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Contract Law

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Contract Law

"Legally binding" redirects here. For other uses, see :legally binding.
For other uses, see Contract (disambiguation).

In common law legal systems, a contract is an agreement having a lawful object entered into voluntarily by two or more parties, each of whom intends to create one or more legal obligations between them. The elements of a contract are "offer" and "acceptance" by "competent persons" having legal capacity who exchange "consideration" to create "mutuality of obligation."[1]

Proof of some or all of these elements may be done in writing, though contracts may be made entirely orally or by conduct. The remedy for breach of contract can be "damages" in the form of compensation of money or specific performance enforced through an injunction. Both of these remedies award the party at loss the "benefit of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract,[2] although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.

Contract law varies greatly from one jurisdiction to another, including differences in common law compared to civil law, the impact of received law, particularly from England in common law countries, and of law codified in regional legislation. Regarding Australian Contract Law for example, there are 40 relevant acts which impact on the interpretation of contract at the Commonwealth (Federal / national) level, and an additional 26 acts at the level of the state of NSW. In addition there are 6 international instruments or conventions which are applicable for international dealings, such as the United Nations Convention on Contracts for the International Sale of Goods.[3]

History

Main articles: History of contract law and Roman law

Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, which is usually translated "agreements must be kept" but more literally means "pacts must be kept".[4] Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations, along with tort, unjust enrichment, and restitution. The common law of contract originated with the writ of assumpsit, which was originally a tort action based on reliance.[5]

Jurisdictions vary in their principles of freedom of contract. In common law jurisdictions such as the United Kingdom and the United States, a high degree of freedom is expected. For example, in American law, it was determined in the 1901 case of Hurley v. Eddingfield that a physician was permitted to deny treatment to a patient despite the lack of other available medical assistance and the patient's subsequent death.[6] This is in contrast to the civil law, which typically applies certain overarching principles to disputes arising out of contract, as in the French Civil Code. Other legal systems such as Islamic law, socialist legal systems, and customary law have their own variations.

However, in the case of the United States the principle of freedom of contract has eroded over time due to judicial deference to legislation affecting contracts.[7] For example, the Civil Rights Act of 1964 restricted private racial discrimination against African-Americans.[8] In the early 20th century the United States underwent the "Lochner era", in which the Supreme Court of the United States struck down economic regulations on the basis of freedom of contract and the Due Process Clause; these decisions were eventually overturned and the Supreme Court established a deference to legislative statutes and regulations which restrict freedom of contract.[7] The U.S. Constitution contains a Contract Clause, but this has been interpreted as only restricting the retroactive impairment of contracts.[7]

Not all agreements are necessarily contractual, as the parties must have an intention to be legally bound. In American English, a gentlemen's agreement is one which is not intended to be legally enforceable.

Commercial use

Contracts are widely used in commercial law, and form the legal foundation for transactions across the world. Common examples include construction contracts, product purchases (with associated warranties of quality), software licenses, employment contracts, insurance policies, real estate deeds to transfer title, professional services, wholesale merchandise supply, and various other uses.

Online contracts have common. E-signature laws have made the electronic contract and signature as legally valid as a paper contract. It has been estimated that roughly one hundred and ten electronic contracts are signed every second.

Elements

At common law, the elements of a contract are offer, acceptance, intention to create legal relations, and consideration.

Offer and acceptance

In order for a contract to be formed, the parties must reach mutual assent (also called a meeting of the minds). This is typically reached through offer and an acceptance which does not vary the offer's terms, which is known as the "mirror image rule". If a purported acceptance does vary the terms of an offer, it is not an acceptance but a counteroffer and, therefore, simultaneously a rejection of the original offer. The Uniform Commercial Code disposes of the mirror image rule in §2-207, although the UCC only governs transactions in goods in the USA. As a court cannot read minds, the intent of the parties is interpreted objectively from the perspective of a reasonable person,[9] as determined in the early English case of Smith v Hughes [1871].

