Comparison of contract and
tort law
The law of obligations has traditionally been
divided into contractual obligations, which are
voluntarily undertaken and owed to a specific
person or persons, and obligations in tort which
are based on the wrongful infliction of harm to
certain protected interests, primarily imposed by
the law, and typically owed to a wider class of
persons. Recently it has been accepted that there
is a third category, restitutionary obligations,
based on the unjust enrichment of the defendant
at the plaintiffs expense. Contractual
liability, reflecting the constitutive function
of contract, is generally for failing to make
things better (by not rendering the expected
performance), liability in tort is generally for
action (as opposed to omission) making things
worse, and liability in restitution is for
unjustly taking or retaining the benefit of the
plaintiffs money or work [Beatson (1998)
Ansons Law of Contract, 27th ed. (Oxford:
OUP), pg. 21].
Scope
of common law contract law
Basic common law contract law addresses four sets
of issues:
1. When and how is a contract formed?
2. When may a party escape obligations of a
contract (such as a contract formed under duress
or because of a misrepresentation)?
3. What is the meaning and effect to be given to
the terms of a contract?
4. What is the remedy to be given for breach of a
contract?
Contract formation: There must be an agreement
which consists of an offer and acceptance,
consideration (see also consideration under
English law) and contractual intention for a
simple contract to exist: i.e. it is not a deed -
otherwise no consideration is needed.
Subject to the sine quo non of Contract
Formation, other ingredients that make up a
contract include:
* Form - In some cases, certain formalities (that
is, writing) must be observed.
* Capacity - The parties must be legally capable
of entering into a contract.
* Consent - The agreement must have been entered
into freely. Consent may be vitiated by duress or
undue influence.
* Legality - The purpose of the agreement must
not be illegal or contrary to public policy.
A contract which possesses all of the above
ingredients is said to be valid. The absence of
an essential element will render the contract
either void, voidable or unenforceable
In some situations, a collateral contract may
exist.
Meaning and effect of contract terms:
Many contract disputes involve a disagreement
between the parties about what terms in the
contract require each party to do or refrain from
doing. Hence, many rules of contract law pertain
to interpretation of terms of a contract that are
vague or ambiguous. The parol evidence rule
limits what things can be taken into account when
trying to interpret a contract.
Privity: In general, only parties to a contract
may sue for the breach of a contract.
Validity
of contracts
For a contract to be valid, it must meet the
following criteria:
* Mutual agreement - (see main
article offer and acceptance): There must be an
express or implied agreement. The essential
requirement is that there 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. For a contract based on
offer and acceptance to be enforced, the terms
must be capable of determination in a way that it
is clear that the parties assent was given to the
same terms. The terms, like the manifestation of
assent itself, are determined objectively.
* Consideration: There must be
consideration (see also consideration under
English law) given by all the parties, meaning
that every party is conferring a benefit on the
other party or himself sustaining a recognizable
detriment, such as a reduction of the party's
alternative courses of action where the party
would otherwise be free to act with respect to
the subject matter without any limitation.
* Competent, Adult (Sui Juris) Parties:
Both parties must have the capacity to understand
the terms of the contract they are entering into,
and the consequences of the promises they make.
For example, animals, minor children, and
mentally disabled individuals do not have the
capacity to form a contract, and any contracts
with them will be considered void or voidable.
Although corporations are technically legal
fictions, they are considered persons under the
law, and thus fit to engage in contracts.
For adults, most jurisdictions have statutes
declaring that the capacity of parties to a
contract is presumed, so that one resisting
enforcement of a contract on grounds that a party
lacked the capacity to be bound bears the burden
of persuasion on the issue of capacity.
* Proper Subject Matter: The
contract must have a lawful purpose. A contract
to commit murder in exchange for money will not
be enforced by the courts. It is void ab initio,
meaning "from the beginning."
* Mutual Right to Remedy: Both
parties must have an equal right to remedy upon
breach of the terms by the other party
* Mutual Obligation to Perform:
Both Parties must have some obligation to fulfill
to the other. This can be distinct from
consideration, which may be an initial inducement
into the contract.
