CHAPTER 1

Introduction to Contract Law

Contracts are agreements between two or more parties which can be enforced in a court of law and impose binding obligations. The word “contract” often suggests a very formal or technical document drawn up by lawyers, and while this may be true of many complex commercial contracts, and, indeed, though certain contracts (such as those for the sale of land) must be written, an arduous negotiation and drafting process and formalities are not always a necessity to have a legally binding contract. Indeed, contracts may be settled orally, without any specific legal terminology. The law of contract determines which agreements are legally binding and enforceable at law and which are not; not all obligations can be enforced in court. How the law of contracts approaches such issues differs between jurisdictions and these differences form the subject matter of this and subsequent chapters.

Contracts may be entered into by any legal person that is: any individual or commercial entity with legal personhood. Thus, contracts might be personal or commercial in nature. The obligations in a contract are freely assumed. In other words, you agree the terms and obligations in the contract to which you will be bound; the law does not impose these on you. Distinguish this from, for example, the law of tort, which places a general duty on us that we do not injure others through our careless actions, whether we expressly consent or not. While the law may impose certain terms in a contract (see Chapter 4), there is no general requirement for you to enter into the agreement in the first place.

Freedom of contract is an essential, common doctrine underpinning the legal regimes examined here.1 Under this theory, parties freely negotiate agreements and bargain as equals and, as such, the law should only intervene to uphold the agreed terms of the contract. This theory is premised on the belief that every person negotiating a contract has equal bargaining power and fails to account for the fact that, in some views, contracts have historically served to enforce exploitative dynamics in society. The case of Lochner v. New York illustrates a liberal enforcement of the doctrine.2 The State of New York enacted legislation restricting the amount of hours that bakers could work, based on evidence that hours in excess of 60 per week would be detrimental to the health of the employee. Lochner was prosecuted twice for flouting this legislation and on his second conviction appealed. Here, the United States Supreme Court struck down the legislation as offensive to the doctrine. The court held that the employer and employee could negotiate hours of work and the role of the law should be to enforce those mutually agreed terms and not to intervene unnecessarily to restrict the parties.3 The reality of this and similar cases, however, is that the two parties are rarely on an equal footing; employers, for example, often have the upper hand. If the employee does not agree, he may be dismissed, and another will take his place.4 Accordingly, the freedom of contract is tempered in practical terms by the concept of inequality of bargaining power. In more modern times, the law began to recognize this and moved to intervene and level the field.5 Legislation was enacted in order to protect the weaker party in situations where it was recognized that there was an inherent inequality, such as consumer and employment contracts.6

Contracts in the Common Law and Civilian Tradition

The creation of contractual relationships is examined here through the prism of two dominant legal paradigms across Europe and the Americas: those of the civilian and common law traditions. The English common law system began in the 1100’s and 1200’s and its propagation across continents traces the spread of British rule itself.7 The civilian tradition, by contrast, traces its origins to Roman law and represents the dominant legal tradition in Continental Europe, Central and Latin America, as well as some nations on the African continent; this influence was likewise extended as colonizers imposed their legal traditions on overseas holdings.8 Within the civilian tradition, the Germanic9 and Napoleonic (French) codes10 are selected here as representing the modern development of the civilian tradition in Europe. Accordingly, our discussion will focus most heavily on the concepts identified in each chapter and how these have been defined and interpreted in either tradition.

In the common law system, there is no formal definition of a contract, nor has there been a sustained effort to codify (draft into one code) those rules applicable to the formation of contracts. Textbooks have provided various definitions such as “the law of contract may be provisionally described as that branch of the law which determines the circumstances in which a promise will be legally binding on the person making it”11 or “A contract is an agreement giving rise to obligations which are enforced or recognized by law.”12 The lack of a specific definition of the law of contract results from the evolution of this area of law in common law. It did not develop from overarching theory of a contract but rather a form of primordial action in the common law—known as “the action of assumpsit”—whereby success was tied to the form of a claim asserted to a greater extent than the factual scenario giving rise to the claim.13 While there is no universally accepted definition of contract in common law today, the basic principles of contract law can be defined with sufficient certainty. The factor which distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties.14 In the civilian tradition, provisions within private law codes distinguish contracts from other types of obligations also based on the assent of the parties. However, they further contain cataloguing of the types of contracts which can be made, and what elements must be present to render them legally binding.15