Contracts may be bilateral or unilateral. A bilateral contract is an agreement in which each of the parties to the contract makes a promise or set of promises to each other. 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. These common contracts take place in the daily flow of commerce transactions, and in cases with sophisticated or expensive promises may involve extensive negotiation and various condition precedent requirements, which are requirements that must be met for the contract to be fulfilled.

Less common are unilateral contracts in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. In the similar case of advertisements of deals or bargains, a general rule is that these are not contractual offers but merely an "invitation to treat" (or bargain), but the applicability of this rule is disputed and contains various exceptions.[10] The High Court of Australia stated that the term unilateral contract is "unscientific and misleading".[11]

In certain circumstances, an implied contract may be created. A contract is implied in fact if the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, a patient may implicitly enter a contract by visiting a doctor and being examined; if the patient refuses to pay after being examined, the patient 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. Quantum meruit claims are an example.

Intention to be legally bound

In commercial agreements it is presumed that parties intend to be legally bound unless the parties expressly state the opposite as in a heads of agreement document. For example, in Rose & Frank Co v JR Crompton & Bros Ltd an agreement between two business parties was not enforced because it contained an 'honour clause' which stated the parties wish that the agreement not be reviewed or enforced by a court.

In contrast, domestic and social agreements such as those between children and parents are typically unenforceable on the basis of public policy. For example, in the English case Balfour v. Balfour a husband agreed to give his wife £30 a month while he was away from home, but the court refused to enforce the agreement when the husband stopped paying. In contrast, in Merritt v Merritt the court enforced an agreement between an estranged couple.

Consideration

Main article: Consideration

Consideration is something of value given by a promissor to a promisee in exchange for something of value given by a promisee to a promissor. Typically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking. This thing of value or forbearance from some legal right is considered to be a legal detriment. In the exchange of legal detriments, a bargain is created.[12] In the United States, the emphasis has shifted to the process of bargaining as exemplified by Hamer v. Sidway (1891). Roman law-based systems[13] (including Scotland) do not require consideration, and some commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts.[14] However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind."[15]

Courts will typically not weigh the "adequacy" of consideration as long as the consideration is determined to be "sufficient", with sufficiency defined as meeting the test of law, whereas "adequacy" is the subjective fairness or equivalence For instance, agreeing to sell a car for a penny may constitute a binding contract if a party desires the penny.[16] This is known as the peppercorn rule, but in some jurisdictions, the penny may constitute legally insufficient nominal consideration. Parties may do this for tax purposes, attempting to disguise gift transactions as contracts. Transferring money may be sufficient, particularly if there is accord and satisfaction.

However, consideration must be given as part of entering the contract, not prior as in past consideration. For example, in the early English case of Eastwood v. Kenyon [1840], the guardian of a young girl took out a loan to educate her. After she was married, her husband promised to pay the debt but the loan was determined to be past consideration. The insufficiency of past consideration is related to the preexisting duty rule. In the early English case of Stilk v. Myrick [1809], a captain promised to divide the wages of two deserters among the remaining crew if they agreed to sail home short-handed; however, this promise was found unenforceable as the crew were already contracted to sail the ship. The preexisting duty rule also extends to general legal duties; for example, a promise to refrain from committing a tort or crime is not sufficient.[17]

Formation

In addition to the elements of a contract:

  • A party must have capacity to contract
  • The purpose of the contract must be lawful
  • The form of the contract must be legal
  • The parties must intend to create a legal relationship
  • The parties must consent

As a result, there are a variety of affirmative defenses that a party may assert to avoid his obligation.

Affirmative defenses

Vitiating factors constituting defences to purported contract formation include:

Such defenses operate to determine whether a purported contract is either (1) void or (2) voidable. Void contracts cannot be ratified by either party. Voidable contracts can be ratified.

In the United States, persons under 18 are typically minor and their contracts are considered voidable; however, if the minor voids the contract, benefits received by the minor must be returned. The minor can enforce breaches of contract by an adult while the adult's enforcement may be more limited under the bargain principle. Promissory estoppel or unjust enrichment may be available, but generally are not.