Written
contracts
Contrary to common wisdom, an informal exchange
of promises can still be binding and legally as
valid as a written contract. A spoken contract is
often called an "oral contract", not a
"verbal contract." Any contract that
uses words, spoken or written, is a verbal
contract. Thus, all oral contracts and written
contracts are verbal contracts. This is in
contrast to a "non-verbal, non-oral
contract," also known as "a contract
implied by the acts of the parties."
Courts in the United States have generally ruled
that if the parties have a meeting of the minds,
and act as though there was a formal, written and
signed contract, then a contract exists. However,
most jurisdictions require a signed writing for
certain kinds of contracts (like real estate
transactions).
In the United States, a law setting out such
requirements is typically called the Statute of
Frauds; the name originates from an English
statute that was for "the prevention of
frauds." The point of the Statute of Frauds
is to prevent false allegations of the existence
of contracts that were never made, by requiring
formal (i.e. written) evidence of the contract.
Contracts that do not meet the requirements of
Statute of Frauds legislation are unenforceable,
but not void. However, a party unjustly enriched
by an unenforceable contract may be subject to
restitution for unjust enrichment.
In Australia, for contracts subject to
legislation equivalent to the Statute of Frauds,
there is no requirement for the entire contract
to be in writing, although there must be a note
or memorandum evidencing the contract, which may
come into existence after the contract has been
formed. The note or memorandum must be signed in
some way, and a series of documents may be used
in place of a single note or memorandum. It must
contain all material terms of the contract, the
subject matter and the parties to the contract.
In England and Wales, the Statute of Frauds is
still in force, but only for guarantees, which
must be evidenced in writing, although the
agreement may be made orally. Certain other kinds
of contract (such as for the sale of land) must
be in writing or they are void.
Furthermore, the existence of a written contract
does not necessarily ensure its enforceability or
validity. A contract can be deemed unenforceable
if it requires a party to undertake an illegal
act, if it was signed under duress or while
intoxicated, if the disparity in knowledge
between the parties is extreme and the weaker
party was given onerous terms, etc. For example,
in Massachusetts a contract is not enforceable if
it is executed on a Sunday.
If the terms of a contract subject to Statute of
Frauds legislation are to be varied, the
variations must be noted in writing as well.
However, the contract may be discharged orally.
If a contract is in a written form, then
generally, you are bound by its terms regardless
of whether you have read it or not (L'Estrange v.
F Graucob Ltd [1934] 2 KB 394). However, this is
tempered by the exception that if the terms of
the contract are misrepresented, then the
plaintiff is unable to rely on the terms of the
contract; in addition, the document must be
contractual in nature (Curtis v. Chemical
Cleaning and Dyeing Co [1951] 1 KB 805).
Furthermore, if a party wishes to use a document
as the basis of a contract, reasonable notice of
its terms must be given to the other party prior
to their entry into the contract (see Balmain New
Ferry Company Ltd v. Robertson (1906) 4 CLR 379).
This includes such things as tickets issued at
parking stations.
Void,
voidable and unenforceable contracts
In general, there are three classifications of
contracts that are not binding:
* Void: If a contract is held to
be void, the contract has never come into
existence. For example, a contract is void if it
is based on an illegal purpose or contrary to
public policy; the classic example is a contract
with a hit man. Such a contract will not be
recognized by a court, and cannot be enforced by
either party.
* Voidable: A contract is
voidable if one of the parties has the option to
terminate the contract. Contracts with minors are
examples of voidable contracts.
* Unenforceable: If a contract
is unenforceable, neither party may enforce the
other's obligations. For example, in the United
States, a contract is unenforceable if it
violates the Statute of frauds. An example of the
above is an oral contract for the sale of a
motorcycle for US$5,000 (because in the USA any
contract for the sale of goods over US$500 must
be in writing to be enforceable).
Uncertainty
and incompleteness
If the terms of the contract are uncertain or
incomplete, the parties cannot have reached an
agreement in the eyes of the law. An agreement to
agree does not constitute a contract, and an
inability to agree on key issues, which may
include such things as price, may cause the
entire contract to fail.
However, a court will attempt to give effect to
commercial contracts where possible, by
construing a reasonable construction of the
contract (see Hillas v. Arcos Ltd (1932) 147 LT
503).
Courts may also look to external standards, which
are either mentioned explicitly in the contract
(Whitlock v. Brew (1968) 118 CLR 445) or implied
by common practice in a certain field (Three
Rivers Trading Co., Ltd. v. Gwinear &
District Farmers, Ltd. (1967), 111 Sol. J. 831).
