Contract Law.

A contract is a legally valid agreement for either a present or future

exchange, and is legally enforceable. If the contract is broken, the aggrieved party will usually be entitled to a judicial remedy of damages, or, in exceptional cases, a court order requiring the breaching party to perform. The legal recognition of contracts and of remedies for their breach is of ancient origin, and all Western systems of law enforce contracts. This is not difficult to explain. Individuals and entities are regularly motivated to enter into exchange relationsto exchange their services for money, to exchange money for goods, to exchange promises of money for title to real estate, and so on. Individuals and entities are not self-sufficient, and so must get what they need or want at least partly through exchanges with others. They enter particular exchanges because they value what they are to receive more than what they are to give up. Money greatly facilitates contractual exchange for it provides a common measure of value. But, even in a modern society, the mere barter of one object for another without the use of money also occurs. The general economic importance of free contractual exchange goes well beyond the satisfaction of the immediate needs and wants of particular individuals in two-party contexts. It also gives rise to competitive markets in which individuals and entities can register their preferences in monetary terms for objects of value. This in turn induces producers to allocate resources to their highest valued uses in light of what participants in the relevant markets are willing to pay for the objects in question. Contractual exchange thus contributes to overall economic efficiency. Private contractual exchange is also generally more efficient than state manufacture and distribution of objects of value. This is partly because private producers responding to market demand can usually create the relevant objects of value more cheaply than state functionaries. The moral and political rationales for legal recognition of free contractual exchange are no less important than the economic ones. In a society in which people provide for their own needs and wants through contractual exchange, people thereby determine the course of their own lives in such matters as education, employment, residence, lifestyle, and so on. People are thus relatively autonomous beings exercising wide freedom of contractual choice subject to the constraints of their own resources. They are not mere recipients of state distributions of objects, with little choice in what these objects are to be. Yet the state participates in a system of contractual exchange as well. It must, through its legislature and its court system, create and administer a general body of contract law recognizing contractual exchanges and providing remedies for breach. This is a major function of the legal order in a market-oriented system such as that of the United States. A related function is that of affirmatively facilitating contractual exchange through the provision of money (legal tender), a standardized system of weights and measures, the regulation of communication and of transportation, a central banking system, laws recognizing and protecting rights of ownership, laws forbidding the imposition of tariffs by one state on goods from another, laws against private monopolistic practices, and so on. Thus the state plays a major role in creating and maintaining a general legal and economic environment and also particular markets in which contractual exchange can flourish (see economics and law).

The law of contract is a discrete branch of law within the general law of a society. In the United States, contract law is made largely by the legislatures and the courts of each of the fifty states, rather than by the federal government. The early American law of contract was mostly imported from England in the form of common law made by judges deciding disputes between particular parties. These judges set forth their decisions and their reasoning in judicial opinions, which then became precedents for future similar cases. In colonial times and in nineteenth-century America, the judges often had to travel to the locales of disputes by horseback. Many of them carried in their saddlebags English treatises such as William Blackstones Commentaries of the Laws of England (1765). The early American law of contract often consisted largely of efforts to apply the principles of the English common law of contract. Eventually, each state judiciary came to develop its own body of contractual common law, and judges began the practice of borrowing from earlier opinions of judges in sister states. The subject matter of contract disputes in the courts of the colonies and in the various states as they evolved was highly varied. Disputes arose in regard to employer-employee relations, the sale of goods, the sale or lease of land, the construction of buildings, the insuring of property of all kinds, the use of negotiable instruments, and more. Disputes arose over contract formation, interpretation, breach, remedies, and virtually all aspects of contractual interaction. In these disputes, the trial and appellate courts of each state drew on prior common law and fashioned principles that comprise the primary basis of the general common law of contract today. This law, as it has evolved, applies today in the absence of statute or Code to the contrary. The leading twentieth-century treatises on the common law of contract are S. Williston and G. J. Thompson, Treatise on The Law of Contract, 3rd ed., 1965; Arthur L. Corbin, Corbin on Contracts, rev. ed., 1970, and E. Allan Farnsworth, Contracts, 3rd ed., 1999. These treatises were all written by professors of lawWilliston was at Harvard Law School, Thompson at Cornell Law School, Corbin at Yale Law School, and Farnsworth at Columbia Law School. The law of contract today is not entirely in the form of common law made by courts. In the last decade of the nineteenth century, all of the American state legislatures adopted the same body of general statute law on negotiable instruments such as checks and promissory notes, which came to be widely used as substitutes for money. This new body of statute law was called the Uniform Negotiable Instruments Law, and was drafted largely by professors of law and sponsored by the National Conference of Commissioners on Uniform State Laws. The state-by-state adoption of this body of law marked the beginning of the uniform laws movement in the United States, followed in the twentieth century by adoption in most states of separate bodies of uniform law for many other contractual subjects that had theretofore been largely the province of the common law, including the sale of goods, personal property security interests, bank collections, and warehouse receipts. In the mid-1940s, Professor Karl N. Llewellyn, then of Columbia, and William Schnader, President of the Conference of Commissioners on Uniform State Law, conceived the idea of a single Uniform Commercial Code that would draw together and modernize the

