A contract is a legally binding document that recognizes and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law. A contract typically involves the exchange of goods, service, money, or promise of any of those. "Breach of contract", means that the law will have to award the injured party either the access to legal remedies such as damages or cancellation.
In the Anglo-American common law, formation of a contract generally requires an offer, acceptance, consideration, and mutual intent to be bound. Each party must be those who are binding by the contract. Although most oral contracts are binding, some types of contracts may require formalities such as being in writing or by deed.
In the civil law tradition, contract law is a branch of the law of obligations.
Each country recognised by private international law has its own national system of law to govern contracts. Although systems of contract law might have similarities, they may contain significant differences. Accordingly, many contracts contain a choice of law clause and a jurisdiction clause. These provisions set the laws of the country which will govern the contract, and the country or other forum in which disputes will be resolved, respectively. Failing express agreement on such matters in the contract itself, countries have rules to determine the law governing the contract and the jurisdiction for disputes. For example, European Member States apply Article 4 of the Rome I Regulation to decide the law governing the contract, and the Brussels I Regulation to decide jurisdiction.
Formation
At
common law, the elements of a contract are; offer, acceptance,
intention to create legal relations, consideration, and legality of both
form and content.
Not all agreements are necessarily contractual, as the parties generally must be deemed to have an intention to be legally bound. A so-called gentlemen's agreement is one which is not intended to be legally enforceable, and "binding in honour only".
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". An offer is a definite statement of the offeror's willingness to be bound should certain conditions be met.
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, as determined in the early English case of Smith v Hughes
[1871]. It is important to note that where an offer specifies a
particular mode of acceptance, only an acceptance communicated via that
method will be valid.
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 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. The High Court of Australia stated that the term unilateral contract is "unscientific and misleading".
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, John Smith, a
former lawyer 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.
Invitation to treat
Where something is advertised in a newspaper or on a poster, the
advertisement will not normally constitute an offer but will instead be
an invitation to treat, an indication that one or both parties are prepared to negotiate a deal.
The Carbolic Smoke Ball offer
An exception arises if the advertisement makes a unilateral promise, such as the offer of a reward, as in the famous case of Carlill v Carbolic Smoke Ball Co, decided in nineteenth-century England.
The company, a pharmaceutical manufacturer, advertised a smoke ball
that would, if sniffed "three times daily for two weeks", prevent users
from catching the 'flu. If the smoke ball failed to prevent 'flu, the company promised that they would pay the user £100,
adding that they had "deposited £1,000 in the Alliance Bank to show our
sincerity in the matter". When Mrs Carlill sued for the money, the
company argued the advert should not be taken as a serious, legally binding offer; instead it was 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.
Although an invitation to treat cannot be accepted, it should not
be ignored, for it may nevertheless affect the offer. For instance,
where an offer is made in response to an invitation to treat,
the offer may incorporate the terms of the invitation to treat (unless
the offer expressly incorporates different terms). If, as in the Boots case,
the offer is made by an action without any negotiations (such as
presenting goods to a cashier), the offer will be presumed to be on the
terms of the invitation to treat.
Auctions are governed by the Sale of Goods Act 1979
(as amended), where section 57(2) provides: “A sale by auction is
complete when the auctioneer announces its completion by the fall of the
hammer, or in other customary manner. Until the announcement is made
any bidder may retract his bid."
Electronic contracts
Entry
into contracts online has become common. Many jurisdictions have passed
e-signature laws that have made the electronic contract and signature
as legally valid as a paper contract.
In India, E-contracts are governed by the Indian Contract Act
(1872), according to which certain conditions need to be fulfilled while
formulating a valid contact. Certain sections in information Technology
Act (2000) also provide for validity of online contract.
In some U.S. states, email exchanges have become binding
contracts. New York courts in 2016 held that the principles of real
estate contracts to apply equally to electronic communications and
electronic signatures, so long as “its contents and subscription meet
all requirements of the governing statute” and pursuant to the
Electronic Signatures and Records Act (ESRA).
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 an
"honour clause" in the document stated "this is not a commercial or
legal agreement, but is only a statement of the intention of the
parties".
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 because the
circumstances suggested their agreement was intended to have legal
consequences.
