The Nature of Contracts
Explain what a contract is and why contracts are useful.
The law of contracts deals with the enforcement of promises. It is important to
realize from the outset of your study of contracts that not every promise is legally
enforceable. (If every promise were enforceable, this chapter could end here!) We have all made and broken promises without fear of being sued. If you promise to
take a friend out to dinner and then fail to do so, you would be shocked to be sued
for breach of contract. What separates such promises from legally enforceable contracts? The law of contracts sorts out what promises are enforceable, to what
extent, and how they will be enforced.
A contract is a legally enforceable promise or set of promises. In other
words, when promises have the status of contract, the contracting party harmed by
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a breach of the contract is entitled to obtain legal remedies against the breaching
party.
The Functions of Contracts Contracts give us the ability to enter into agreements with others with confidence that we may call on the law—not merely the good faith of the other party—to make
sure that those agreements will be honored. Within limitations that you will study
later, contracting lets us create a type of private law—the terms of the agreements we make—that governs our dealings with others.
Contracts facilitate the planning that is necessary in a modern, industrialized society.
Who would invest in a business if she could not rely on the fact that the builders
and suppliers of the facilities and equipment, the suppliers of the raw materials necessary to manufacture products, and the customers who agree to purchase those
products would all honor their commitments? How could we make loans, sell
goods on credit, or rent property unless loan agreements, conditional sales agreements, and leases were backed by the force of the law? Contract, then, is
necessary to the world as we know it. Like that world, its particulars tend to change
over time, while its general characteristics remain largely stable.
The Evolution of Contract Law The idea of contract is ancient. Thousands of years ago, Egyptians and Mesopotamians recognized devices resembling contracts; by the 15th century, the
common law courts of England had developed a variety of theories to justify
enforcing certain promises. Contract law did not, however, assume major importance in our legal system until the 19th century, when the Industrial
Revolution created the necessity for greater private planning and certainty in
commercial transactions.
The central principle of contract law that emerged from this period was freedom of
contract. Freedom of contract is the idea that contracts should be enforced because
they are the products of the free wills of their creators, who should, within broad
limits, be free to determine the extent of their obligations. The proper role of the courts in such a system of contract was to enforce these freely made bargains but
otherwise to adopt a hands-off stance. The freedom to make good deals carried
with it the risk of making bad deals. As long as a person voluntarily entered a contract, it would generally be enforced against him, even if the result was grossly
unfair. And because equal bargaining power tended to be assumed, the courts were
usually unwilling to hear defenses based on unequal bargaining power. This judicial posture allowed the courts to create a pure contract law consisting of precise, clear,
and technical rules that were capable of general, almost mechanical, application.
Such a law of contract met the needs of the marketplace by affording the predictable and consistent results necessary to facilitate private planning.
The emergence of large business organizations after the Civil War produced
obvious disparities of bargaining power in many contract situations, however. These
large organizations found it more efficient to standardize their numerous transactions by employing standard form contracts, which also could be used to
exploit their greater bargaining power by dictating the terms of their agreements.
Contract law evolved to reflect these changes in social reality. During the 20th
century, there was a dramatic increase in government regulation of private
contractual relationships. Think of all the statutes governing the terms of what
were once purely private contractual relationships. Legislatures commonly dictate many of the basic terms of insurance contracts. Employment contracts are
governed by a host of laws concerning maximum hours worked, minimum wages
paid, employer liability for on-the-job injuries, unemployment compensation, and retirement benefits. The purpose of much of this regulation has been to protect
persons who lack sufficient bargaining power to protect themselves.
Courts also became increasingly concerned with creating contract rules that
produce fair results. The precise, technical rules that characterized traditional common law gave way to permit some broader, imprecise standards such as good
faith, injustice, reasonableness, and unconscionability. Despite the increased
attention to fairness in contract law, the agreement between the parties is still the heart of every contract.
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The Methods of Contracting Many students reading about contract law for the first time may have the idea that contracts must be in writing to be enforceable. Generally speaking, that is not true.
There are some situations in which the law requires certain kinds of contracts to be
evidenced by a writing to be enforced. The most common examples of those
situations are covered in Chapter 16. Unless the law specifically requires a
certain kind of contract to be in writing, an oral contract that can be proven is as
legally enforceable as a written one. (Of course, having a written contract may often be desirable even when a writing is not mandatory.)
Contracts can be and are made in many ways. When most of us imagine a contract,
we envision two parties bargaining for a deal, drafting a contract on paper, and
signing it or shaking hands. Some contracts are negotiated and formed in that way. Far more common today, both online and offline, is the use of standardized form
contracts. Such contracts are preprinted by one party and presented to the other
party for signing. In most situations, the party who drafts and presents the standardized contract is the one with greater bargaining power and/or
sophistication in the transaction. Frequently, the terms of standardized contracts
are nonnegotiable. Such contracts have the advantage of providing an efficient method of standardizing common transactions. On the other hand, they present
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