Gavin Howe
Contract law is generally governed by state common law, and while general contract law is common throughout the country, some specific court interpretations of a particular element of the contract may vary between states. The law of contracts varies from state to state, with rare exceptions, such as certain contracts to which the federal government is a party. There is nationwide federal contract law in certain areas, such as contracts entered into pursuant to the Federal Reclamation Law. The Uniform Commercial Code (UCC), whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) and Article 2 (Sales).
| Characteristics | Values |
|---|---|
| Contract law | Regulates the obligations established by agreement, whether express or implied, between private parties in the United States |
| Law of contracts | Varies from state to state |
| Nationwide federal contract law | Applicable in certain areas, such as contracts entered into pursuant to Federal Reclamation Law |
| Transactions involving the sale of goods | Governed by the Uniform Commercial Code (UCC) |
| Interpretation of contracts | Depends on the extent to which a state has codified its common law of contracts or adopted portions of the Restatement (Second) of Contracts |
| Basic elements of a legally enforceable contract | Mutual assent, valid offer and acceptance, adequate consideration, capacity, and legality |
| Contract remedies for breach | General damages, consequential damages, reliance damages, and specific performance |
| Governing law | Determined by the choice of law rules of the state in which the case is heard |
| Federal court jurisdiction | Limited to civil cases arising under federal law or between parties of diverse citizenship |
| Common law | Refers primarily to state common law and the Restatements |
| Federal common law | Influenced by the Restatement (Second) of Conflict of Laws and the Uniform Commercial Code (UCC) |
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What You'll Learn
Contract law is governed by state law
In the United States, contract law is generally governed by state law. While general overall contract law is common throughout the country, specific court interpretations of a particular element of the contract may vary between states. The law of contracts varies from state to state, and there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.
The basic elements required for an agreement to be a legally enforceable contract are mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.
The Uniform Commercial Code (UCC), whose original articles have been adopted in nearly every state, represents a body of statutory law that governs important categories of contracts. The main articles that deal with the law of contracts are Article 1 (General Provisions) and Article 2 (Sales). Sections of Article 9 (Secured Transactions) govern contracts assigning the rights to payment in security interest agreements.
Contract provisions specifying the choice of law that will govern and the choice of forum to resolve disputes range from simple to elaborate. Governing law is typically specified within a "Choice of Law" or "Governing Law" clause in an agreement's Terms and Conditions section. For example, a Governing Law clause might state: "This Agreement shall be governed by and construed in accordance with the laws of the State of California." This means that any legal issues arising from the agreement will be subject to California state law, regardless of where the parties are located.
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Federal Arbitration Act
In the United States, contract law is generally governed by state common law, and while general contract law is common throughout the country, some specific court interpretations of a particular element of the contract may vary between states. There is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.
The Federal Arbitration Act (FAA), enacted on July 30, 1947, falls under Title 9 of the United States Code, entitled 'Arbitration'. This Act covers all contracts arising under federal or state law, and arbitration clauses are generally enforceable unless the party resisting arbitration can demonstrate unconscionability, fraud, or something else that undermines the entire contract.
Under the FAA, if a party fails to comply with a written agreement to arbitrate, the aggrieved party can petition a United States district court for an order directing that arbitration proceed as agreed. The court will hear both parties and, if satisfied that there is indeed an agreement to arbitrate and that there is a default in proceeding, will order the parties to proceed with arbitration as per the terms of the agreement.
The FAA also outlines the procedure for appointing an arbitrator. If the agreement provides a method for naming an arbitrator, that method must be followed. However, if no method is provided or if there is a lapse in filling a vacancy, either party can apply to the court, which will then designate an arbitrator.
In summary, the Federal Arbitration Act provides a framework for enforcing arbitration agreements and resolving disputes involving arbitration under federal and state law contracts. It ensures that arbitration clauses are upheld and establishes a process for addressing any failures to comply with arbitration agreements.
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Common law and the Uniform Commercial Code
In the United States, contract law is governed by two bodies of law: the common law and the Uniform Commercial Code (UCC). While the common law of contracts generally applies to contracts for services, real estate, insurance, intangibles, and employment, the UCC governs the sale of goods and securities. The UCC has been adopted in nearly every state and standardises the law governing transactions involving the sale of goods.