In addition, the court may also imply a term; if
price is excluded, the court may imply a
reasonable price, with the exception of land, and
second-hand goods, which are unique.
Severence
of unenforceable clauses
If there are uncertain or incomplete clauses in
the contract, and all options in resolving its
true meaning have failed, it may be possible to
sever and void just those affected clauses. The
test of whether a clause is severable is an
objective test - whether a reasonable person
would see the contract standing even without the
clauses.
Spy
contracts
In the U.S., one unusual type of unenforceable
contract is a personal employment contract to
work as a spy or secret agent. This is because
the very secrecy of the contract is a condition
of the contract (in order to maintain plausible
deniability). If the spy subsequently sues the
government on the contract over issues like
salary or benefits, then the spy has breached the
contract by revealing its existence. It is thus
unenforceable on that ground, as well as the
public policy of maintaining national security
(since a disgruntled agent might try to reveal
all the government's secrets during his lawsuit).
Bilateral
v. unilateral contracts
Contracts may be bilateral or unilateral. The
more common of the two, a bilateral contract, is
an agreement in which each of the parties to the
contract makes a promise or promises to the other
party. For example, in a contract for the sale of
a home, the buyer promises to pay the seller
£200,000 in exchange for the seller's promise to
deliver title to the property.
In a unilateral contract, only one party to the
contract makes a promise. A typical example is
the reward contract: A promises to pay a reward
to B if B finds A's dog. B is not obliged to find
A's dog, but A is obliged to pay the reward to B
if B finds the dog. In this example, the finding
of the dog is a condition precedent to A's
obligation to pay.
An offer of a unilateral contract may often be
made to many people (or 'to the world') by means
of an advertisement. In that situation,
acceptance will only occur on satisfaction of the
condition (such as the finding of the offeror's
dog). If the condition is something that only one
party can perform, both the offeror and offeree
are protected the offeror is protected
because he will only ever be contractually
obliged to one of the many offerees; and the
offeree is protected, because if she does perform
the condition, the offeror will be contractually
obliged to pay her.
In unilateral contracts, the requirement that
acceptance be communicated to the offeror is
waived. The offeree accepts by performing the
condition, and the offeree's performance is also
treated as the price, or consideration, for the
offeror's promise.
The most common type of unilateral contract is
the insurance contract. The insurance company
promises to pay the insured a stated amount of
money on the happening of an event if the insured
pays premiums; note that the insured does not
make any promise to pay the premiums.
Courts generally favor bilateral contracts. The
general rule in the United States is: "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." Restatement (Second) of Contracts
§ 32 (1981) (emphasis added). Here the law
attempts to provide some protection from the risk
of revocation in a unilateral contract to the
offeree. Note that if the offer specifically
requests performance rather than a promise, a
unilateral contract will exist. See option
contracts for more information on protection
given to the offeree in a unilateral contract.
Express
and implied contracts
A contract can be either an express contract or
an implied contract. An express contract is one
in which the terms are expressed verbally, either
orally or in writing. An implied contract is one
in which some of the terms are not expressed in
words.
Implied in fact or implied in law
An implied contract can either be implied in fact
or implied in law. 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 physical, a patient
agrees that he will pay a fair price for the
service. If he refuses to pay after being
examined, he has breached a contract implied in
fact.
Quasi-contract
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, an unconscious
patient treated by a doctor at the scene of an
accident has not agreed (either expressly or by
implication) to pay the doctor for emergency
services, but the patient would be unjustly
enriched by the doctor's services were the
patient not required to compensate the doctor.
Incorporation
of terms
Course of dealing
If two parties have regularly conducted business
on certain terms, it may be reasonable to presume
that in future dealings where there is no
contract, the parties wish to incorporate the
terms of the previous contracts. However, if a
party wishes to incorporate terms by course of
dealing, the original document must have been
contractual in nature, and delivery receipts may
not fit this description. In Australia, there is
a further requirement that the document was
procured after formation.
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Express
and implied terms
Different types of statements
Whether a statement is a term of a contract is
important because only if a promise is a term of
the contract can a party sue for the breach of
the contract. Statements can be split into the
following types:
* Puff (sales talk): If no
reasonable person hearing this statement would
take it seriously, it is a puff, and no action in
contract is available if the statement proves to
be wrong.
