Contract

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The examples and perspective in this article deal primarily with common law and do not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page.

A contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law. It is where an unqualified offer meets a qualified acceptance and the parties reach Consensus ad Idem. The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (pacts must be kept).[1] Breach of contract is recognised by the law and remedies can be provided. Sometimes written contracts are required, such as when buying a house.[2] However, most contracts can be and are made orally, such as purchasing a book or a sandwich. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).

According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".

Contractual formation

Contract law
Part of the common law series
Contract formation
Offer and acceptance · Mailbox rule
Mirror image rule · Invitation to treat
Firm offer · Consideration
Defenses against formation
Lack of capacity
Duress · Undue influence
Illusory promise · Statute of frauds
Non est factum
Contract interpretation
Parol evidence rule
Contract of adhesion
Integration clause
Contra proferentem
Excuses for non-performance
Mistake · Misrepresentation
Frustration of purpose · Impossibility
Impracticability · Illegality
Unclean hands · Unconscionability
Accord and satisfaction
Rights of third parties
Privity of contract
Assignment · Delegation
Novation · Third party beneficiary
Breach of contract
Anticipatory repudiation · Cover
Exclusion clause · Efficient breach
Fundamental breach
Remedies
Specific performance
Liquidated damages
Penal damages · Rescission
Quasi-contractual obligations
Promissory estoppel
Quantum meruit
Subsets
Conflict of law · Commercial law
Other common law areas
Tort law · Property law
Wills, trusts and estates
Criminal law · Evidence

In common law systems, the five key requirements for the creation of a contract are: 1. offer and acceptance (agreement) 2. consideration 3. an intention to create legal relations 4. legal capacity 5. formalities

In civil law systems, the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.

One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company [3] decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would cure people's flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick. But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, primarily because of the reference to the £100 deposited into the bank. People had given good "consideration" for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will," said Lindley LJ, "here is a distinct promise expressed in language which is perfectly unmistakable".

Where a product in large quantities is advertised in a newspaper or on a poster, it is as an offer; however, if the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying land, it is regarded merely as an invitation to treat. In Carbolic Smoke Ball, the major difference was that a reward was included in the advertisement, which is a general exception to the rule and is then treated as an offer.

Offer and acceptance

The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a 'concurrence of wills' or 'ad idem' (meeting of the minds) of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement.[4] An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.

The case of Carlill v. Carbolic Smoke Ball Co. (above) is an example of a 'unilateral contract', obligations are only imposed upon one party upon acceptance by performance of a condition. In the U.S., the general rule is that in "case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses."[5]

Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one 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. For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill. Will the man be held liable for payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be liable. Such a claim is also referred to as "quantum meruit".[6]

See also: Invitation to treat

Consideration and estoppel

Consideration is known as 'the price of a promise' and is a controversial requirement for contracts under common law. It is not necessary in all common law or civil law systems,[7] and is considered by some to be unnecessary as the requirement of intention to create legal relations by both parties meets the same requirement under contract. The idea is that both parties to a contract must bring something to the bargain, that both parties must confer some benefit or detriment (for example, money, however in some cases money will not suffice as consideration - eg when one party agrees to make part payment of a debt in exchange for being released from the full amount[8]). This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience towards oneself. Three rules govern consideration.

• Consideration must be real, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract.[9] While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of real consideration. In such cases, the fact that the consideration is exceedingly inadequate can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, or being contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.
• Consideration must not be from the past. For instance, in Eastwood v. Kenyon,[10] the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration--it was completed before the husband promised to repay it.
• Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations.[11] Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts.[12] 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."[13]