Cecily Zamora
Contracts are formal, legally binding agreements that create mutual obligations enforceable by law. In the United States, most contracts are governed by a combination of common law and statutory law within the state where they are applied. Common law contracts are guided by tradition and court decisions instead of statutes. They generally apply to contracts for services, real estate, insurance, and intangible assets. The Uniform Commercial Code (UCC), on the other hand, is a body of statutory law that governs contracts for the sale of goods and securities. The applicability of either common law or UCC to a contract can significantly impact the outcome of a contract dispute, including the ability to collect punitive damages, discharge or modify a contract, and sue under a breach of contract.
| Characteristics | Values |
|---|---|
| Governing body of law | Common law of contracts and Uniform Commercial Code (UCC) |
| Application | Common law of contracts generally applies to contracts for services, real estate, insurance, intangibles, and employment. |
| Uniformity | Common law varies by state, while the UCC provides uniformity in commercial law across states. |
| Acceptance | Common law follows the "Mirror Image Rule", requiring acceptance to be an exact mirror image of the offer. UCC allows for minor changes without impacting the offer. |
| Modification | Common law requires additional consideration for modification, while UCC allows for modification without new consideration. |
| Discharge | Under common law, a contract cannot be discharged due to impracticability, unlike UCC. |
| Privity of contract | Common law requires privity of contract to sue, but UCC does not. |
| Statute of limitations | Common law has a varying statute of limitations, typically between four to six years. UCC has a uniform four-year limit. |
| Punitive damages | Common law does not usually grant punitive damages, but UCC does. |
| Basis | Common law is guided by tradition and court decisions (judicial precedent), while UCC is a body of statutory law. |
| Formation | Common law contract formation requires an offer, acceptance, consideration, and mutual intent. |
| Validity | Contracts must fall within the scope of existing law to be considered valid. |
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What You'll Learn
Common law vs UCC
In the United States, two primary sources of law govern contracts: the common law and the Uniform Commercial Code (UCC). While the UCC is a set of laws, common law is based on past court decisions and similar precedents. The two bodies of contract law have distinct differences that are important to understand, especially if you regularly deal with contracts.
Common Law
Common law governs contractual transactions with real estate, services, insurance, intangible assets, and employment. It also governs contracts for services and contracts not governed by the UCC. It requires a description of the quantity, price, performance time, nature of work, and identity of an offer to be part of a valid contract. Common law follows the "Mirror Image Rule", which requires an acceptance to be an exact mirror image of the terms of the offer for it to be a legally recognised acceptance. Any changes to an offer are considered a rejection and a counteroffer. Common law also requires consideration for contract modifications and to keep an offer open.
Uniform Commercial Code (UCC)
The UCC governs contractual transactions with goods and tangible objects, such as the purchase of a car or crops, timber, minerals, etc. It offers more flexibility in contract formation, specifying only quantity as a required term in its contracts. The UCC allows greater flexibility for contract modifications without new consideration. It also has a uniform four-year statute of limitations, while common law varies by state. The UCC also provides specific remedies in cases of fraud and allows the seller to take steps like withholding delivery, stopping delivery, or cancelling the contract.
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Contract formation
In the majority of English-speaking countries, the rules of contract formation are derived from English contract law, which emerged from precedents set by various courts in England over the centuries. Common law, which originated in Medieval England, forms the basis of the English legal system and has been exported to many countries with historical ties to England, such as the United States and the Commonwealth.
Contract law is generally governed by state common law, and while there are some variations in specific court interpretations across states, the overall law is common throughout the country. Contracts are formed when a duty arises from a promise made by one of the parties, and to be legally binding, this promise must be exchanged for adequate consideration. This consideration must be lawful and requested by the promisee, and it cannot be a pre-existing legal or contractual obligation. It must also occur at or after the formation of the contract.
The Uniform Commercial Code (UCC) and common law are the two main bodies of law that govern contracts. The UCC deals with the sale of goods and securities, while common law typically applies to contracts for services, real estate, insurance, and intangible assets. Contracts for sale, gift, lease, and insurance are often regulated as nominate contracts, which are closely regulated in form and substance by law.
The formation of a contract generally requires an offer, acceptance, consideration, and mutual intent to be bound. Common law follows the "Mirror Image Rule," requiring acceptance to be an exact replica of the offer's terms for it to be legally recognised. If any changes are made, it becomes a rejection and a counteroffer. However, the UCC allows for more flexibility, considering only material changes that affect the contract to be relevant.
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Modification and discharge
When it comes to the modification and discharge of a contract, there are distinct differences between the Uniform Commercial Code (UCC) and the common law of contracts.
Modification
Under the common law, a contract can only be modified if there is additional consideration for the modification. This is in contrast to the UCC, which allows for greater flexibility in contract modifications without the need for new consideration. The UCC does not require consideration for good faith modifications.
Discharge
Discharge of a contract refers to the termination or fulfilment of the contract. This can occur in several ways:
- Performance: A contract is discharged when both parties fulfil their obligations as specified in the contract.
