5.1 General Perspectives on Contracts

Introduction to Contract Law

Contract  is probably the most familiar legal concept in our society because it is so central to our political, economic, and social life. So commonplace is the concept of contract—and our freedom to make contracts with each other—that it is difficult to imagine a time when contracts were rare, when people’s everyday associations with one another were not freely determined.

Historical Perspective

Yet in historical terms, it was not so long ago that contracts were rare, entered into by very few: that affairs should be ordered based on mutual assent was mostly unknown. In primitive societies and in feudal Europe, relationships among people were largely fixed; traditions spelled out duties that each person owed to family, tribe, or manor. People were born into an ascribed position—a status (not unlike the caste system still existing in India)—and social mobility was limited. Sir Henry Maine, a nineteenth-century British historian, wrote that “the movement of the progressive societies has…been a movement from status to contract.”  This movement was not accidental—it developed with the emerging industrial order. From the fifteenth to the nineteenth century, England evolved into a booming mercantile economy, with flourishing trade, growing cities, an expanding monetary system, the commercialization of agriculture, and mushrooming manufacturing. This evolution necessitated the creation of contract law.

Contract law did not develop according to a conscious plan, however, but it was a response to changing conditions. Not until the nineteenth century, in both the United States and England, did a full-fledged judge-made law of contracts arise together with, and help create, modern capitalism. Today, the contract determines the nature of most economic transactions.

In An Economic Analysis of Law, Judge Richard A. Posner (a former University of Chicago law professor) suggests that contract law performs three significant economic functions. First, it helps maintain incentives for individuals to exchange goods and services efficiently. Second, it reduces the costs of economic transactions because its very existence means that the parties need not go to the trouble of negotiating a variety of rules and terms already spelled out. Third, the law of contracts alerts the parties to troubles that have arisen in the past, thus making it easier to plan the transactions more intelligently and avoid potential pitfalls.

The Definition of Contract

The Restatement (Second) of Contracts (Section 1) says, “A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Similarly, the Uniform Commercial Code (UCC) says, “‘Contract’ means the total legal obligation which results from the parties’ agreement as affected by this Act and any other applicable rules of law.”  As operational definitions, these two are circular; in effect, a contract is defined as an agreement that the law will hold the parties to.

Most simply, a contract is a legally enforceable promise between two or more parties. Not every promise or agreement creates a binding contract, so a contract requires more than just an agreement. The law of contracts takes into account the way in which contracts are made, by whom they are made, and for what purposes they are made. 

Overview of the Study of Contracts

Although contract law has many nuances, it consists of several principal inquiries, each of which will be taken up in subsequent Chapters.

Did the parties create a valid contract? One party to a contract must make a clear and unequivocal offer to the other party which in turn must accept the offer without any conditions or changes. Each party must exchange something of value (consideration) with the other party. Both parties must have the legal capacity to enter into a contract. And finally, the contract must be for a lawful purpose.

Did the parties intend to enter a valid contract? Both parties must have a genuine intent to create a legally binding agreement. If it turns out that one or both parties did not have the requisite intent, the attempt at contract may not be valid.

Do we know what the contract means and can it be carried out? Many contracts can be oral, but sometimes contracts need to be in writing (or evidenced by some writing), or they can’t be enforced. If the terms of a contract are unclear, a court has to interpret the contract, or it can’t be enforced.

Do persons other than the contracting parties have rights or duties under the contract? Sometimes third parties may have rights in the contracts of others, and so we must determine if any other parties have rights in the contract that is under review.

How do we know when the contract has come to an end? A contract can be terminated with performance, without performance, and sometimes a contract may be breached. A contract that is not fully performed may have remedies available, and we will study how those remedies will be assigned and calculated.

Together, the answers to the questions outlined above determine the rights and obligations of contracting parties.