* Representation: A
representation is a statement of fact made to
induce another person to enter into a contract
and which does induce them to enter into a
contract, but it is one that the maker of the
statement does not guarantee its truth. If the
statement proves to be incorrect, it cannot be
enforced, as it is not a term of the contract,
but it may prove to be a misrepresentation,
whereupon other remedies are available.
* Term: A term is similar to a
representation, but the truth of the statement is
guaranteed by the person who made the statement.
The test is an objective test.
Factors that a court may take into account in
determining the nature of a statement include:
* Timing: If the contract was
concluded soon after the statement was made, this
is a strong indication that the statement induced
the person to enter into the contract.
* Content of statement: It is
necessary to consider what was said in the given
context, which has nothing to do with the
importance of a statement.
* Knowledge and expertise: In
Oscar Chess Ltd v. Williams [1957] 1 WLR 370, a
person selling a car to a second-hand car dealer
stated that it was a 1948 Morris, when in fact it
was a 1939 model car. It was held that the
statement did not become a term because a
reasonable person in the position of the car
dealer would not have thought that an
inexperienced person would have guaranteed the
truth of the statement.
Terms
implied in fact
The Privy Council proposed a five stage test in
BP Refinery Western Port v. Shire of Hastings:
1. Reasonableness and equitableness:
The implied term must be reasonable and
equitable.
2. Business efficacy: The
implied term must be necessary for the business
efficacy of the contract. For instance, if the
term simply causes the contract to operate
better, that does not fit this criterion.
3. Obviousness: The term is so
obvious that it goes without saying. Furthermore,
there must be one and only one thing that would
be implied by the parties. For example, in
Codelfa Construction Pty Ltd v. State Rail
Authority of New South Wales (1982) 149 CLR 337,
a term regarding the inability of construction
company to work three shifts a day could not be
implied because it was unclear what form it would
have taken.
4. Clear expression: The term
must be capable of clear expression. No specific
technical knowledge should be required.
5. Consistency: The implied term
may not contradict an express term.
In Australia, the High Court has ruled that the
test in BP Refinery applies only to formal
contracts, while the test in Byrne and Frew v.
Australian Airlines Ltd (1995) 185 CLR 410 shall
apply to informal contracts:
* Necessity: The term must be
necessary to ensure reasonable or effective
operation of a contract of the nature before the
court.
* Consistency: The implied term
may not contradict an express term (same as for
formal contracts).
* Clear expression: The term
must be capable of clear expression (same as for
formal contracts).
* Obvious: McHugh and Gummow JJ
have stated that it must also be obvious.
Terms
implied in law
These are terms that have been implied into
standardised relationships. The other difference
between this and terms implied in fact is that
the test is one of necessity (Liverpool City
Council v. Irwin [1976] 2 WLR 562); a necessary
term is one where the contract is rendered
worthless or nugatory if it is without it.
Terms
implied by custom or trade
You are generally bound by the custom of the
industry that you are in. To imply a term due to
custom or trade, you must prove the existence of
the custom, which must be notorious, certain,
legal and reasonable (Con-stan Industries of
Australia Pty Ltd v. Norwich Winterthur Insurance
(Australia) Ltd (1986) 160 CLR 226). See also
Frigaliment Importing Co., Ltd., v. B.N.S.
International Sales Corp., 190 F. Supp. 116
(S.D.N.Y. 1960) (plaintiff failed to prove what
he meant by "chicken") and U.C.C. §
1-205.
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Agreements
to negotiate
It is common for lengthy negotiations to be
written into a heads of agreement document that
includes a clause to the effect that the rest of
the agreement is to be negotiated. Although these
cases may appear to fall into the category of
agreement to agree, courts nowadays (at least in
Australia) will imply an obligation to negotiate
in good faith provided that certain conditions
are satisfied (Coal Cliff Collieries Pty Ltd v.
Sijehama Pty Ltd (1991) 24 NSWLR 1):
* Negotiations were well-advanced and the large
proportion of terms have been worked out; and
* There exists some mechanism to resolve disputes
if the negotiations broke down.
The test of whether one has acted in good faith
is a subjective one; the cases suggest honesty,
and possibly also reasonably.
