Contracts Research Paper

Contracts must satisfy specified legal requirements in order for there to be a binding agreement. These requirements are contained in legal principles, rules of law, and standards of application. The key legal principle is the liberty of parties to contract (Atiyah 1979). Applicable rules relate, among others, to the exchange of offers between the parties and their performance under the contract. Legal principles and rules of application, in turn, are subject to standards of reasonableness. The liberty to contract must be exercised reasonably. Offers and acceptance must be reasonably certain. Performance must comply reason-ably with the promise. What is reasonable, however, is a matter of construction that may vary according to the context.

A contract can be described analytically according to the correlative rights and duties that arise from it. A contract arises when one, but usually two, parties assume correlative rights and duties, usually towards each other (Trakman and Gatien 1999). Contract rights and duties arise in individual or discrete transactions between parties. They also arise in ongoing relationships between parties. Whether contracts are discrete or relational (Macneil 1980), they entail correlative rights and duties between the parties to them. The seller has a duty to provide the goods or services promised; and the right to be paid for them. The buyer has the right to the goods or services promised by the seller; and the duty to pay for them.

 Contracts also entail the rights and duties of third parties. For example, parties to marriage contracts owe duties, not only towards each other, but also to the state and other third parties to their contract. They have a duty to register their marriage contract and not to commit bigamy. The state, in turn, owes them a duty to enforce it, but not if one party is a bigamist. Others, such as employees, have a duty not to dis-criminate on the basis of marital status. The rights and duties of third parties arise as a consequence of the contract, not under the contract itself. Only the parties to a contract ordinarily have rights and duties in terms of it.

Contracts ideally are freely and voluntarily concluded. Such freedom entails the right of parties to choose the terms and conditions of their contracts. For example, parties to marriage contracts cannot be forced to marry, or to agree to particular terms of marriage. However, they can be required to comply with legal rules governing marriage, such as not to enter into incestuous marriages.

Some argue that contracts should be efficient (Kronman 1980). However, efficiency is not a legal requirement of a contract. The terms of a contract must be reasonable, even if they are inefficient (Dworkin 1980). For example, a court may declare that a contract is unenforceable in law for violating public policy even though it is efficient. What is reasonable engages the subjective determination of the party reaching it. Courts, however, are expected to comply with principles of contract law, and rules of application, in deciding what is reasonable.

1. Legal Requirements Of A Contract

Contracts are concluded between real and artificial persons. Individuals, companies, and governments all enter into contracts. There are many different kinds of contracts. Some relate to family, religious, and cultural life. Some relate to business dealings, others to relations with the state. Parents and children enter into domestic contracts when they agree to share car expenses. Consumers and supermarkets conclude consumer contracts to purchase groceries and other household goods. Merchants enter into business contracts when they purchase goods and services for resale, when they insure them, ship them, and secure credit. Governments enter into contracts when they grant individuals and companies licenses to trade, when they conclude agreements with multinational corporations or other governments, and when they sign multilateral conventions.

Some contracts are subject to formal requirements. Marriage contracts must be solemnized publicly through registration. Sales of property must also be registered. Most contracts, however, are not subject to registration. Some must be in writing. Most are concluded informally. A nod of one’s head may constitute a legal agreement. Even complex business contracts may be concluded informally, such as on the golf course or at a party.

Contracts may be subject to substantive requirements. One substantive requirement is that the parties to contracts must intend to create binding relations, or such an intention may be imputed to them. A related requirement is that they must exchange promises, or one party must perform an act or acts in terms of a promise by the other. A further requirement is a bargained-for-exchange or consideration in common-law jurisdictions (Sutton 1974). Civil law jurisdictions require a causa or reason for contracting (von Mehren 1959). A contract is distinguished from a gift in both common and civil law. The parties to a gift do not ordinarily enter into a bargain or an exchange. Nor do they have a reason for contracting. What is a contract or a gift, however, is a question of construction upon which jurists may differ.