Contract Law in the Modern European Union

There is no pan-European code of contract law, and those seeking to enforce a contract must generally frame their arguments in terms of national laws or codes on the subject. The EU does have limited competence in legislating to provide the form and enforcement of contracts regarding, for example, consumer protection.16 That said, the area of contract law is still very much one of national legal regimes. Additionally, the EU has competence in relation to private international law, which concerns the agreed procedural mechanisms for enforcement of contractual obligations, for example, where to litigate a claim, in circumstances of trans-national commerce and related matters heavily associated with the freedoms of the EU, for example, freedom of movement of people, ­services, and capital. Harmonization projects aimed a standardizing the substantive aspects contract law among EU member states have not gained the momentum necessary to supplant the role of national legislatures and courts in the development and enforcement of contract law across the jurisdictions which form part of the EU.17 This is not to pretend that no efforts have been made in this regard, with the notable example of the Principles of European Contract Law (hereinafter PECL), produced by the Commission on European Contract Law, headed predominantly by Ole Lando and Hugh Beale, which provides a general account of those principles of contract law which are considered common to European member states.18 These Principles are not legally binding per se, but may be incorporated by explicit reference into a contract, or used to evidence general principles for the interpretation of contracts. Efforts aimed at creating a binding, general European law of contracts have not, to date, been successful.19

International Contract Law

As well, at the international level, there are restatements of common principles of contract law, such as the Principles of International Commercial Contracts produced by International Institute for the Unification of ­Private Law (UNIDROIT),20 and international agreements which govern the terms of certain contracts of an international character, such as contracts for the sale of goods, governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG)21 and overseen more generally at the international level by United Nations Commission on International Trade Law (UNCITRAL). These international efforts to codify the law applicable to certain contracts often mix elements from both the common law and civilian traditions.

Contract Law in the United States of America

Turning finally to the American jurisdiction, there is no single law of contract, as the laws relating to contracts are unique to each state, as adopted by their respective legislatures. In narrow instances, contract terms and enforcement may be regulated at the federal level in limited areas.22 Over the years, efforts have been made to provide general or “model” laws to standardize the law in certain areas.23 One of these, the Restatement ­(Second) of Contract Law (hereinafter, Restatement),24 is a general treatise on contract law in the United States, and consolidates general principles of contract law. However, the most influential effort at a model law of contract has been the Uniform Commercial Code,25 a uniform act governing commercial transactions (contracts for goods) the provisions of which have been enacted, in varying in whole or in part by certain articles, by all 50 states.26 We will concern ourselves primarily with Article II of the UCC which governs sales of goods as this Article is most relevant to our purposes; the other Articles are more specific to particular types of transactions or legal instruments. States have modified certain articles, which were not patent with their own legal terminologies or custom, but, in the main, these are largely confined to the formalities used in the reproduced articles rather than their substance.27

Legal Theory and Structure of Common Law and Civil Legal Systems

This text is intended to provide the reader with an accessible introduction to the subject of contract law and, toward this, our discussion is comprised of legislation, case law, examples and commentary which present the subject in a straightforward manner—before it is obscured by complex considerations or abstract terminology. Our discussion also incorporates an added dimension of analysis, which emphasizes the differences in the law governing contracts that exist between the Anglo-American (English and American) common law and civilian traditions (European). It will also examine legal systems that incorporate elements of both traditions, so-called hybrid jurisdictions.

Civilian and Common Law Legal Theory

As a preliminary matter, it may be helpful to note the ways in which these traditions vary before we narrow our inquiry to the subject of contracts. In the common law tradition, judges sitting in court generally apply rules found in legislation or established in previous cases to the facts at issue in order to craft their decisions;28 moreover, lower courts (such as trial courts) are bound by the decisions made by higher courts (such as a court of appeal) by the doctrine of stare decisis.29 This doctrine holds that, when faced with identical or near-identical factual scenarios, judges apply uniform rules, which have been identified and articulated by judges in previous cases (precedents) in order not only to bring a resolution to the case before them, but also to ensure consistency in the legal system as a whole. In this manner, previous cases have bearing on the development of law and the resolution of future cases; this has led one legal commentator to describe the operation of precedent in the common law system as a sort of “chain novel,”30 whereby judges author their decisions by continuing the work of their predecessors. In contrast, judges are not bound by previous decisions in the civilian tradition;31 rather, the rules applicable to a given case are found in a codified body of laws, a civil code, which law professionals study extensively during their education: “[s]o the Common law comes from the court, Continental law comes from the study; the great jurists of England were judges, on the Continent professors.”32 The task of the judge in the case is to apply relevant provisions drawn from the code to the case before her or him. In the civil law tradition, there does exist a doctrine similar in some respects to stare decisis known as jurisprudence constante (French, consistent jurisprudence), which arises from a consistent interpretation of a legal provision, rather than from rules established in a previous case—or precedents—in the common law system.33 The differences are discussed further in Chapters 2 and 10.