various uniform laws, and, like those laws, be adopted by the legislatures in each of the various states. The American Law Institutea group of law professors, judges, and practicing lawyersbecame cosponsors of this project. In 1952, the first official text of the Uniform Commercial Code appeared, as promulgated by the Commissioners and the Institute. It was eventually adopted (with a few amendments in some states) by nearly all state legislatures. There have been various official revisions of the text since, and some version of the Uniform Commercial Code has today been enacted and reenacted in revised form in all American states. This body of law displaces much of what would have been left solely to the common law of contract. Yet each state has its own general common law of contract, except insofar as superceded by the Uniform Commercial Code and other statutes. In various major fields such as employer-employee contracts, land-sale contracts (in many states), and insurance contracts, the common law of contracts makes up the vast bulk of the relevant law. There is now a large body of case law interpreting the Uniform Commercial Code, and this law is not always consistent from state to state. The most widely cited scholarly work on the Uniform Commercial Code is a four-volume treatise: J. White and R. Summers, The Uniform Commercial Code, 4th ed., 1995. Professor White is at the University of Michigan School of Law, Summers is at Cornell Law School. In addition to the uniform laws movement and the works of scholars in universities, another major and continuing influence on the law of contract in the twentieth century consists of the first and the second Restatement of Contracts promulgated by the American Law Institute in 1932 and in 1981, respectively. The Chief Reporter for the 1932 version was Samuel Williston, and of the 1981 version, Professor Robert Braucher of Harvard and Professor E. Allan Farnsworth of Columbia. Each Restatement purported to restate generally prevailing rules and principles of the common law of contract as a single body of general law in the United States as a whole, without regard to specific variations between the states. The Restatements also purported to adopt the better view in those instances in which the law of the various states was in conflict. The Restatement of Contracts is frequently cited in American courts, and is much studied in American law schools as well. The ideas influencing the evolution of the general law of contract, in its common law, statutory, and code forms over the last hundred years, are not, in general, difficult to identify. The power of the idea of freedom of contract has been central and enduring. It is enshrined in all of the foregoing forms of law. At the same time it has been subjected to significant limitations. A major limitation is the doctrine that an unconscionable term or contract is not enforceable, as provided in section 2-302(1) of the Uniform Commercial Code, and in related law:

If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may

so limit the application of any unconscionable clause as to avoid any unconscionable result.

Other major limits on freedom of contract include doctrines making certain bargains illegal, protecting minors from their own improvidence, protecting persons not fully competent mentally, protecting against misrepresentation, fraud and duress in the bargaining process, and protecting parties to standardized form contracts from unfair surprise. Concerning the latter, a provision of the second Restatement of Contracts that has been the focus of much attention and controversy is section 211, which states:

(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing. (2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing. (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

Another leading principle of general contract law is that the formation of a valid agreement is ojective. That is, although the law recognizes a subjective concurrence of the wills of the parties as the standard example of contract formation, the law does not require this for valid contract formation. A contract can be validly formed if party A believes, and has reason to believe from party B, that B intends to enter the relationship, even though party B may actually privately intend otherwise. In regard to contract formation, another leading principle requires that the parties to a valid contract give consideration. As the Restatement of Contracts (second), section 71, puts it, consideration requires that the parties enter a bargained-for exchange. A major rationale for this requirement is that bargaining between the parties usually signifies that they were in a cautionary state of mind when they reached agreement. A further leading principle of contract formation is that many types of contracts must be partly in writing to be valid, a principle that is subject to various exceptions. The law here is complex, and derives from the 1677 English Statute of Frauds. A vast amount of American case law has arisen under the various versions of this early English statute adopted in the American states.

