Define: Contracts

Quick Summary of Contracts

A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do. Most contracts that can be carried out within one year can be either oral or written. Major exceptions include contracts involving the ownership of real estate and commercial contracts for goods worth $500 or more, which must be in writing to be enforceable. (See statute of frauds.) A contract is formed when competent parties — usually adults of sound mind or business entities — mutually agree to provide each other some benefit (called consideration), such as a promise to pay money in exchange for a promise to deliver specified goods or services or the actual delivery of those goods and services. A contract normally requires one party to make a reasonably detailed offer to do something — including, typically, the price, time for performance and other essential terms and conditions — and the other to accept without significant change. For example, if I offer to sell you ten roses for $5 to be delivered next Thursday and you say “It’s a deal,” we’ve made a valid contract. On the other hand, if one party fails to offer something of benefit to the other, there is no contract. For example, if Maria promises to fix Josh’s car, there is no contract unless Josh promises something in return for Maria’s services.

An agreement between a number of parties binding them to carry out certain actions or forebear from certain actions and intending to have legal consequences. A contract is formed under the principle of Consensus ad idem, that is, all parties are in agreement as to the particulars of the contract. A contract can involve multiple consenting parties, or it can be unilateral. When a contract has no further effect, it is referred to as discharged.

Classes Of Contract

English law recognises three classes of contract; in decreasing order of formality, they are:

• Contracts of record, e.g., court judgements;
• Contracts by deed (also known as “speciality contracts”), e.g., sales of land;
• Simple contracts, that is, contracts not under Seal.

An issue of particular interest at the moment is the use of exclusion clauses in contracts to allow one or another party to limit their liabilities for, for example, negligence.

Validity

A proper, useful contract is valid and enforceable. For a contract to be legally binding, or “valid”, five requirements are often expressed:

• There must be an Offer by one of the parties.
• The offer accepted by the other party.
• The parties must be in agreement on objects of the contract.
• Unless the contract is “by deed,” there must be Consideration. To wit, the offerer must demand something of the offeree. Except in special cases, courts will not enforce contracts that offer something for nothing.
• The parties must have an intention to enter into a legally binding agreement.

Legality

The requirements for a valid contract operate alongside the basic requirements for legality that govern any legal instrument, which are:

• The parties that enter into the contract must consent fully to do so.
• They must have the legal capacity to enter into a contract.
• They must be capable of carrying out their respective parts of the agreement.
• The actions demanded of the contracting parties must be legal.

Enforceability

If any of the above conditions are not met, the contract will either be void or voidable. Even if the contract is valid, it may be unenforceable. That is, a court may accept the contract as being in force but refuse to compel compliance with it. To be enforceable, a contract must:

• be in evidence, that is, the terms must be apparent to the court;
• be in the right form, for example, some contracts must be in writing;
• comply with the Limitation Act (1980); that is, there is a limit to the time that can elapse between the point at which any party can take action for damages and the point at which the action is actually taken.

Contractual Formation

In common law, there are three key elements to the creation of a contract. These are offer and acceptance, consideration, and an intention to create legal relations. In civil law systems, the concept of consideration is not central. In addition, for some contracts, formalities must be complied with under what is sometimes called a statute of fraud.

One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would cure people’s flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the advertisement was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, or mere puff, a gimmick. But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer. People had given good “consideration” for it by going to the “distinct inconvenience” of using a faulty product. Read the advertisement how you will, and twist it about as you will,” said Lord Justice Lindley. “Here is a distinct promise expressed in language that is perfectly unmistakable.

Offer And Acceptance

Perhaps the most important feature of a contract is that one party makes an offer for a bargain that another accepts. This can be called a ‘concurrence of wills’ or a ‘meeting of the minds’ of two or more parties. There must be evidence that the parties, from an objective perspective, engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody give the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to contract.

The case of Carlill v. Carbolic Smoke Ball Co. (above) is an example of a ‘unilateral contract’, in which obligations are only imposed upon one party upon acceptance by performance of a condition. In the U.S., the general rule is that in “cases 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.”