Another point of contrast between the civilian and common law traditions centers on sources of law. In the common law tradition, law consists of primary (i.e., constitutions, statutes) and secondary (i.e., regulations or rules promulgated by designated institutions) legislation as well as case law (precedent) which establishes legal precedents applicable to future cases. By contrast, the civil tradition accentuates the primacy of the civil code as a source of law. Where the code is silent on a matter, individuals and judges may have recourse to other sources of law also identified in those codes, such as general principles of law not found in the code, custom, usage, equitable considerations or the opinions of legal experts. Indeed, in the civilian tradition, the civil code is meant to provide a general and ­systematic examination of subjects in law and to conduct legal professionals toward a sound legal conclusion when applied faithfully and analytically to a certain factual scenario.34 To put a finer point on this proposition, as one scholar maintains, legal provisions in the civilian tradition are drafted to be “concise,” as they are meant to encompass the wide range of factual scenarios to be governed by a principle, whereas common law statutes are intended to be “precise,” as they are only intended to govern a specific range of facts or scenarios, not to be of general applicability.35

For example, Statutes of Frauds36 represent such precise legislation in the English and American common law systems; these require that a certain narrow range of contracts must be in writing in order to be valid, such as contracts concerning an interest in land. Whereas, in the civilian tradition, the codes seek to define general headings of contracts, their necessary elements, and the formalities required for each methodically. For example, the French Civil Code sets out types of contract that can be concluded,37 how they are formed,38 their interpretation, and other applicable rules.39 Whereas doctrines and concepts such as mistake or consideration have been jurisprudentially developed through major decisions of courts over time in the common law system, civil codes specifically identify and define their nature and effect in a composite code. This is because civil codes are drafted to serve as the sole and exclusive source of law and to resolve all questions as to how the law should treat a given contract. This distinction is relevant in practice as well. For example, when a lawyer in a common law system analyzes whether her client is liable for a contract which he mistakenly entered, she will turn to past cases or specific legislation in order to frame her argument; a civilian lawyer, faced with the same scenario, would turn to relevant provisions of the civil code to frame hers.

Structure of this Text

In order to provide a faithful and comprehensive portrait of the law of contract in the civilian and common law traditions, our discussion will draw on a myriad of examples. To represent the common law tradition, cases and materials have been drawn from the United Kingdom and the United States of America, as these jurisdictions are representative of the common law system, and display many common approaches to the law of contract. Moreover, the decisions reached in these jurisdictions tend to have extraterritorial influence, which bear upon the development of this area of law in other common law nations; in the case of the United Kingdom, this influence is particularly robust in the case of Commonwealth and former-Commonwealth nations, due to their shared legal heritage and court systems. In the case of the civilian tradition, examples are drawn primarily from the Germanic and Napoleonic (French) traditions, which have been selected both for their influence in the context of ­Continental European legal systems, as well as in the development of civil law systems in the Americas and elsewhere. Moreover, the principles and provisions of these codes have remained relatively stable in modern times and provide informative studies as to the development of contract law in civilian legal systems. Finally, our discussion will also touch upon the phenomenon of “hybrid” or “mixed” jurisdictions. These legal systems do not fit comfortably in either the civilian or common law paradigm, and rather display attributes of both systems. Examples of such “hybrid” jurisdictions include Québec, the American state of Louisiana, and Scotland.

Turning now to the format of our discussion, the subsequent chapters are divided in a logical fashion to examine the critical points of contract formation, drafting, and termination, as well as the issues that can frustrate the intentions of the parties and the execution of a contract. Our discussion aims not only to examine the principal aspects of contract law, but also, critically, to throw into sharp relief the differences that exist between the common law and civilian traditions. The methodologies deployed throughout range from doctrinal (a study of major concepts in the law), social–historical, to comparative analysis between different jurisdictions, with a view to providing an accurate and representative survey of contract law as it stands in the jurisdictions selected for study. Each section is arranged to provide the reader with a brief introduction to the subject matter, a description of the concept at issue followed with complementary analysis from these legal traditions, with examples drawn from case law (primarily for the common law tradition) or from code provisions and scholarly commentary (for the civilian tradition), concluding with general observations. The emphasis on case law for the common law aspects of our discussions is merited by the instrumental purpose individual cases serve in this tradition. As described earlier, case law in common law systems serves to define the contours of the law applicable to contracts; the fact-intensive inquiries conducted by courts, which are in turn marshalled to reach conclusions in individual cases, serve as well a more expansive purpose of developing over time the law applicable to contracts. Case law, by contrast, does not fulfill the same function within the civilian tradition and, accordingly, examples will be draw from specific code provisions as well as commentaries on interpretations of provisions.