Most contract requirements are satisfied in stages. The formation stage occurs when a party makes an offer or promise which the other party accepts. For example, a party offers to sell goods to another, and the other party accepts the offer. The performance stage occurs when the parties perform the contract, such as when the seller delivers the goods and the buyer pays for them. A nonperformance stage may occur if the seller fails to deliver the goods or the buyer fails to pay. This failure to perform ordinarily gives rise to a duty, such as to compensate the other party for losses incurred. Absent nonperformance, the final stage, is the termination of the contract, as when all goods are delivered and paid for under the contract.

Non- or defective performance can give rise to litigation for default or breach of contract. For example, a seller may deliver goods which the buyer alleges are defective. The buyer may sue for the contracted goods, substitute goods and/or damages for losses. In Anglo-American jurisdictions, the most frequent remedy is for the defaulting party to pay damages to compensate the other party for breach (Fuller and Perdue 1936). In civil law jurisdictions, the most common remedy for default is specific performance. The seller in default is required to perform specifically in terms of the contract, for example, by delivering the goods as promised. Both civil and common law jurisdiction, however, recognize a range of remedies, varying from compensatory to punitive damages, and from specific to modified performance.

Law and economics scholars sometimes conceive of contract default as amoral, not immoral (Coleman 1980). They maintain that a seller should be entitled to default, without moral judgment, so long as the seller compensates the buyer for damages arising from that default. This attempt to legitimize efficient breach is suspect, however, when it produces inequities and losses that cannot readily be quantified, such as sentimental or emotional loss. Breach may also be inefficient when an ‘innocent’ party accepts inadequate compensation in response to litigation threats by the other party.

2. Construing Contracts

In the nineteenth and early twentieth centuries, the interpretation of contracts was grounded in a subjective theory of contracting. A contract was formed as a result of ascertaining the subjective or intention of the parties to it. Significantly, this subjective theory was replaced over the twentieth century by an objective theory. Here, the intention of the parties is determined, less by their subjective intention, than according to the objective circumstances surrounding their contract. Judges resorted to this objective intention because the subjective intention of the parties was allegedly ambiguous, or to prevent a party from manipulating its subjective intention at the time of dispute. In some measure, the objective theory incorporates a tort standard of due care into contract law. Contracting parties are required to communicate with due care and not to rely on a doubtful subjective intention (Sharp 1939). Ultimately, the objective intention of the parties derives from the courts’ construction of what it believes is reasonably intended in the circumstances. Their objective intention is expressed subjectively by the court. At its most objective, the court examines the parties’ course of dealings, past practices, and usages of trade (Devlin 1951). At its most subjective, the court applies its own conception of reasonableness in deter-mining the objective intention of the parties.

This does not infer that, while parties may manipulate their subjective intention, courts manipulate the objective theory. Courts ordinarily choose to apply the subjective or objective theory of contracting along a continuum. The presence of clear and unambiguous evidence of a subjective intention by both parties supports use of the subjective theory. The absence of such evidence supports use of the objective theory. The application of the objective theory used, in turn, depends on the contractual circumstances. These include, among others, the complexity of the trans-action, the bargaining power of the parties, and changed circumstances since the date of contracting (Trakman 1985). In applying the objective theory of contracting, courts are likely to be influenced significantly by an implied duty of care owed by the parties. For example, courts are likely to construe the subjective intention of a producer in a take-it-or-leave-it consumer contract restrictively, in accordance with its implied duty of care towards its customers. They are more likely to construe the subjective intention of the parties expansively, in the absence of such adhesive elements (Kessler 1943).