Offers and acceptance do not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. 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 check-up, a patient agrees that he will pay a fair price for the service. If he refuses to pay after being examined, he has breached a contract implied in fact. A contract that 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, say a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbour was getting new sprinklers. That morning, he sees the plumber installing them in his own lawn. Pleased at the mistake, he says nothing and then refuses to pay when the plumber hands him the bill. Will the man be held liable for payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be liable. Such a claim is also referred to as “quantum meruit.

Consideration And Estoppel

Consideration is a controversial requirement for contracts under common law (for example, money). It is not necessary in civil law systems, and for that reason, it has come under increasing criticism. The idea is that both parties to a contract must bring something to the bargain. This can either confer an advantage on the other party or incur some kind of detriment or inconvenience. Three rules govern consideration.

• Consideration must be sufficient, but it need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract. While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of sufficient consideration. In such cases, the fact that the consideration is exceedingly unequal can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons, such as fraud, duress, unequal bargaining power, or being contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
• Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl raised a loan to educate the girl and improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was beyond consideration because it was completed before the husband promised to repay it.
• Consideration must move away from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book and I accepted your offer without giving anything in return, I would have a legal right to the book, and you could not change your mind about giving me it as a gift. However, in common law systems, the concept of culpa in contrahendo, a form of ‘estoppel’, is increasingly used to create obligations during pre-contractual negotiations.  Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned and estoppel be used to replace it as a basis for contracts. 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, “The doctrine of consideration is too firmly fixed to be overthrown by a side-wind.

Intention To Be Legally Bound

There is a presumption for commercial agreements that parties intend to be legally bound. On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance, between children and parents. One early example is found in Balfour v. Balfour. Using contract-like terms, Mr Balfour had agreed to give his wife £30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr Balfour stopped payments. Mrs Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise.

The case is often cited in conjunction with Merritt v. Merritt. Here the court distinguished the case from Balfour v. Balfour because Mr and Mrs Merritt, although married again, were estranged at the time the agreement was made. Therefore, any agreement between them was made with the intention of creating legal relations.

The Abstraction Principle

Germany has a special approach to contracts, which ties into property law. Their ‘abstraction principle’ (Abstraktionsprinzip) means that the personal obligation of contract forms separately to the title of property being conferred. When contracts are invalidated for some reason, e.g. a car buyer was so drunk that he lacked legal capacity to contract, the contractual obligation to pay can be invalidated separate from proprietary title of the car. Unjust enrichment law, rather than the law of contract, is then used to restore title to the rightful owner.

Formalities And Writing

Contrary to common wisdom, an informal exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might be considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral 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,” which can be either implied in fact or implied in law.

Most jurisdictions have rules of law or statutes that may render otherwise valid oral contracts unenforceable. This is especially true regarding oral contracts involving large amounts of money or real estate. For example, in the U.S., generally speaking, a contract is unenforceable if it violates the common law statute of frauds or equivalent state statutes, which require certain contracts to be in writing. An example of the above is an oral contract for the sale of a motorcycle for US$5,000 in a jurisdiction that requires a contract for the sale of goods over US$500 to be in writing to be enforceable. The purpose of the Statute of Frauds is to prevent false claims that unmade contracts existed by requiring formal (i.e., written) proof of the contract. However, a common remark is that more frauds have been committed through the application of the Statute of Frauds than have ever been prevented. Contracts that do not meet the requirements of common law or statutory statutes of fraud are unenforceable but are not necessarily thereby void. However, a party unjustly enriched by an unenforceable contract may be subject to restitution for unjust enrichment. Statutes of Fraud are typically codified in state statutes covering specific types of contracts, such as contracts for the sale of real estate.

In Australia and many, if not all, jurisdictions that have adopted the common law of England, 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 common law 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 contracts must be in writing or they are void, for instance, for the sale of land under s. 52 of the Law of Property Act of 1925.