Consideration
A concept of English common law, consideration is required for simple contracts but not for special contracts (contracts by deed). The court in Currie v Misa
declared consideration to be a “Right, Interest, Profit, Benefit, or
Forbearance, Detriment, Loss, Responsibility”. Thus, consideration
is a promise of something of value given by a promissor in exchange for
something of value given by a promisee; and typically the thing of value
is goods, money, or an act. Forbearance to act, such as an adult
promising to refrain from smoking, is enforceable only if one is thereby surrendering a legal right.
In Dunlop v. Selfridge Lord Dunedin adopted Pollack's metaphor of purchase and sale to explain consideration. He called consideration 'the price for which the promise of the other is bought'.
In colonial times, the concept of consideration was exported to many common law countries, but it is unknown in Scotland and in civil law jurisdictions. Roman law-based systems neither require nor recognise consideration, and some 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 that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind." In the United States, the emphasis has shifted to the process of bargaining as exemplified by Hamer v. Sidway (1891)
.
.
Courts will typically not weigh the "adequacy" of consideration
provided 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
(although if the transaction is an attempt to avoid tax, it will be
treated by the tax authority as though a market price had been paid). Parties may do this for tax purposes, attempting to disguise gift transactions as contracts. This is known as the peppercorn rule, but in some jurisdictions, the penny may constitute legally insufficient nominal consideration. An exception to the rule of adequacy is money, whereby a debt must always be paid in full for "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
pre-existing 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 pre-existing duty rule also extends to general
legal duties; for example, a promise to refrain from committing a tort
or crime is not sufficient.
Capacity
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.
Each contractual party must be a "competent person" having legal
capacity. The parties may be natural persons ("individuals") or juristic persons ("corporations"). An agreement is formed when an "offer" is accepted. The parties must have an intention to be legally bound; and to be valid, the agreement must have both proper "form" and a lawful object. In England (and in jurisdictions using English contract principles), the parties must also exchange "consideration" to create a "mutuality of obligation," as in Simpkins v Pays.
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 requirements for some contracts
A contract is often evidenced in writing or by deed,
the general rule is that a person who signs a contractual document will
be bound by the terms in that document, this rule is referred to as the
rule in L'Estrange v Graucob. This rule is approved by the High Court of Australia in Toll(FGCT) Pty Ltd v Alphapharm Pty Ltd. But a valid contract may (with some exceptions) be made orally or even by conduct. Remedies for breach of contract include damages (monetary compensation for loss) and, for serious breaches only, repudiation (i.e. cancellation). The equitable remedy of specific performance, enforceable through an injunction, may be available if damages are insufficient.
Typically, contracts are oral or written, but written contracts have typically been preferred in common law legal systems; 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. 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.
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).
An oral contract
may also be called a parol contract or a verbal contract, with "verbal"
meaning "spoken" rather than "in words", an established usage in British English with regards to contracts and agreements, and common although somewhat deprecated as "loose" in American English.
If a contract is in a written form, and somebody signs it, then
the signer is typically bound by its terms regardless of whether they
have actually read it provided the document is contractual in nature.
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.
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.
Contract terms: construction and interpretation
A contractual term is "an[y] 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 weight as they are peripheral to the objectives of the contract.
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.
In New South Wales, even if there is uncertainty or incompleteness in a
contract, the contract may still be binding on the parties if there is a
sufficiently certain and complete clause requiring the parties to
undergo arbitration, negotiation or mediation.
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 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. Typically,
non-severable contracts only require the substantial performance of a
promise rather than the whole or complete performance of a promise to
warrant payment. However, express clauses may be included in a
non-severable contract to explicitly require the full performance of an
obligation.
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. Whether or not a term is a condition is determined in part by the parties' intent.
In a less technical sense, however, a condition is a generic term and a warranty is a promise.
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. 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. In general insurance law, a warranty is a promise that must be complied with. 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, but a singer's obligation to rehearse may be a warranty. 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 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. Representations are traditionally precontractual statements that allow for a tort-based action (such as the tort of deceit) if the misrepresentation is negligent or fraudulent; historically, a tort was the only action available, but by 1778, breach of warranty became a separate legal contractual action. In U.S. law, the distinction between the two is somewhat unclear;
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. 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.
Some modern commentators suggest avoiding the words and substituting
'state' or 'agree', and some model forms do not use the words; however, others disagree.