Formalities and writing

Main article: Statute of frauds

Typically, contracts are oral or written, but written contracts have typically been preferred in common law legal systems;[18] in 1677 England passed the Statute of Frauds which influenced similar statute of frauds laws in the United States and other countries such as Australia.[19] In general, the Uniform Commercial Code as adopted in the United States requires a written contract for tangible product sales in excess of $500, and real estate contracts are required to be written. If the contract is not required by law to be written, an oral contract is valid and therefore legally binding.[20] The United Kingdom has since replaced the original Statute of Frauds, but written contracts are still required for various circumstances such as land (through the Law of Property Act 1925).

If a contract is in a written form, and somebody signs it, then the signer is typically bound by its terms regardless of whether he has actually read it[21] provided the document is contractual in nature.[22] However, affirmative defenses such as duress or unconscionability may enable the signer to avoid the obligation. Further, reasonable notice of a contract's terms must be given to the other party prior to their entry into the contract.[23]

An unwritten, unspoken contract, also known as "a contract implied by the acts of the parties", which can be either an implied-in-fact contract or implied-in-law contract, may also be legally binding. Implied-in-fact contracts are real contracts under which the parties receive the "benefit of the bargain". However, contracts implied in law are also known as quasi-contracts, and the remedy is quantum meruit, the fair market value of goods or services rendered.

Invitation to treat

Main article: Invitation to treat

Where a product in large quantities is advertised in a newspaper or on a poster, it generally is not considered an offer but instead will be regarded as an invitation to treat, since there is no guarantee that the store can provide the item for everyone who might want one. However, an exception to this rule may be made if an advertisement includes a reward, which is what happened in the famous case of Carlill v. Carbolic Smoke Ball Company,[24] decided in nineteenth-century England.


In Carlill, a medical firm, advertised a smoke ball marketed as a wonder drug that would, according to the instructions, protect users from catching the flu. If it did not work, buyers would receive £100 and the company said that they had deposited £1,000 in the bank to show their good faith. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick (a "mere puff"). But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, and determined that the reward was a contractual promise.

Third parties

The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. In cases where facts involve third party beneficiaries or debtors to the original contracting party have been allowed to be considered parties for purposes of enforcement of the contract. A recent advance has been seen in the case law as well as statutory recognition to the dilution of the doctrine of privity of contract. The recent tests applied by courts have been the test of benefit and the duty owed test. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party, and whereas the benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to third party beneficiaries. A recent example is the UK's Contracts (Rights of Third Parties) Act 1999.

Performance

Performance varies according to the particular circumstances. While a contract is being performed, it is called an executory contract, and when it is completed it is an executed contract. In some cases there may be substantial performance but not complete performance, which allows the performing party to be partially compensated.

Uncertainty, incompleteness and severance

If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law.[25] An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, 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.[26]

Courts may also look to external standards, which are either mentioned explicitly in the contract[27] or implied by common practice in a certain field.[28] 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.

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 if the contract includes a severability clause. 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.

Contractual terms

Main article: Contractual term

A contractual term is "an[y] provision forming part of a contract".[29] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal weight as they are peripheral to the objectives of the contract.

Standard form contracts contain "boilerplate", which is a set of "one size fits all" contract provisions. However, the term may also narrowly refer to conditions at the end of the contract which specify the governing law provision, venue, assignment and delegation, waiver of jury trial, notice, and force majeure. Restrictive provisions in contracts where the consumer has little negotiating power ("contracts of adhesion") attract consumer protection scrutiny.

Classification of terms

Contractual terms are classified differently depending upon the context or jurisdiction. Terms establish conditions precedent. English (but not necessarily non-English) common law distinguishes between important conditions and warranties, with a breach of a condition by one party allowing the other to repudiate and be discharged while a warranty allows for remedies and damages but not complete discharge.[30] Whether or not a term is a condition is determined in part by the parties' intent.[31]:150–1 In a less technical sense, however, a condition is a generic term and a warranty is a promise.[30] Not all language in the contract is determined to be a contractual term. Representations, which are often precontractual, are typically less strictly enforced than terms, and material misrepresentations historically was a cause of action for the tort of deceit. Warranties were enforced regardless of materiality; in modern United States law the distinction is less clear but warranties may be enforced more strictly.[32] Statements of opinion may be viewed as "mere puff".

