Anaya Nolan
A contract is an agreement between two or more parties that specifies certain legally enforceable rights and obligations. Common law contracts are a type of contract that is governed primarily by court-made law and judicial precedents. They are widely used in commercial law and form the basis for most transactions worldwide. Common law contracts are less flexible than other types of contracts and require a strict match between the offer and acceptance. They are also influenced by the jurisdiction, with English-speaking countries generally following English contract law, and civil law jurisdictions deriving their contract law from Roman law.
| Characteristics | Values |
|---|---|
| Formation | Requires an offer, acceptance, consideration, and mutual intent to be bound |
| Historical Basis | Emerged as a result of precedents established by various courts in England over the centuries |
| Historical Actions | Debt and covenant |
| Enforcement | Guided by state court precedents, which can vary across jurisdictions |
| Modification | Requires new consideration |
| Performance and Breach | Uses the "substantial performance" standard |
| Judicial Remedy | Compensatory damages, consequential damages, specific performance, rescission or reformation |
| Nature of Agreement | Promise supported by consideration |
| Nature of Obligations | Should be between parties of substantially equal awareness and bargaining power |
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What You'll Learn
Contract requirements
Contracts are widely used in commercial law and form the legal foundation for transactions across the world. They are a type of agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties.
Contract law varies between jurisdictions. In common law jurisdictions, the formation of a contract generally requires an offer, acceptance, consideration, and mutual intent to be bound. The concept of contract law as a distinct area of law in common law jurisdictions originated with the now-defunct writ of assumpsit, which was originally a tort action based on reliance. While verbal contracts are generally binding in most common law jurisdictions, some types of contracts may require formalities such as being in writing or by deed.
In the United States, most contracts are governed by a combination of common law and statutory law within the states where they are applied. The Uniform Commercial Code (UCC) and the common law govern contracts. The UCC has been adopted in nearly every state and governs important categories of contracts, such as contracts assigning the rights to payment in security interest agreements. Common law, on the other hand, governs transactions with intangible assets, real estate, employment, services, and insurance.
To be valid, a contract must include the following elements:
- Offer: A clear and definite promise by one party to do or refrain from doing something.
- Acceptance: The acceptance must mirror the offer to form a valid agreement.
- Consideration: Something of value is offered in exchange for the above-stated action or inaction.
- Legality: The contract must not be for an illegal purpose.
- Capacity: All parties must demonstrate the legal capacity to understand the obligations, terms, and consequences of the contract.
- Mutual Assent: All parties must show mutual assent and consideration.
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Contract modifications
Modifications under common law require new consideration, unlike UCC contracts, where good faith can suffice. Contract modifications are of two types: bilateral and unilateral. A bilateral modification is a contract modification that is signed by both parties, while a unilateral modification is signed by only one party. In the case of the US government, only contracting officers acting within the scope of their authority are empowered to execute contract modifications on its behalf. If a modification causes an increase or decrease in the cost or time required for performance, the contracting officer must make an equitable adjustment in the contract price, the delivery schedule, or both. Administrative changes are unilateral changes that do not affect the substantive rights of the parties and are used to make changes such as a change in the paying office or the name of the contracting officer.
When a new contract is viewed as a modification of an existing contract, management will need to evaluate whether the terms and conditions of the new contract were negotiated separately from the original contract and whether the pricing of the new contract depends on the pricing of the existing contract. If the goods or services are priced at a discount to the standalone selling price, management will need to evaluate the reason for the discount as this may indicate that the new contract is a modification. In some cases, a new agreement with an existing customer could be a modification of an existing contract even if it is not structured as one.
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Performance and breach
Performance under a contract can be conditional, meaning that an event, not certain to occur, must occur for performance under a contract to be due. For example, a contract may specify that a seller must deliver equipment as specified, and the buyer must pay for the equipment upon delivery. If the seller delivers the equipment, but the buyer fails to pay, the buyer has breached the contract.
A breach of contract occurs when one or both parties fail to perform one or all of the obligations imposed upon them under the contract. There are two types of breaches: actual breaches and anticipatory breaches. An actual breach occurs when a party fails to perform as promised by the contract's deadline. An anticipatory breach occurs before the performance is due, indicating that the party does not intend to perform as promised. For example, if a seller fails to deliver the promised goods by the specified date, they are in actual breach. If they indicate beforehand that they do not intend to deliver the goods by the specified date, they are in anticipatory breach.