Regardless of whether someone has read a written contract before signing it, they are still subject to its terms if they do.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. This includes such things as tickets issued at parking stations.

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. 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.

Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by common practice in a certain field. 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 for resolving their 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

A contractual term is “any provision forming part of a contract.” 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 gravity as they are peripheral to the objectives of the contract.

Boilerplate

As discussed in Tina L. Stark’s Negotiating and Drafting Contract Boilerplate, when lawyers refer to a “boilerplate” provision, they are referring to any standardised, “one size fits all” contract provision. But lawyers also use the term in a more narrow context to refer to certain provisions that appear at the end of the contract. Typically, these provisions tell the parties how to govern their relationship and administer the contract. Although often thought to be of secondary importance, these provisions have significant business and legal consequences. Common provisions include the governing law provision, assignment and delegation provisions, waiver of jury trial provisions, notice provisions, and force majeure provisions.

Classification Of Term

Condition or Warranty. Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract, allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress’ obligation to perform the opening night of a theatrical production is a condition, whereas a singers obligation to perform during the first three days of rehearsal is a warranty.

A 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 provides that terms as to title, description, quality, and sample (as described in the Act) are conditions save in certain defined circumstances.

Innominate term. Lord Diplock, in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., created the concept of an innominate term, breach of which may or may not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorization into condition or warranty due to legal certainty. This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen.

Status As A Term

Status as a term is important, as a party can only take legal action for the non-fulfilment of a term as opposed to representations or mere puffs. Legally speaking, only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement.

Implied Terms

A Term may either be expressed 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 may be implied due to the facts of the proceedings by which the contract was formed. The Privy Council established a five-stage test in BP Refinery Western Port v. Shire of Hastings. to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia).

Some jurisdictions, notably Australia, Israel or India, imply a term of good faith into contracts. A final way in which terms may be implied due to fact is through a previous course of dealing or common trade practice.

• Terms may also be implied in law.

These are terms that have been implied into standardised relationships.

Common law.

• Liverpool City Council v. Irwin established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair.
• Wong Mee Wan v. Kwan Kin Travel Services Ltd. established that when a tour operator contracts for the sale of goods,. The most important legislation under United Kingdom law is the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000, and the Supply of Goods and Services Act 1982, which imply terms into all contracts whereby goods are sold or services provided.

These terms will be implied into all contracts of the same nature as a matter of law.

Statutory.

The rules by which many contracts are governed are provided in specialised 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. The most important legislation implying terms under United Kingdom law are the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000, and the Supply of Goods and Services Act 1982, which imply terms into all contracts whereby goods are sold or services provided.

Three ways of evaluating a contracted exchange as coercive or voluntary

• Statistical consideration: did the participants have a statistical prediction of the likelihood of an event occurring that is covered by the contract? Example: If X happens every day at 5pm, I enter into a contract to avoid X. X does or does not occur.
• Phenomenological consideration: what models did the participants have that influenced their perception of what was to occur or what had occurred? Example: I observe X and Y every day at 5pm. I contract against X. Today I did/did not see Y occur.
• Moral consideration: objective consideration of right or wrong outside of the objective cause or the perceived cause. Example: X occurs every day at 5pm. X is wrong. Anything that avoids X is good; allowing X even if all parties agree is bad.

Setting aside the contract

There can be three different ways in which contracts can be set aside. A contract may be deemed ‘void’, ‘voidable’ or ‘unenforceable’. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their will. Unenforceability implies that neither party may have recourse to a court for a remedy. Recission is a term that means to take a contract back.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party that 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.

According to Gordon v. Selico, it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. 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.

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 mistakes in contracts: unilateral mistakes, mutual mistakes, and common mistakes.

• A unilateral mistake is 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 is determined that the non-mistaken party was aware of the mistake and tried to take advantage of it. It is also possible for a contract to be void if there is a mistake in the identity of the contracting party. An example is in Lewis v. Avery, 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.
• A mutual mistake is 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. Although a contract based on a mutual mistake in judgement does not cause the contract to be voidable by the party that is adversely affected,. See Raffles v. Wichelhaus.
• A common mistake is when both parties hold the same mistaken belief about the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd., which established that a 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.

