Contract
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In law, a contract is a legally binding agreement between two or more parties which, if it contains the elements of a valid legal agreement, is enforceable by law or by binding arbitration. A legally enforceable contract is an exchange of promises with specific legal remedies for breach. These can include compensatory remedy, whereby the defaulting party is required to pay monies that would otherwise have been exchanged were the contract honoured, or an Equitable remedy such as Specific Performance, in which the person who entered into the contract is required to carry out the specific action they have reneged upon.
An agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). 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 (usually translated "agreements are to be kept", but more literally "pacts must be kept"). Breach of contract is recognized by the law and remedies can be provided.
As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that generally only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdiction for certain types of agreement, for example when buying a house or land.
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".
As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms (see "Contractual theory", below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.
This article mainly concerns contract law in common law jurisdictions (approximately coincident with the English-speaking world and anywhere the British Empire once held sway). Common-law jurisdictions usually offer proceedings in the English language, which has become to an extent a lingua franca of international business. The common law retains a high degree of freedom of contract, with parties largely free to set their own terms, whereas civil-law systems typically apply certain over-arching principles to disputes arising out of contract (see, for example the French Civil Code). It is very common for businesses not located in common-law jurisdictions to opt in to the common law through a Choice of law clause[citation needed].
However, contract is a form of economic ordering common throughout the world, and different rules apply in jurisdictions applying civil law (derived from Roman law principles), Islamic law, socialist legal systems, and customary or local law.
Contract 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
Related areas of law
Conflict of laws · Commercial law
Other common law areas
Tort law · Property law
Wills, trusts and estates
Criminal law · Evidence
The eight key requirements for the creation of a contract are:
- Agreement (Offer and Acceptance)
- Capacity to contract
- Consideration
- Legal purpose
- Legality of form
- Intention to create legal relations
- Consent to contract
- Vitiating factors: Mistakes, undue influence, misrepresentation, duress
In civil-law systems, the concept of consideration is not central.
In most systems of law, parties have freedom to choose whether or not they wish to enter into a contract, absent superseding duties. In American law, one early case exemplifying this proposition is Hurley v. Eddingfield (1901), in which the Supreme Court of Indiana ruled in favor of a physician who voluntarily decided not to help a patient whom the physician had treated on past occasions, despite the lack of other available medical assistance and the patient's subsequent death.
In addition, for some contracts formalities must be complied with under legislation sometimes called a statute of frauds (especially transactions in real property or for relatively large cash amounts).
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. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention: see Smith v. Hughes. Richard Austen-Baker has suggested that the perpetuation of the idea of 'meeting of minds' may come from a misunderstanding of the Latin term 'consensus ad idem', which actually means 'agreement to the [same] thing'. 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. 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 Company is an example of a 'unilateral contract', obligations are only imposed upon one party upon acceptance by performance of a condition [disambiguation needed]. In the United States, 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."
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".
Invitation to treat
Where a product in large quantities is advertised in a newspaper or on a poster, it generally is not considered an offer but instead will be regarded as an invitation to treat, since there is no guarantee that the store can provide the item for everyone who might want one. This was the basis of the decision in Partridge v. Crittenden a criminal case in which the defendant was charged with "offering for sale" bramblefinch cocks and hens. The court held that the newspaper advertisement could only be an invitation to treat, since it could not have been intended as an offer to the world, so the defendant was not guilty of "offering" them for sale. Similarly, a display of goods in a shop window is an invitation to treat, as was held in Fisher v. Bell another criminal case which turned on the correct analysis of offers as against invitations to treat. In this instance the defendant was charged with "offering for sale" prohibited kinds of knife, which he had displayed in his shop window with prices attached. The court held that this was an invitation to treat, the offer would be made by a purchaser going into the shop and asking to buy a knife, with acceptance being by the shopkeeper, which he could withhold. (The law was later amended to "exposing for sale".) A display of goods on the shelves of a self-service shop is also an invitation to treat, with the offer being made by the purchaser at the checkout and being accepted by the shop assistant operating the checkout: Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. 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 [disambiguation needed] was included in the advertisement, which is a general exception to the rule and is then treated as an offer.
One of the most famous cases on invitation to treat is Carlill v. Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would prevent those who used it according to the instructions from catching the flu, and if it did not, buyers would receive £100 and said that they had deposited £1,000 in the bank to show their good faith. 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 (a 'mere puff'). 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 £1000 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".