In specific circumstances these terms are used differently. For example, in English insurance law, violation of a "condition precedent" by an insured is a complete defense against the payment of claims.[33]:160 In general insurance law, a warranty is a promise that must be complied with.[33] In product transactions, warranties promise that the product will continue to function for a certain period of time.

In the United Kingdom the courts determine whether a term is a condition or warranty; for example, an actress' obligation to perform the opening night of a theatrical production is a condition,[34] but a singer's obligation to rehearse may be a warranty.[35] Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A[36] provides that terms as to title, description, quality and sample are generally conditions. The United Kingdom has also contrived the concept of an "intermediate term" (also called innominate), first established in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962].

Representations versus warranties

Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations. Traditionally, warranties are factual promises which are enforced through a contract legal action, regardless of materiality, intent, or reliance.[32] Representations are traditionally precontractual statements which allow for a tort-based action (such as the tort of deceit) if the misrepresentation is negligent or fraudulent;[37] historically a tort was the only action available, but by 1778, breach of warranty became a separate legal contractual action.[32] In U.S. law, the distinction between the two is somewhat unclear;[32] warranties are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.[32] In modern English law, sellers often avoid using the term 'represents' in order to avoid claims under the Misrepresentation Act 1967, while in America 'warrants and represents' is relatively common.[38] Some modern commentators suggest avoiding the words and substituting 'state' or 'agree', and some model forms do not use the words;[37] however, others disagree.[39]

Statements in a contract may not be upheld if the court finds that the statements are subjective or promotional puffery. English courts may weigh the emphasis or relative knowledge in determining whether a statement is enforceable as part of the contract. In the English case of Bannerman v. White[40] the court upheld a rejection by a buyer of hops which had been treated with sulphur since the buyer explicitly expressed the importance of this requirement. The relative knowledge of the parties may also be a factor, as in English case of Bissett v. Wilkinson[41] where the court did not find misrepresentation when a seller said that farmland being sold would carry 2000 sheep if worked by one team; the buyer was considered sufficiently knowledgeable to accept or reject the seller's opinion.

Implied terms

A term may either be express or implied. An express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

Terms implied in fact

Terms may be implied due to the factual circumstances or conduct of the parties. In the Australian case of BP Refinery Westernport v. Shire of Hastings[42] the UK Privy Council proposed a five stage test to determine situations where the facts of a case may imply terms. The classic tests have been the "business efficacy test" and the "officious bystander test". Under the "business efficacy test" first proposed in The Moorcock [1889], the minimum terms necessary to give business efficacy to the contract will be implied. Under the officious bystander test (named in Southern Foundries (1926) Ltd v Shirlaw [1940] but actually originating in Reigate v. Union Manufacturing Co (Ramsbottom) Ltd [1918]), a term can only be implied in fact if an "officious bystander" listening to the contract negotiations suggested that the term be included the parties would promptly agree. The difference between these tests is questionable.

Terms implied in law

Statutes or judicial rulings may create implied contractual terms, particularly in standardized relationships such as employment or shipping contracts. The Uniform Commercial Code of the United States also imposes an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by the Code. In addition, Australia, Israel and India imply a similar good faith term through laws.

Most countries have statutes which deal directly with sale of goods, lease transactions, and trade practices. In the United States, prominent examples include, in the case of products, an implied warranty of merchantability and fitness for a particular purpose, and in the case of homes an implied warranty of habitability. In the United Kingdom, implied terms are created by the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982.

Setting aside the contract

There can be four different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable', 'unenforceable'or 'ineffective'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Kill fees are paid by magazine publishers to authors when their articles are submitted on time but are subsequently not used for publication. When this occurs, the magazine cannot claim copyright for the "killed" assignment. Unenforceability implies that neither party may have recourse to a court for a remedy. Ineffectiveness implies that the contract terminates by order of a court where a public body has failed to satisfy public procurement law. To rescind is to set aside or unmake a contract.