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 judgement; especially., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition.” An example is in Barton v. Armstrong, a decision of the Privy Council. Armstrong threatened to kill Barton if he did not sign a contract, so the court set the contract aside. An innocent party wishing to set aside a contract for duress needs only to prove that the threat was made and that it was a reason for entry into the contract; the onus 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 the concept of ‘economic duress’ is used to vitiate contracts.

Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. The law presumes that in certain classes of special relationships, such as between parent and child or solicitor and client, there will be a special risk of one party unduly influencing their conduct and motives for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists, the general rule is whether there was a relationship of such trust and confidence that it should give rise to such a presumption. See Odorizzi v. Bloomfield School District.

Incapacity

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 the bargains they have made, or errant 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. When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or be a way of restraining people who act as agents for others.

Illegal contracts

A contract is void if it is based on an illegal purpose or is contrary to public policy. One example, from Canada, is Royal Bank of Canada v. Newell. A woman forged her husband’s signature on 40 checks, totaling over $58,000. To protect her from prosecution, her husband signed a letter of intent prepared by the bank in which he agreed to assume “all liability and responsibility” for the forged checks. However, the agreement was unenforceable and struck down by the courts because of its essential goal, which was to “stifle a criminal prosecution.” The bank was required to return the husband’s payments as a result of the contract’s illegality and subsequent voided status.

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). 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

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 performances may be ordered.

As for many governments, it was not possible to sue the Crown in the U.K. 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

There are four different types of damages.

• Compensatory damages are given to the party that was detrimented by the breach of contract. With compensatory damages, there are two kinds of branches: consequential damages and direct damages.
• Nominal damages, which include minimal dollar amounts, are often sought to obtain a legal record of who was at fault.
• Punitive damages which are used to punish the party at fault,. These are not usually given regarding contracts but are possible in a fraudulent situation.
• Exemplary damages, which are used to make an example of the party at fault, discourage similar crimes. For such damages, fines can increase by up to 50 times.

Whenever you have a contract that requires completing something and a person informs you that it will not be completed before they begin your project, this is referred to as an anticipatory breach. 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 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, if 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 the grounds that the property has a unique value. In the United States, specific performance is an illegal remedy for personal services contracts, or employment contracts, due to the notorious history in the United States involving involuntary servitude, a.k.a. slavery.

Both an order for specific performance and an injunction are discretionary remedies, originating, for the most part, in equity. Neither is available as a right, and in most jurisdictions and in 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, it is enforceable by specific performance. However, even in this case, the defences 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 an arbitration clause, however, the aggrieved party must submit an arbitration claim in accordance with the procedures set forth in the agreement.

Many contracts provide that all disputes arising thereunder will be resolved by arbitration rather than litigated in court. 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 organisations such as the NASD or NYSE, to use brokerage agreements that contain arbitration clauses. 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 anticompetitive conduct or civil rights violations). Arbitration judgements may generally be enforced in the same manner as ordinary court judgements. 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 judgements. Notably, New York State, where a sizable portion of major commercial agreements are executed and performed, has not adopted the Uniform Arbitration Act.

In England and Wales, a contract may be enforced by the 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.

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. A recent example is in England, where the Contract (Rights of Third Parties) Act 1999 was introduced.

Contractual 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.

Another dimension of the theoretical debate in contract is its place within and relationship to the wider law of obligations. Traditionally, obligations have been split into two types: contracts and torts. Contracts are voluntary and are owed to a specific person or group of people, while torts are based on the wrongdoing of harm to protected interests and are usually owed to a larger group of people.

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.

In the U.S. context, the Uniform Commercial Code defines “contract” as “the total legal obligation that results from the parties agreement” and does not attempt to state what act is essential to creating a legal duty to perform a promise. The common law describes the circumstances under which the law will recognise the existence of rights, privilege or powers arising out of a promise.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.