Courts use different methods of interpretation to identify the intention of the parties. At one extreme, they use literal methods to establish what the parties actually intended, based on the plain word meaning of their contract. On the other extreme, they use open-textured methods, varying from party practices and trade usages, to the courts’ own construction of what is reasonable (Farnsworth 1968). These open-textured methods of interpretation ordinarily give rise to judicial ‘gap-filling.’ Judges fill gaps in contracts on grounds that contracts are incomplete and reasonably warrant filling (Costigan 1920). They make different assumptions in doing so. One assumption is that, had the parties considered the gap, they would have filled it, as did the court. Had the seller and buyer anticipated a breakdown in supply, they would have provided for it by contract. Another assumption is that the buyer and seller knew of the gaps, but did not fill them in order to clinch the deal. Business people sometimes fail to provide for default in the hopeful expectation that default will not arise (Macaulay 1963). Courts fill contract gaps on behalf of such parties. A further assumption is that judges fill gaps in ‘interpreting’ contracts to avoid injustice. They imply warranties of merchantability into contracts of sale to prevent sellers from excluding their liability to customers.

The extent to which courts ought to fill gaps in contracts is controversial. Excessive gap filling is considered incompetent contracting and a threat to the liberty of contract. Judges who avoid gap filling are viewed as opening the door to between the parties bad faith dealings. Courts respond to this controversy according to the perceived nature of the gap, the parties’ anticipation of it, the injustice arising from not filling it, and the courts’ discretion in filling it (Farnsworth 1968).

3. From Form To Substance

The nineteenth and early twentieth centuries were marked by formalism in contract law. Contracts consisted of distinct forms associated with categories of contracts, such as marriage contracts and contracts for the purchase and sale of property. Each form of contract had its own characteristics, and each gave rise to distinct legal consequences (Atiyah 1979).

The pervasive use of formal contracts declined in the early years of the twentieth century. Jurists emphasized increasingly the substance of contracts. This shift from form to substance developed, in part, in response to the evolution of legal pragmatism. Pragmatists argued for a functional approach towards law (James and Castell 1948, Dewey 1924). Some stressed the substantively position of contracting parties and the functional role of courts in relation to them (Kessler 1943). Others scrutinized how law-makers and judges ought to address business risks arising in contract (Patterson 1924). Yet others challenged the classical theory of liberty of contract. Their concern lay in substantive abuse in contract practice. They maintained that, for there to be true liberty of contract, contracting parties ought to be free both to conclude contracts, and to influence their terms (Pound 1908, Williston 1921). The result was a functional analysis of fine-print disclaimer and warranty clauses used by dominant parties to limit or exclude their liability by contract. The purpose was for consts to construe such adhesive contract clauses against the drafter and in favor of the weaker party.

This functional approach towards contract law was supported by the belief that the law should be developed and applied in light of contract behavior. Contract law was regarded as less an aloof juridical science, than a response to social behavior. Contract practices were to be regulated, less through principled ends inhering in contract law, than through social ends imputed by law (von Jhering 1913, Pound 1943). This engineering of law through social science was supported by two schools of thought: sociological jurisprudence; and in regard to the judiciary, legal realism. Sociological jurisprudence identified the relationship between social behavior and the law. Legal realism concentrated on predicting how judges made law, including contract law. Both emphasized the inter-dependence between the law and social or business practice (Powell 1956, Devlin 1951). This inter-dependence also became central to an evolving Law and Society movement (Stone 1966, Selznick 1959) and contract law scholars within it. Some established the distinction between long-term relationships and discrete transactions (Macneil 1980). Others scrutinized the manner in which business communities devised noncontractual as distinct from contractual relations (Macaulay 1963).

The relationship between law and social sciences gave rise to critical attacks on the liberal roots of modern contract law in the late twentieth century. Critical Legal Theorists charged that laissez-faire principles and standards of modern contract law favored the privileged elite, disempowering workers and consumers (Unger 1986). Irrationalists demolished such principles as internally contradictory (Singer 1984). Critical scholars deconstructed contract law rules and standards as incoherent (Dalton 1985). Philosopher kings reconstructed contract law values away from individual autonomy and towards communal solidarity (Unger 1986).