In the event of a breach, the injured party may seek judicial remedies such as damages or equitable remedies. Damages can be compensatory, covering economic losses resulting from the breach, or consequential, addressing losses indirectly caused by the breach, such as lost profits. Equitable remedies include specific performance, where the court orders the breaching party to fulfil their contractual obligations, or rescission, where the contract is voided, and the parties are restored to their pre-contract positions.
It is important to note that not all breaches are considered equal. A material breach, or total breach, significantly impacts the contract and usually results in the non-breaching party being discharged from their contractual obligations. On the other hand, an immaterial breach is considered trivial or minor and may not release the non-breaching party from their duties. Additionally, there may be lawful excuses for a breach, such as when performance becomes impossible due to unexpected circumstances.
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Contract remedies
Contracts are widely used in commercial law and form the legal foundation for transactions across the world. Contract law varies between jurisdictions, but in most English-speaking countries, the rules are derived from English contract law. Common law contracts are less flexible than UCC contracts and require a stricter match between offer and acceptance.
- Compensatory Damages: Compensatory damages aim to restore the non-breaching party to their original position by covering any losses incurred. These damages are not meant to punish the breaching party but to make the injured party whole again.
- Consequential Damages: Consequential damages are awarded for losses that are indirectly caused by the breach.
- Specific Performance: In some cases, especially in real estate matters, monetary damages may be insufficient. In such situations, a court may order specific performance, requiring the breaching party to fulfill their obligations under the contract.
- Rescission: Rescission allows the non-breaching party to cancel the contract and refuse to complete their end of the bargain. This remedy puts both parties back in the position they would have been in had they never entered into the contract. However, to justify rescission, the breach must be material, going to the heart of the contractual agreement.
- Injunctions: Injunctions are court orders directing a party to do or refrain from doing something. Temporary injunctions may be ordered during litigation to prevent potential damage, while permanent injunctions are issued as part of a judge's final ruling.
- Termination: In some cases, the parties may agree to terminate the contract and resolve the matter between themselves.
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Contract jurisdictions
Contract law varies between jurisdictions. In common law jurisdictions, the formation of a contract generally requires an offer, acceptance, consideration, and mutual intent to be bound. Verbal contracts are generally binding in most common law jurisdictions, but some types of contracts may require formalities such as being in writing or by deed. Common law contracts are less flexible than UCC contracts and require a stricter match between offer and acceptance. Modifications under common law require new consideration, unlike UCC contracts, where good faith can suffice.
Jurisdictions that were previously British colonies generally adopted English common law. Other jurisdictions largely adopted the civil law tradition, either inheriting a civil law legal system at independence or adopting civil and commercial codes based on German or French law. While jurisdictions such as Japan, South Korea, and the Republic of China modelled their contract law after German law, the Arab world largely modelled its legal framework after the Napoleonic Code. Mainland China, which generally falls under civil law jurisdictions, adopted the Civil Code of the People's Republic of China in 2021, codifying its contract law.
When drafting international contracts, it is important to carefully consider the jurisdiction and choice-of-law clauses. Jurisdiction refers to the geographical limits of a court's authority, which is not necessarily the same as national boundaries. Jurisdiction clauses relate to which courts will hear a dispute, and there are three main types: exclusive, non-exclusive, and asymmetric. Exclusive jurisdiction clauses specify that only the courts of a particular jurisdiction should deal with disputes arising from a contract. Non-exclusive clauses specify that particular courts have jurisdiction while acknowledging that some other courts might also have jurisdiction. Asymmetric clauses set out how one party is restricted to suing in a particular jurisdiction, while the other party has greater choice over where they start proceedings.
When contracting with a party in a different jurisdiction, it is important to understand the applicable law and how the court system operates in that jurisdiction. Many parties agree to refer their disputes to arbitration rather than litigation. However, issues relating to jurisdiction and choice of law can still arise in arbitration. When choosing the governing law of a contract, it is generally advisable to pick a jurisdiction you are connected to, such as where your business is located or where production is handled.
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Frequently asked questions
A contract is an agreement between two or more parties that specifies certain legally enforceable rights and obligations. Contracts typically involve the consent to transfer goods, services, money, or a promise to transfer any of those at a future date.
A common law contract is a legally binding agreement primarily governed by court-made law and judicial precedents. Common law contracts are less flexible than UCC contracts and require a strict match between the offer and acceptance. They are important to understand when running a legal business in the United States.
English common law has dealt with contractual problems through two primary actions: debt and covenant. From the 15th century onwards, common-law courts developed a form of action to render informal agreements enforceable, which became known as assumpsit.
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