"Subject
to" contracts
If a contract specifies "subject to
contract", it may fall into one of three
categories (Masters v. Cameron (1954) 91 CLR
353):
1. The parties are immediately bound to the
bargain, but they intend to restate the deal in a
formalised contract that will not have a
different effect; or
2. The parties have completely agreed to the
terms, but have made the execution of some terms
in the contract conditional on the creation of a
formalised contract; or
3. It is merely an agreement to agree, and the
deal will not be concluded until the formalised
contract has been drawn up.
If a contract specifies "subject to
finance", it imposes obligations on the
purchaser (Meehan v. Jones (1982) 149 CLR 571):
* The purchaser must seek finance; and
* When offers of finance arrive, the purchaser
must make a decision as to whether the offers of
finance are suitable.
Once again, there is an element of good faith
involved.
This may also refer to contingent conditions,
which come under two categories: condition
precedent and condition subsequent. Conditions
precedent are conditions that have to be complied
with before performance of a contract. With
conditions subsequent, parties have to perform
until the condition is not met. Failure of a
condition does not void the contract, it is just
regarded as voidable.
Statutory
law applicable to contracts
The rules by which many contracts are governed
are provided in specialized statutes that deal
with particular subjects. Most countries, for
example, have statutes which deal directly with
sale of goods, lease transactions and trade
practices. For example, most American states have
adopted Article 2 of the Uniform Commercial Code,
which regulates contracts for the sale of goods.
There are also many acts around the world which
deal with specific types of transactions and
businesses. For example, the states of California
and New York in the U.S. have statutes that
govern the provision of services to customers by
health studios, and the UK has the Sale of Goods
Act 1979 which governs the contracts between
sellers and buyers.
Remedies
Damages
Typically, the remedy for breach of contract is
an award of money damages. Courts usually adopt
one of three ways of calculating the value of
damages.
The most common is to assess the sum which would
restore the injured party to the economic
position that he or she expected from performance
of the promise or promises (known as an
"expectation measure" or
"benefit-of-the-bargain" measure of
damages).
When it is either not possible or desirable to
award damages measured in that way, a court may
award money damages designed to restore the
injured party to the economic position that he or
she had occupied at the time the contract was
entered (known as the "reliance
measure"), or designed to prevent the
breaching party from being unjustly enriched
("restitution").
Specific perfomance
There may be circumstances in which it would be
unjust to permit the defaulting party simply to
buy out the injured party with damages. For
example where an art collector purchases a rare
painting and the vendor refuses to deliver, the
collector's damages would be equal to the sum
paid.
The court may make an order of what is called
"specific performance", requiring that
the contract be performed. In some circumstances
a court will order a party to perform his or her
promise (an order of "specific
performance") or issue an order, known as an
"injunction," that a party refrain from
doing something that would breach the contract.
Both an order for specific performance and an
injunction are discretionary remedies,
originating for the most part in equity. Neither
is available as of right and in most
jurisdictions and most circumstances a court will
not normally order specific performance.
Procedure
In the United States, in order to obtain damages
for breach of contract or to obtain specific
performance, the injured party may file a civil
(non-criminal) lawsuit, usually in a state court,
or petition a private arbitrator to decide the
contract issues presented.
Many contracts provide that all contract disputes
must be arbitrated by the parties to the
contract, rather than litigated in courts. By
law, some contracts, including most securities
brokerage contracts, must be arbitrated; other
contracts are referred by courts as a matter of
local law or policy. Arbitrated judgements are
generally enforced and appealed in the same
manner as ordinary court judgements; a majority
of states have adopted the Uniform Arbitration
Act to facilitate the enforcement of arbitrated
judgements.
In England and Wales, a contract may be enforced
by use of a claim, or in urgent cases by applying
for an interim injunction to prevent a breach.
Theoretical
considerations
Contract theory is the body of legal theory that
addresses normative and conceptual questions in
contract law. One of the most important questions
asked in contract theory is why contracts are
enforced. One prominent answer to this question
focuses on the economic benefits of enforcing
bargains. Another approach, associated with
Charles Fried, maintains that the purpose of
contract law is to enforce promises. This theory
is developed in Fried's book, Contract as
Promise. Other approaches to contract theory are
found in the writings of legal realists and
critical legal studies theorists.
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