Misrepresentation

Main article: Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

There are two types of misrepresentation: fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party alleging misrepresentation knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable.

According to Gordon v Selico [1986] it is possible to misrepresent either by words or conduct. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.[43] If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.[44]

Mistake

A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: common mistake, mutual mistake, and unilateral mistake.

  • A common mistake occurs when both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd.,[45] which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
  • A mutual mistake occurs when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. However, a contract based on a mutual mistake in judgment does not cause the contract to be voidable by the party that is adversely affected. See Raffles v. Wichelhaus.[46]
  • A unilateral mistake occurs when only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.[47] It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v. Avery[48] where Lord Denning MR held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

Duress and undue influence

Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition."[49] An example is in Barton v Armstrong [1976] in a person was threatened with death if they did not sign the contract. An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, 'economic duress'.

Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person through a special relationship such as between parent and child or solicitor and client. As an equitable doctrine, the court has discretion. When no special relationship exists, the question is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.[50] See Odorizzi v. Bloomfield School District.

Incapacity

Main article: Capacity (law)

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness.[51] In these cases the contract is either void or voidable.

Illegal contracts

Main article: Illegal agreement

If based on an illegal purpose or contrary to public policy, a contract is void. In the 1996 Canadian case of Royal Bank of Canada v. Newell.[52] a woman forged her husband's signature, and her husband signed agreed to assume "all liability and responsibility" for the forged checks. However, the agreement was unenforceable as it was intended to "stifle a criminal prosecution", and the bank was forced to return the payments made by the husband.

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/her lawsuit).[53] Other types of unenforceable employment contracts include contracts agreeing to work for less than minimum wage and forfeiting the right to workman's compensation in cases where workman's compensation is due.

Remedies for breach of contract

Main article: Breach of contract

A breach of contract is failure to perform as stated in the contract. There are many ways to remedy a breached contract assuming it has not been waived. Typically, the remedy for breach of contract is an award of money damages. When dealing with unique subject matter, specific performance may be ordered.

As for many governments, it was not possible to sue the Crown in the UK for breach of contract before 1948. However, it was appreciated that contractors might be reluctant to deal on such a basis and claims were entertained under a petition of right that needed to be endorsed by the Home Secretary and Attorney-General. S.1 Crown Proceedings Act 1947 opened the Crown to ordinary contractual claims through the courts as for any other person.

Damages

Main article: Damages

There are several different types of damages.

  • Compensatory damages, which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two heads of loss, consequential damage and direct damage.
  • Liquidated damages are an estimate of loss agreed to in the contract, so that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may be called "penalty clauses" in ordinary language, but the law distinguishes between liquidated damages (legitimate) and penalties (invalid). A test for determining which category a clause falls into was established by the English House of Lords in Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Co. Ltd[54]
  • Nominal damages consist of a small cash amount where the court concludes that the defendant is in breach but the plaintiff has suffered no quantifiable pecuniary loss, and may be sought to obtain a legal record of who was at fault.
  • Punitive or exemplary damages, which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation. Again, these are not permitted in all jurisdictions, with England & Wales, for instance, prohibiting them.

Compensatory damages compensate the plaintiff for actual losses suffered as accurately as possible. They may be "expectation damages", "reliance damages" or "restitutionary damages". Expectation damages are awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised. Reliance damages are usually awarded where no reasonably reliable estimate of expectation loss can be arrived at or at the option of the plaintiff. Reliance losses cover expense suffered in reliance to the promise. Examples where reliance damages have been awarded because profits are too speculative include the Australian case of McRae v. Commonwealth Disposals Commission[55] which concerned a contract for the rights to salvage a ship. In Anglia Television Ltd v. Reed[56] the English Court of Appeal awarded the plaintiff expenditures incurred prior to the contract in preparation of performance.