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
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
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.
Standard terms and contracts of adhesion
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.
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 case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings, the UK Privy Council,
on appeal from Australia, 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.
In England, some contracts (insurance and partnerships) require utmost good faith, while others may require good faith (employment contracts and agency). Most English contracts do not need any good faith, provided that the law is met. There is, however, an overarching concept of "legitimate expectation".
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 may be created by:
- Statute, such as the Sale of Goods Act 1979, the Consumer Rights Act 2015 and the Hague-Visby Rules;
- Common Law, such as The Moorcock, which introduced the "business efficacy" test;
- Previous Dealings, as in Spurling v Bradshaw.
- Custom, as in Hutton v Warren.
Terms implied by custom
A term may be implied on the basis of custom or usage in a particular market or context. In the Australian case of Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Aust) Limited,
the requirements for a term to be implied by custom were set out. For a
term to be implied by custom it needs to be "so well known and
acquiesced in that everyone making a contract in that situation can
reasonably be presumed to have imported that term into the contract".
Third parties
The common law doctrine of privity of contract provides that only those who are party to a contract may sue or be sued on it. The leading case of Tweddle v Atkinson [1861] immediately showed that the doctrine had the effect of defying the intent of the parties. In maritime law, the cases of Scruttons v Midland Silicones [1962] and N.Z. Shipping v Satterthwaite [1975] established how third parties could gain the protection of limitation clauses within a bill of lading.
Some common law exceptions such as agency, assignment and negligence allowed some circumvention of privity rules, but the unpopular doctrine remained intact until it was amended by the Contracts (Rights of Third Parties) Act 1999 which provides:
A person who is not a party to a contract (a “third party”) may in his own right enforce a contract if:
(a) the contract expressly provides that he may, or
(b) the contract purports to confer a benefit on him.
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.
Research in business and management has also paid attention to
the influence of contracts on relationship development and performance.
Defenses
Vitiating factors constituting defences to purported contract formation include:
- Mistake (such as non est factum)
- Incapacity, including mental incompetence and infancy/minority
- Duress
- Undue influence
- Unconscionability
- Misrepresentation or fraud
- Frustration of purpose
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.
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.
In a court of law, to prove misrepresentation and/or fraud, there
must be evidence that shows a claim was made, said claim was false, the
party making the claim knew the claim was false, and that party's
intention was for a transaction to occur based upon the false claim.
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.
Assume two people, Party A and Party B, enter into a contract.
Then, it is later determined that Party A did not fully understand the
facts and information described within the contract. If Party B used
this lack of understanding against Party A to enter into the contract,
Party A has the right to void the contract.
The foundational principle of “caveat emptor,” which means “let the buyer beware,” applies to all American transactions. In Laidlaw v. Organ,
the Supreme Court decided that the buyer did not have to inform the
seller of information the buyer knew could affect the price of the
product.
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.
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.
It is a fallacy that an opinion cannot be a statement of fact. If
a statement is the honest expression of an opinion honestly
entertained, it cannot be said that it involves any fraudulent
misrepresentations of fact.
For an innocent misrepresentation, the judge takes into account
the likelihood a party would rely on the false claim and how significant
the false claim was.
Remedies for misrepresentation. Rescission is the principal
remedy and damages are also available if a tort is established. In order
to obtain relief, there must be a positive misrepresentation of law and
also, the person to whom the representation was made must have been
misled by and relied on this misrepresentation:Public Trustee v Taylor.
Contract law does not delineate any clear boundary as to what is
considered an acceptable false claim or what is unacceptable. Therefore,
the question is what types of false claims (or deceptions) will be
significant enough to void a contract based on said deception.
Advertisements utilizing "puffing," or the practice of exaggerating
certain things, fall under this question of possible false claims.
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 types of mistake in contract: common mistake,
mutual mistake, and unilateral mistake.
- 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., 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. In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd, the court held that the common law will grant relief against common mistake, if the test in Bell v. Lever Bros Ltd is made out. If one party has knowledge and the other does not, and the party with the knowledge promises or guarantees the existence of the subject matter, that party will be in breach if the subject matter does not exist.
- Mutual mistake occurs when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. Courts usually try to uphold such mistakes 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.