The basic elements required for an agreement to be a legally enforceable contract are mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. At common law, the terms of a purported acceptance must be the "mirror image" of the terms of the offer, with any variation constituting a counteroffer. However, under the UCC, only changes that affect the contract "materially" have an impact, and minor changes with no significant impact on the terms do not void the offer.
Another difference between the two bodies of law is the modification and discharge of a contract. Under the common law, a contract can only be modified if there is additional consideration for the modification, whereas under the UCC, a contract can be modified without any additional consideration. Additionally, the UCC allows for the discharge of a contract due to impracticability, which is not permitted under common law.
The eligibility to sue for breach of contract also differs between the UCC and common law. Under the common law, privity of contract is required to litigate, but this is not necessary under the UCC. The statute of limitations also varies, with the UCC allowing for a four-year period, while common law typically allows for four to six years.
It is important to distinguish between UCC contracts and common law contracts as it can significantly impact the outcome of a contract dispute, including the ability to collect punitive damages and whether there was a legally recognised contract.
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Contract damages
In the United States, contract law is generally governed by state common law, and while general contract law is common throughout the country, some specific court interpretations of a particular element of the contract may vary between states. There is nationwide federal contract law in certain areas, such as contracts entered into pursuant to the Federal Reclamation Law.
- Compensatory damages: These compensate the non-breaching party for the actual financial losses suffered as a direct result of the breach. The goal is to place the non-breaching party in the same position they would have been in if the contract had been fulfilled.
- Consequential damages: These are indirect damages that occur due to special circumstances caused by the breach.
- Incidental damages: These are expenses incurred by the non-breaching party as a direct result of the breach. They are typically awarded in addition to other damages and aim to reimburse the non-breaching party for the costs of the breach.
- Reliance damages: These compensate the non-breaching party for the economic position they would have been in had they not relied on the contract.
- Restitution: This is an equitable remedy to take away profits from the party that breached.
- Expectancy damages: This is what the non-breaching party expected to receive under the contract.
- Specific performance: In some cases, instead of awarding damages, the court may order the breaching party to fulfill its duties under the contract.
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Choice of law rules
In the United States, contract law is generally governed by state common law, and while general overall contract law is common throughout the country, some specific court interpretations of a particular element of the contract may vary between states. There is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.
A "choice of law" or "governing law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if they live in (or the agreement is signed in) a different state. These provisions can range from simple to elaborate but do not always get the care they deserve. Fully elaborated commercial contracts typically identify the governing law and specify the forum that would hear any dispute. They may also provide that disputes will be resolved by arbitration instead of judicial litigation.
Choice-of-law clauses provide that the contract is to be governed by the laws of a particular state "without regard to its conflict of laws rules." The internal law of the chosen jurisdiction does not include that jurisdiction's choice-of-law rules, while the whole law of the chosen jurisdiction does include these rules. Choice-of-law rules allow a court to determine which jurisdiction's law to apply when the transaction or the parties have connections to more than one place.
Courts should always apply the law of the jurisdiction selected in the choice-of-law clause to interpret the language in the clause. However, in some cases, courts must fashion a default rule to determine whether the clause applies to tort and statutory claims. The courts in some states (Florida, New York, Texas) have held that generic clauses do not apply to non-contract claims, while courts in other states (California, Minnesota, Virginia) have held that they do.
Some contracts involving secured transactions and the Uniform Commercial Code (UCC) could also conflict with choice-of-law rules. Contracts governing corporate behaviour usually must be decided by the law of the state of incorporation.
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Frequently asked questions
A contract is an agreement between two or more parties creating reciprocal obligations enforceable by law. The basic elements required for an agreement to be a legally enforceable contract are mutual assent, expressed by a valid offer and acceptance, adequate consideration, capacity, and legality.
The common law of contracts is primarily governed by state statutory and common (judge-made) law and private law. Most of the principles of the common law of contracts are outlined in the Restatement of Law, Second Contracts published by the American Law Institute.
Federal common law refers to the law applied in federal courts. Federal courts have jurisdiction in civil cases only if the claims arise under federal law or are between parties of completely diverse citizenship.
Federal common law follows the approach outlined in the Restatement (Second) of Conflict of Laws. When applying federal common law to contract issues, courts generally look to the Restatement for guidance.
In the United States, contracts are generally governed by state law. However, there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to the Federal Reclamation Law.
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