With the rise of contracting through the use of computers, many states have enacted, or are in the course of enacting, new laws, or revising old laws, to deal with this mode of contracting. Among other things, the National Conference of Commissioners on Uniform State Laws has proposed new uniform laws in this area, as well as revising the proposed new official text of Article Two of the Uniform Commercial Code. For example, contracts that had to be in writing can now be in electronic form. Other issues concern the matter of when an electronic message can be properly attributed to a party, and problems, arising from mistaken electronic messages. Two proposed uniform statutes dealing with these issues are the Uniform Electronic Transactions Act (UETA) and the Uniform Computer Information Transactions Act (UCITA). The most common source of disputes in the field of general contract law arises from the interpretation of contract terms. As a result, a large body of principles has now evolved governing such issues. The best summation of these principles is to be found in the Restatement of Contracts (second) at sections 200204. Breach of contract consists of a breach of one or more duties of performance arising under the contract, duly interpreted, and may entitle the aggrieved party to various remedies, provided the other party has no defense. A major current controversy rages over whether the law should recognize efficient breach of contract, all things considered. Economics-minded scholars have argued on both sides. See R. Posner, Economic Analysis of Law, pp.8990, 2nd ed., 1977, and compare Friedmann, The Efficient Breach Fallacy , Journal Legal Studies 18 (1989). Contractual rights to performance and to remedies for breach are defeasible. That is, the nonperforming party may have a defense. I have already identified some of these defenses: unconscionability, illegality, and fraud, for example. There are still other defenses such as impossibility of performance and mutual mistake. In the most influential single scholarly article of the twentieth century in the field of contracts, The Reliance Interest in Contract Damages (Yale Law Journal 46 (1936): 52), Lon L. Fuller of Harvard Law School differentiated and analyzed three major contract interests, corresponding to the three most fundamental monetary remedies an aggrieved party may assert for breach: expectancy, reliance, and restitution. The first lost expectancy damagesplaces the aggrieved party in the monetary position that this party would have been in had the contract been performed as promised. Lost expectancy is sometimes not available because this expectancy cannot be proved, as in the case of uncertain lost profits. Here, the aggrieved party may, as an alternative, choose to recover expenditures incurred in reliance on the contractthat is, reliance damages. Another alternative, restitutionary damages, accords the aggrieved party the value of any benefit that this party has conferred on the other party. Instead of monetary recovery, the aggrieved may, in a limited class of cases, secure a court decree ordering the breaching party to perform the very acts called for by the contract. In the United States and England, unlike in some Continental countries, this

remedy of specific performance is available only in very exceptional cases, as in a saleof-goods dispute, for example, where the goods are unique (such as an heirloom) and so cannot be procured on the open market, or in a contract for the purchase of land, where the aggrieved purchaser wants the very land in questionland being unique. In the field of contractual interactions, American law recognizes several general theories of obligation. Under the leading theory, obligation arises from a valid agreement with consideration, the principal focus of this discussion. Another basic theory of obligation is called promissory estoppel. Here, the aggrieved party has justifiably relied on a promise of the other party, suffered a detriment, and is seeking recovery therefor, even though unable to prove a valid agreement with consideration. A further theory of obligation is called unjust enrichment. When this theory applies, the aggrieved party may recover the value of any benefit conferred on the breaching party. Indeed, under American law, if a party substantially breaches a contract, and the aggrieved party has conferred a benefit on the breacher pursuant to the contract, the aggrieved party may, in most states, recover the market value of the benefit conferred even if this amount exceeds the contract price the parties had placed on the benefit. Still another theory of obligation is tort. Various torts may be committed in contractual interactions. A common tort of this kind is negligent performance of a contract. In many states, if the contractual duty so broken is also one imposed by general law, as in the case of an engineer required to exercise due care in the practice of his profession, the aggrieved party may sue in tort and even recover punitive damages in an amount well beyond any lost expectancy or reliance, recovery for breach of contract, or restitutionary recovery for any unjust enrichment.