The end of the twentieth century saw an uneasy balance between ideological conflicts over liberty of contract and subset individual and community values. Critical scholarship facilitated the partial reconstruction of contract law principles along communitarian lines. Strident communitarians who confronted laissez-faire contracting (Sandel 1982) were offset by moderates who balanced individual free choice against family and religious values (Glendon 1991).

The early twenty-first century is likely to rekindle neoclassical models of free choice theory. Innovations in contracting, such as Internet transacting, are likely to be heralded as exemplifications of laissez-faire practices at work. New technologies are likely to enhance modes of communicating, including contracting. Courts are likely to resort to more refined plain-word methods of interpreting contracts and fewer open-textured ones. Judicial gap-filling in contracts is likely to be constrained. Disparities in contract bargaining power are likely to be construed more narrowly on grounds that consumers enjoy improved levels of literacy, foresight of risk, and bargaining power (Bernstein 1996).

These neoclassical developments likely will produce healthy tensions in contract law. Those who champion a neoclassical freedom to contract will accentuate the right of parties to conclude contracts of their own free will. Those who accentuate the abuse of free choice will argue for freedom from contract in an imperfect market. The debate over ‘the rise and fall of freedom of contract’ likely will be revitalized. Practices, such as the exchange of marriage vows over the Internet, will evolve; as will restrictions imposed on them in the interests of public policy and morality. Nation-states are likely to sanction the Internet as an instrument of contract practice. But they will try to constrain excesses in its usage.

The early twenty-first century is likely to include greater resort to structuralism in contract to redress internal contradictions in contract law principles and undue variance in substantive rationality (Shamir 1993). It is also likely to work towards greater analytical coherence in relating contract law to contract practice.

4. Conclusion

Almost a century ago, Sir Henry Maine (1917) wrote that the shift from ancient to modern society involved a shift from status to contract. The twentieth century represented a partial shift back to status. A model of perfect competition, applied in the early Industrial Revolution, was replaced by a model of imperfect competition in the post-Industrial Revolution period. The assumption that contracting parties had perfect knowledge and equal ability was replaced by the assumption that they enjoyed unequal education, legal know-how, and economic and political power. Against this background, jurists stressed the substance of contract law over its form. They evaluated contracts functionally, according to the nature of contract relations and discrete transactions. They construed them in light of the imperfect nature and value of the bargain, and the disparate positions of parties.

The early twenty-first century has revitalized the formal rationality of a century earlier. This renewal comes at a time of a new technological revolution. New technologies have opened the door to new contract practices. Contract bargains may be reached through inventive methods of communication that transcend differences in legal systems and national boundaries. Contract formalism is an understandable response to such developments. The new technological era has augured the appearance of a panacea in which sophisticated, informed, and educated parties contract freely across the globe in the absence of regulation. This perception has rejuvenated the image of laissez-faire contracting. Parties choose the terms of their contracts freely. Courts construe them literally ac-cording to their plain-word meaning; and nation-states enforce them.

This laissez-faire revitalized formalism in contract relations is likely to diminish over the course of the twenty-first century. Debate over the freedom to contract and the freedom from contract in unequal bargaining relations is likely to renew. Lawmakers are likely to challenge the assumption that the masses who have access to sophisticated technology are equally able to use and enjoy it in concluding contracts. Despite the access of billions of consumers to new technologies, including ways of contracting, their disparate understanding and use of those technologies will expand over time, not decline. Nation-states and their courts will return, perhaps with greater vengeance than before, to examining the substance of contract relationships. Contract forms will be scrutinized for their palpable social impact, beyond the form itself. The reasonable contracting party will be subject to increasing standards of due care. Motivated by both public and self-interest, nation-states will extend their regulation of contracts. Debate will rage over the extent to which contract law should inform, or be informed, by contract practice. Contract jurists will take sides; and resolution will remain elusive.

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