- 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. 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 where Lord Denning MR held that the contract can only be voided 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." 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 only needs 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.
Unconscionable dealing
In Australian law, a contract can be set aside due to unconscionable dealing.
Firstly, the claimant must show that they were under a special
disability, the test for this being that they were unable to act in
their best interest. Secondly, the claimant must show that the defendant
took advantage of this special disability.
Illegal contracts
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
a woman forged her husband's signature, and her husband 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). 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 defendant on defenses
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.
Disputes
Procedure
In many countries, 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
court.
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.
Arbitration
If the contract contains a valid arbitration
clause then, prior to filing a lawsuit, 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.
Arbitration judgments may generally be enforced in the same
manner as ordinary court judgments, and are recognized and enforceable
internationally under the New York Convention,
which has 156 parties. However, in New York Convention states, arbitral
decisions are generally immune unless there is a showing that the
arbitrator's decision was irrational or tainted by fraud.
Some arbitration clauses are not enforceable, and in other cases
arbitration may not be sufficient to resolve a legal dispute. For
example, disputes regarding validity of registered IP rights may need to
be resolved by a public body within the national registration system.
For matters of significant public interest that go beyond the narrow
interests of the parties to the agreement, such as claims that a party
violated a contract by engaging in illegal anti-competitive conduct or
committed civil rights violations, a court might find that the parties
may litigate some or all of their claims even before completing a
contractually agreed arbitration process.
United States
In the United States, thirty-five states (notably not including New York) and the District of Columbia have adopted the Uniform Arbitration Act to facilitate the enforcement of arbitrated judgments.
Customer claims against securities brokers and dealers are almost
always resolved pursuant to contractual arbitration clauses 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.
Choice of law
When
a contract dispute arises between parties that are in different
jurisdictions, law that is applicable to a contract is dependent on the conflict of laws analysis by the court where the breach of contract action is filed. In the absence of a choice of law clause,
the court will normally apply either the law of the forum or the law of
the jurisdiction that has the strongest connection to the subject
matter of the contract. A choice of law clause allows the parties to
agree in advance that their contract will be interpreted under the laws
of a specific jurisdiction.
Within the United States, choice of law clauses are generally
enforceable, although exceptions based upon public policy may at times
apply.
Within the European Union, even when the parties have negotiated a
choice of law clause, conflict of law issues may be governed by the Rome I Regulation.
Choice of forum
Many contracts contain a forum selection clause
setting out where disputes in relation to the contract should be
litigated. The clause may be general, requiring that any case arising
from the contract be filed within a specific state or country, or it may
require that a case be filed in a specific court. For example, a choice
of forum clause may require that a case be filed in the U.S. State of
California, or it may require more specifically that the case be filed
in the Superior Court for Los Angeles County.
A choice of law or venue is not necessarily binding upon a court.
Based upon an analysis of the laws, rules of procedure and public
policy of the state and court in which the case was filed, a court that
is identified by the clause may find that it should not exercise
jurisdiction, or a court in a different jurisdiction or venue may find
that the litigation may proceed despite the clause.
As part of that analysis, a court may examine whether the clause
conforms with the formal requirements of the jurisdiction in which the
case was filed (in some jurisdictions a choice of forum or choice of
venue clause only limits the parties if the word "exclusive" is
explicitly included in the clause). Some jurisdictions will not accept
an action that has no connection to the court that was chosen, and
others will not enforce a choice of venue clause when they consider
themselves to be a more convenient forum for the litigation.
Some contracts are governed by multilateral instruments that
require a non-chosen court to dismiss cases and require the recognition
of judgments made by courts having jurisdiction based on a choice of
court clause. For example, the Brussels regime instruments (31 European states) and the Hague Choice of Court Agreements Convention
(European Union, Mexico, Montenegro, Singapore), as well as several
instruments related to a specific area of law, may require courts to
enforce and recognize choice of law clauses and foreign judgments.
Remedies
In the United Kingdom, breach of contract is defined in the Unfair Contract Terms Act 1977
as: [i] non-performance, [ ii] poor performance, [iii]
part-performance, or [iv] performance which is substantially different
from what was reasonably expected. Innocent parties may repudiate
(cancel) the contract only for a major breach (breach of condition), but they may always recover compensatory damages, provided that the breach has caused foreseeable loss.