Once a breach has occurred, the non-breaching party has a duty to mitigate damages, which means that damages will not be awarded if the plaintiff could have avoided the losses without undue risk, expense, or humiliation.[57] but Professor Michael Furmston having stated that the rule is that a plaintiff will not recover damages for loss that would not have occurred had he taken reasonable steps to mitigate loss,[58] has warned that "it is wrong to express this rule by stating that the plaintiff is under a duty to mitigate his loss",[59] citing Sotiros Shipping Inc v. Sameiet, The Solholt.[60] If a party provides notice that the contract will not be completed, an anticipatory breach occurs.

Hadley v. Baxendale establishes general and consequential damages. General damages are those damages which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. However, there is still a duty to mitigate the losses the fact that the car was not there does not give the party a right to not attempt to rent another car.

Specific performance

Main article: Specific performance

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. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value. In the United States by way of the 13th Amendment to the United States Constitution, specific performance in personal service contracts is only legal "as punishment for a crime whereof the criminal shall be dully convicted."[61]

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. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance.

Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract.

Procedure

In the United States, in order to obtain damages for breach of contract or to obtain specific performance or other equitable relief, the aggrieved injured party may file a civil (non-criminal) lawsuit in state court (unless there is diversity of citizenship giving rise to federal jurisdiction). If the contract contains a valid arbitration clause, the aggrieved party must submit an arbitration claim in accordance with the procedures set forth in the clause.

Many contracts provide that all disputes arising thereunder will be resolved by arbitration, rather than litigated in courts. Customer claims against securities brokers and dealers are almost always resolved by arbitration because securities dealers are required, under the terms of their membership in self-regulatory organizations such as the Financial Industry Regulatory Authority (formerly the NASD) or NYSE to arbitrate disputes with their customers. The firms then began including arbitration agreements in their customer agreements, requiring their customers to arbitrate disputes.[62] On the other hand, certain claims have been held to be non-arbitrable if they implicate a public interest that goes beyond the narrow interests of the parties to the agreement (i.e., claims that a party violated a contract by engaging in illegal anti-competitive conduct or civil rights violations). Arbitration judgments may generally be enforced in the same manner as ordinary court judgments. However, arbitral decisions are generally immune from appeal in the United States unless there is a showing that the arbitrator's decision was irrational or tainted by fraud. Virtually all states have adopted the Uniform Arbitration Act to facilitate the enforcement of arbitrated judgments. Notably, New York State, where a sizable portion of major commercial agreements are executed and performed, has not adopted the Uniform Arbitration Act.[63]

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. Likewise, in the United States, an aggrieved party may apply for injunctive relief to prevent a threatened breach of contract, where such breach would result in irreparable harm that could not be adequately remedied by money damages.

Contract theory

Main article: Contract theory

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.

More generally, writers have propounded Marxist and feminist interpretations of contract. Attempts at overarching understandings of the purpose and nature of contract as a phenomenon have been made, notably relational contract theory originally developed by U.S. contracts scholars Ian Roderick Macneil and Stewart Macaulay, building at least in part on the contract theory work of U.S. scholar Lon L. Fuller, while U.S. scholars have been at the forefront of developing economic theories of contract focussing on questions of transaction cost and so-called 'efficient breach' theory.

Another dimension of the theoretical debate in contract is its place within, and relationship to a wider law of obligations. Obligations have traditionally been divided into contracts, 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.[64]

The common law describes the circumstances under which the law will recognise the existence of rights, privilege or power arising out of a promise.

Gallery

See also

By country

Notes

References

  • Ewan McKendrick, Contract Law - Text, Cases and Materials (2005) Oxford University Press ISBN 0-19-927480-0
  • P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon Press ISBN 0-19-825342-7
  • Randy E. Barnett, Contracts (2003) Aspen Publishers ISBN 0-7355-6525-2
  • Scott Fruehwald, "Reciprocal Altruism as the Basis for Contract," 47 University of Louisville Law Review 489 (2009).

External links

  • Australian Contract Law
  • Cornell Law School contracts: an overview
  • Principles of European Contract Law
  • United Nations Convention on Contracts for the International Sale of Goods, Vienna, 11 April 1980
  • LexisNexis Capsule Summary: Contracts


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