- Mutual Agreement: If parties to a contract mutually agree to accept a lesser amount or degree of performance than what was initially agreed upon, this can result in the discharge of the original contract and the formation of a new one.
- Impossibility: A contract is discharged when it becomes impossible or illegal to perform due to subsequent changes in circumstances or laws.
- Time Lapse: Contracts may be discharged if they are not performed within the given time period.
- Death, Insolvency, or Merger: Contracts involving personal skill or ability are discharged upon the death of a party. Insolvency or merger can also result in the discharge of a party's liabilities and the transfer of rights to legal representatives or court-appointed officials.
- Destruction of Subject Matter: If the subject matter of the contract is destroyed, the contract is discharged, and no party is liable to perform.
- Change in Circumstances: When the circumstances surrounding a contract change, it may be discharged, and the other party is freed from the obligation to perform.
- Pre-contractual Impossibility: A contract that is impossible to perform at the time it is entered into is void and creates no rights or obligations.
- Breach of Contract: A breach of contract by one party can lead to the discharge of the contract, allowing the non-breaching party to seek remedies under the law.
It is important to note that the specific laws governing modification and discharge may vary depending on the jurisdiction and the type of contract involved.
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Remedies for breach
A contract is breached when a party fails to act in good faith or does not fulfil their obligations under the agreement. There are several types of contract breaches, with the most serious being a material breach, which constitutes a major violation of the terms of a contract.
There are two types of remedies for breach of contract: monetary damages (or a "remedy in law") and injunctive relief (or an "equitable remedy"). Financial compensation is the most common remedy for breach of contract. When lawyers refer to "remedies in law", they are referring to monetary damages. Compensatory damages, also known as expectation damages or general damages, are a common form of monetary damages. They aim to restore the non-breaching party to their original position by covering any losses incurred. For example, if a seller backs out of a contract to sell a bus for $100,000, and the buyer has to pay another seller $110,000 for a similar bus, the expectation damages would be $10,000. The buyer may also request a refund of money already paid.
Injunctive relief is another remedy for breach of contract. A temporary injunction may be ordered while litigation is pending to prevent potential damage. For example, in a lawsuit concerning a breach of a non-compete contract, a court might order the defendant to cease the competitive activity until the lawsuit is resolved. A permanent injunction is issued as part of a judge's final ruling in a lawsuit.
Rescission is another remedy, which allows a non-breaching party to cancel the contract. Rather than seeking monetary damages, the non-breaching party can refuse to complete their end of the bargain. However, to justify rescission, the breach must be material.
Quasi-contractual remedies are sometimes available as an alternative to a remedy for breach of contract or when there is no remedy for breach of contract. For example, a claim for quantum meruit, which is a reasonable remuneration for work done or goods supplied under a contract that is later found to be void.
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Common law in different states
In the United States, contract law is generally governed by state common law. While the overall law of contracts is common throughout the country, some specific court interpretations of a particular element of the contract may vary between states.
The Uniform Commercial Code (UCC) and the common law of contracts are the two possible general bodies of law that could apply to contracts. The UCC has been adopted in nearly every state and governs important categories of contracts. The UCC applies to the sale of goods and securities, while the common law of contracts generally applies to contracts for services, real estate, insurance, and intangibles.
The differences between the UCC and the common law can significantly impact the outcome of a contract dispute. For example, the common law follows the "Mirror Image Rule," requiring an acceptance to be an exact mirror image of the terms of the offer to be legally recognized. On the other hand, the UCC allows greater flexibility for contract modifications without new consideration.
Regarding marriage, common law marriage is recognized in only a handful of states, and each state has its own rules and requirements for a long-term relationship to qualify as a common law marriage. These states include Colorado, Iowa, Kansas, Montana, Rhode Island, Oklahoma, Texas, and Utah. Some states, like Ohio, Pennsylvania, and Georgia, recognize common law marriages established before a certain date.
All states recognize common law marriages if a couple is married in a common law marriage state, as the Constitution's full faith and credit clause requires states to respect other states' laws. However, if a couple legally married under common law moves to a state that does not recognize common law marriage, they are still considered legally married.
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Frequently asked questions
A common law contract is a type of contract that is guided by tradition and court decisions instead of statutes. Common law contracts are based on legal precedents, which are past court decisions that guide current and future contract law.
The key elements of a common law contract are an offer, acceptance, consideration, and mutual intent.
Common law contracts are generally more rigid and strict than UCC contracts. For example, common law follows the \"Mirror Image Rule", requiring acceptance to be an exact mirror image of the terms of the offer, whereas the UCC allows for minor changes that do not create a conflict in terms.
Common law contracts generally apply to contracts for services, real estate, insurance, intangible assets, and employment.
If a common law contract is broken, the law provides remedies to the harmed party, often in the form of monetary damages or, in limited circumstances, specific performance of the promise made.
