The Legal Meaning of “Contract”

A.      

                                                              i.      Acontract may be defined as an exchange relationship created by oral or written agreement between two or more persons, containing at least one promise, and recognized in law as enforceable.

1.      An oral or written agreement between two or more persons

a.       It is a voluntary, consensual relationship, created only because the parties, acting with free will and intent to be bound, reach an agreement on the essential terms of their relationship.

b.      It is enough that the words and conduct of a part, evaluated on an objective standard, would lead the other party to reasonably understand that an agreement was reached.

c.       Under the statute of frauds, there are some types of contracts that must be recorded in a signed writing to be enforceable.  However, most contracts are not covered by the statute of frauds.

2.      An exchange relationship

a.       The very essence of contract is a reciprocal relationship in which each party gives up something to get something.

3.      At least one promise

a.       For a contract to exist there must be a promise – that is, some commitment for the future, some assumption of liability lasting beyond the instant of the agreement.

b.      A promise is an undertaking to act or refrain from acting in a specified way at some future time.

c.       This promise may be made in clear and express words, or it could be implied – inferred from conduct or from the circumstances of the transaction.

                                                                                                                                      i.      An Instantaneous Exchange =  No Contract

1.      Where an exchange is entirely instantaneous, and neither party makes any promise to the other, their exchange is not regarded as a contract. 

                                                                                                                                    ii.      A Promissory Exchange = Bilateral Contract

1.      If promises exist on both sides after the moment of agreement, then a bilateral contract exists.

                                                                                                                                  iii.      A Promissory Exchange by Implication = Bilateral Contract

1.      It is not always necessary for promises to be stated in express terms.  Often, the circumstances of the transaction, the conventions of the marketplace, or the policy of the law imply a promise even in the absence of promissory language in the agreement.

                                                                                                                                  iv.      A Promise for Performance = Unilateral Contract

1.      When, at the point of contract formation, only one party has a promise outstanding, the contract is called unilateral.

4.      Enforceability

a.       Contracting is often described as an act of private lawmaking by which persons create a kind of personalized “statute” to govern their relationship.  One can only envisage a contract as private legislation if it has the attribute of any law – recognition and enforcement through the compulsive power of the state, acting through its courts.  It is therefore a hallmark of contract that it creates law binding on the parties and confers on them rights and obligations cognizable in law. 

b.      If a promise is broken, the disappointed party can sue.

                                                                                                                                      i.      Court will first adjudicate any questions concerning the existence of a valid contract and try to resolve any disputes over its terms and their breach.

                                                                                                                                    ii.      Once it is established that a contract was entered into and breached, the court will enforce it by giving a remedy for the breach.

1.      The primary remedy for breach of contract is not specific performance of the promise.

2.      Usually, it is a judgment awarding damages to the disappointed party.  The disappointed party must prove that the breach caused financial loss.

a.       Expectation damages are the most common – represent the economic loss suffered by the victim as a result of the breach, and are measured as the amount of money needed to put the victim in the position she would have been in had the contract not been breached.

                                                                                                                                                                                                              i.      Direct damages

                                                                                                                                                                                                            ii.      Consequential damages – losses beyond the contract that resulted from the breach

                                                                                                                                                                                                          iii.      Incidental damages – expenses occurred in dealing with the effects of the breach

A.     The Sources, Nature and Traditions of Contract Law

                                                              i.      Classical Contract Law

1.      Law as a science – relatively formalistic and rigid. 

2.      Classical theory stressed the facilitation of contractual relationships and favored a strictly objective approach – if parties manifested intent, classicists favored enforcement of the transaction and were not inclined to probe the actual state of understanding of either party.

3.      Heavily influenced by the legal philosophy of positivism, which stressed the primacy of legal rules and considered the court’s principle role to be finding and applying those rules to the facts of individual cases. 

                                                            ii.      Contemporary Contract Law

1.      As twentieth century wore on, insight into human interaction grew.  Law began to be studied in a multidisciplinary way, taking into account its social context and the actual workings of the legal system.

2.      Sociological jurisprudents – studied the relationship between law and society.

3.      Legal realists – stressed the dynamics of the legal process, challenged the preeminence of rules, and advocated a looser, more flexible approach to legal analysis.

                                                          iii.      Contract as State Law

1.      Except in some very narrow and specific circumstances, contracts are governed by state law.  Therefore, there is no single and unified law of contracts in the United States.

B.     The Meaning of “Common Law”

                                                              i.      “Common Law” Used to Designate Our Legal System as a Whole

1.      Designates a country whose legal system is based on the common law of England.

2.      Common law places great reliance on the role of courts as participants in the creation of law, while the civil law focuses heavily on the code as the source of law and subordinates the judicial lawmaking role.

                                                            ii.      “Common Law” Used to Denote the Judge-Made Component of Our Legal System

1.      Distinguishes those areas of the law that derive principally from judicial decision rather than from statute.

2.      Contract is a common law subject because most of its rules are not found in legislation, but have been developed by courts.

                                                          iii.      “Common Law” Used to Denote a Process or Approach to Legal Analysis

1.      Even in an area governed by statute, the courts play a vital role in interpreting and developing the law by applying general rules to specific cases.