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
There are several different types of damages.
- Compensatory damages, which are given to the party injured by the breach of contract. With compensatory damages, there are two heads of loss, consequential damage and direct damage. In theory, compensatory damages are designed to put the injured party in his or her rightful position, usually through an award of expectation damages.
- 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
- 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 are used to punish the party at fault; but even though such damages are not intended primarily to compensate, nevertheless the claimant (and not the state) receives the award. Exemplary damages are not recognised nor permitted in some jurisdictions. In the UK, exemplary damages are not available for breach of contract, but are possible after fraud. Although vitiating factors (such as misrepresentation, mistake, undue influence and duress) relate to contracts, they are not contractual actions, and so, in a roundabout way, a claimant in contract may be able to get exemplary damages.
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 which concerned a contract for the rights to salvage a ship. In Anglia Television Ltd v. Reed the English Court of Appeal awarded the plaintiff expenditures incurred prior to the contract in preparation of performance.
After a breach has occurred, the innocent party has a duty to
mitigate loss by taking any reasonable steps. Failure to mitigate means
that damages may be reduced or even denied altogether. However, Professor Michael Furmston has argued that "it is wrong to express (the mitigation) rule by
stating that the plaintiff is under a duty to mitigate his loss", citing Sotiros Shipping Inc v Sameiet, The Solholt. If a party provides notice that the contract will not be completed, an anticipatory breach occurs.
Damages may be general or consequential. 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.
To recover damages, a claimant must show that the breach of contract caused foreseeable loss. Hadley v Baxendale
established that the test of foreseeability is both objective or
subjective. In other words, is it foreseeable to the objective
bystander, or to the contracting parties, who may have special
knowledge? On the facts of this case, where a miller lost production
because a carrier delayed taking broken mill parts for repair, the court
held that no damages were payable since the loss was foreseeable
neither by the "reasonable man" nor by the carrier, both of whom would
have expected the miller to have a spare part in store.
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."
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.
History
Whilst early rules of trade and barter have existed since ancient
times, modern laws of contract in the West are traceable from the
industrial revolution (1750 onwards), when increasing numbers worked in
factories for a cash wage. In particular, the growing strength of the
British economy and the adaptability and flexibility of the English common law led to a swift development of English contract law. Colonies within the British empire (including the USA and the Dominions) would adopt the law
of the mother country. In the 20th century, the growth of export trade
led to countries adopting international conventions, such as the Hague-Visby Rules and the UN Convention on Contracts for the International Sale of Goods, to promote uniform regulations.
Bill of sale of a male slave and a building in Shuruppak, Sumerian tablet, circa 2600 BC
Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, ( "agreements must be kept"). The common law of contract originated with the now-defuct writ of assumpsit, which was originally a tort action based on reliance. Contract law falls within the general law of obligations, along with tort, unjust enrichment, and restitution.
Jurisdictions vary in their principles of freedom of contract. In common law jurisdictions such as England and the United States, a high degree of freedom is the norm. 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. 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 both the European union
and the United States, the need to prevent discrimination has eroded
the full extent of freedom of contract. Legislation governing equality,
equal pay, racial discrimination, disability discrimination and so on,
has imposed limits of the full freedom of contract. For example, the Civil Rights Act of 1964 restricted private racial discrimination against African-Americans. 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 that
restrict freedom of contract. The US Constitution contains a Contract Clause, but this has been interpreted as only restricting the retroactive impairment of contracts.
Commercial use
Contracts are widely used in commercial law, and form the legal foundation for transactions across the world. Common examples include contracts for the sale of services and goods (both wholesale and retail), construction contracts, contracts of carriage, software licenses, employment contracts, insurance policies, sale or lease of land, and various other uses.
Although the European Union is fundamentally an economic community with a range of trade rules, there is no overarching "EU Law of Contract". In 1993, Harvey McGregor, a British barrister and academic, produced a "Contract Code" under the auspices of the English and Scottish Law Commissions,
which was a proposal to both unify and codify the contract laws of
England and Scotland. This document was offered as a possible "Contract
Code for Europe", but tensions between English and German jurists meant
that this proposal has so far come to naught.
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.
The common law describes the circumstances under which the law
will recognise the existence of rights, privilege or power arising out
of a promise.