Chapter Outline

The purpose of this book is to provide the student with an overview of the basic principles of contract law in both common law and civil law jurisdictions. Businesses, and individuals, enter into agreements on a daily basis and it is important to understand which of those agreements will be legally binding and what remedies may be available should the other party breach those agreements. As corporate entities expand and the forms through which transactions take place evolve to incorporate technological advances, it is increasingly the case that contracts have acquired a greater international character, corresponding to the greater freedom of movement citizens enjoy generally in the contemporary ­political order; therefore, knowledge of both systems in theory and practice is a valued expertise.

First, Chapter 2 gives an overview of the general principles of law guiding the common law and civil law jurisdictions. Chapter 3 of this book examines the elements required in both common and civil law jurisdictions to form a legally binding contract. These elements transform a promise into a binding agreement enforceable in a court. In common law systems there are five elements, all of which must be present—an offer, acceptance, consideration, the intention to create legal relations, and capacity. The civilian tradition shares the requirements of offer and acceptance, though their legal effectiveness will be equally measured against distinct criteria. Moreover, we will explore those aspects of formation which are unique to the civilian tradition such as “object” and “cause.” Once we have established that a contract has been formed, Chapter 4 then ­examines the terms of that contract. There are three types of terms relevant in the common law system. Express terms are those that have been agreed upon between the parties. They might include for example delivery dates, prices, hours of work, or ways in which work must be ­carried out. Implied terms are those not expressly agreed between the parties but are implied into every contract either by fact or by law. For example, every time we buy an item in a shop we are not given a written contract that expressly sets out our rights. However, consumer legislation supplies terms to each transaction as it is implied into every consumer contract. Finally, we look at exclusion clauses, which seek to exclude ­liability where one party suffers loss or damage because of a breach of contract. The courts have developed strict rules to determine whether these clauses will be upheld due to their inherently unfair nature. In the civilian tradition, terms may be supplied by the parties, the code itself, or, as a last resort, a judge in order to give effect to the intentions of the ­parties. Certain terms are either prohibited or may be ineffective in certain circumstances, such as terms which are contrary to law or public policy.

As we have seen earlier, one of the original key theories of contract law was the freedom to contract, whereby contracts are presumed to be enforceable statements of freely agreed terms. However, individuals do not always freely enter into contracts with full and perfect knowledge; here, courts have shown themselves willing to intervene and set aside or modify contracts to prevent injustice. Chapter 5 identifies the circumstances in which the court allows individuals to avoid their ­obligations under the contracts they have entered. In common law, where there is a mistake, misrepresentation, or duress it cannot be said that there was a meeting of the minds or that the parties freely entered into the ­contract. Similarly, in the civilian tradition, mistake, duress, and fraud may vitiate consent to a contract, and render the obligations thereunder void or voidable.

Chapter 6 then examines the ways in which a contract can come to an end. Three main ways of terminating a contract are examined in common law jurisdictions. A contract can end by agreement of the parties. The contract can also come to an end when it has been performed. Where a contract is for a specific action or duration it will naturally come to an end once its obligations have been fulfilled. Finally, the issue of frustration of purpose for the contract is examined. The civilian discussion commences with a nuanced examination of where nonperformance amounts to breach of contract and what steps must be taken by the parties in respect of either. It also discusses common ways in which a contract may terminate and the consequences specific to these.

Chapter 7 will examine in what circumstances parties to a contract have a claim for damages where the other party has not fulfilled their contractual obligations, as well as what liability parties have in the pre-­formation, or negotiation, periods.

In Chapters 8, the equitable remedies of injunctive relief, rescission, and rectification are considered in the common law tradition. This ­chapter also incorporates an examination of the remedies available in the civilian tradition, which would seem to privilege specific performance over damages where a contract has been not been performed.

Historically, only the parties to the contract itself could enforce the contract and claim a remedy for breach. Often, this created an unjust situation where a third party suffered a loss as a result of breach but was unable to obtain a remedy. Chapter 9 looks at the rights given to third parties and the circumstances in which they can conclude, enforce, be liable for a contract they themselves did not settle.

Finally, Chapter 10 examines hybrid jurisdictions. These are jurisdictions, which display a mixture of both common law and civil law elements. Indeed, these jurisdictions incorporate concepts from both traditions, the traces of which can be seen in the substance of their laws, the approaches to adjudication, and the framing of legal arguments.