to an action based on acontract for the defendant to claim that he never intended to be bound by the agreement if under all the circumstances it isshown at trial that his conduct was such that it communicated to the other party or parties that the defendant had in factagreed. Signing of a contract is one way a party may show his assent. Alternatively, an offer consisting of a promise to paysomeone if the latter performs certain acts which the latter would not otherwise do (such as paint a house) may be accepted bythe requested conduct instead of a promise to do the act. The performance of the requested act indicates objectively the party'sassent to the terms of the offer.

The essential requirement is that there be evidence that the parties had each from an objective perspective engaged inconduct manifesting their assent. This manifestation of assent theory of contract formation may be contrasted with oldertheories, 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 theminds" theory of contract, a party could resist a claim of breach by proving that although it may have appeared objectively thathe intended to be bound by the agreement, he had never truly intended to be bound. This is unsatisfactory, as the other partieshave no means of knowing their counterparts' undisclosed intentions or understandings. They can only act upon what a partyreveals 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 anintent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making byone party of an offer to be bound upon certain terms, and the other parties' acceptance of the offer on the same terms. Theacceptance of an offer may be either a statement of agreement, or, if the offer invites acceptance in this way, a performance ofan 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 clearthat the parties assent was given to the same terms. The terms, like the manifestation of assent itself, are determinedobjectively. They may be written, or sometimes oral, although some kinds of contracts require a writing as evidence of theagreement to be enforced.

• Consideration: There must be consideration given byall the parties, meaning that every party is conferring a benefit on the other party or himself sustaining a recognizabledetriment, such as a reduction of the party's alternative courses of action where the party would otherwise be free to act withrespect to the subject matter without any limitation.

• Competent, Adult ( SuiJuris ) Parties: Both parties must have the capacity to understand theterms of the contract they are entering into, and the consequences of the promises they make. For example, animals, minorchildren, and mentally disabled individuals do not have the capacity to form a contract, and any contracts with them will beconsidered void or voidable . Although corporations are technically legal fictions , they are considered persons under the law, and thusfit to engage in contracts.

For adults, most jurisdictions have statutes declaring that the capacity of parties to a contract is presumed, so that oneresisting enforcement of a contract on grounds that a party lacked the capacity to be bound bears the burden of persuasion on theissue 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 bythe 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 theother party

• Mutual Obligation to Perform: Both Parties must have some obligation to fulfill to the other. This can bedistinct 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. Aspoken contract is often called an " oral contract ", not a "verbalcontract". 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".

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 signedcontract then a contract exists. However, most jurisdictions require a signed writing for certain kinds of contracts (like realestate transactions); the legislation setting out such requirements are typically entitled the Statute of Frauds . The point of the Statute of Frauds is to prevent false allegations of the existence of contracts that were never made, byrequiring 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 bedeemed 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 wasgiven 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 illegalpurpose or contrary to public policy. It will not be recognized by court or enforceable by either party. A contract isvoidable if one of the parties has the option to terminate the contract. Contracts with minors are examples of voidablecontracts. Finally, a contract is unenforceable if it violates the Statuteof frauds . An example of the above is an oral contract for the sale of a motorcycle for $5,000 (any contract for the sale ofgoods over $500 must be in writing to be enforceable).

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 ofthe 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 aunilateral contract only one party to the contract makes a promise. The most common type of unilateral contract is an insurancecontract. The insurance company promises to pay the insured a stated amount of money on the happening of an event if the insuredpays premiums; note that the insured does not make any promise to pay the premiums.

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 areexpressed verbally, either orally or in writing. An implied contract is one in which some of the terms are not expressed inwords.

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 circumstancesimply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for aphysical, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he hasbreached 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 beunjustly enriched were he or she not required to compensate the other. For example, an unconscious patient treated by a doctor atthe scene of an accident has not agreed (either expressly or by implication) to pay the doctor for emergency services, but thepatient 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. Mostcountries, for example, have statutes which deal directly with sale ofgoods , lease transactions and trade practices . There are alsomany 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 healthstudios, and the UK has the Sale of Goods Act 1979 which governs the contracts between sellers and buyers.

Theoretical considerations

Contract theory is the body of legal theory that addressesnormative and conceptual questions in contract law. One of the most important questions asked in contract theory is why contractsare 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 inFried's book, Contract as Promise. Other approaches to contact theory are found in the writings of legal realists and critical legal studies theorists.

See also

• Contract theory
• Force majeure
• Good faith
• Negotiation
• Promissory estoppel
• Quasi-contract
• Remedy