A contract is an agreement having a lawful object entered into voluntarily by two or more parties, each of whom intends to create one or more legal obligations between or among them.
The elements of a contract are "offer" and "acceptance" by "competent persons" having legal capacity who exchange "consideration" to create "mutuality of obligation."
Proof of some or all of these elements may be done in writing, though contracts may be made entirely orally or by conduct. The remedy for breach of contract can be "damages" in the form of compensation of money or specific performance enforced through an injunction. Both of these remedies award the party at loss the "benefit of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract, although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.
Contract law varies greatly from one jurisdiction to another, including differences in common law compared to civil law, the impact of received law, particularly from England in common law countries, and of law codified in regional legislation. Regarding Australian Contract Law for example, there are 40 relevant acts which impact on the interpretation of contract at the Commonwealth (Federal / national) level, and an additional 26 acts at the level of the state of NSW. In addition there are 6 international instruments or conventions which are applicable for international dealings, such as the United Nations convention on Contracts for the International Sale of Goods (Vienna Sales Convention).
Origin and scope
Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, which is usually translated "agreements must be kept" but more literally means "pacts must be kept".
Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations, along with tort, unjust enrichment, and restitution.
As a means of economic ordering, contract relies on consensual exchange and has been extensively discussed in broader economic, sociological, and anthropological terms (see "Contractual theory" below). In American English, the term extends
beyond the legal meaning to encompass a broader category of agreements.
This article mainly concerns the common law. Such jurisdictions usually retain a high degree of freedom of contract, with parties largely at liberty to set their own terms. This is in contrast to the civil law, which typically applies certain overarching principles to disputes arising out of contract, as in the French Civil Code.
However, contract is a form of economic ordering common throughout the world, and different rules apply in jurisdictions applying civil law (derived from Roman law principles), Islamic law, socialist legal systems, and customary or local law.
At common law, the elements of a contract are offer, acceptance, intention to create legal relations, and consideration.
At common law, mutual assent is typically reached through offer and acceptance, that is, when an offer is met with an acceptance that is unqualified and that does not vary the offer's terms. The latter requirement is known as the "mirror image" rule. If a purported acceptance does vary the terms of an offer, it is not an acceptance but a counteroffer and, therefore, simultaneously a rejection of the original offer. The Uniform Commercial Code notably disposes of the mirror image rule in § 2-207, although the UCC only governs transactions in goods in the USA.
Offer and acceptance
The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or consensus ad idem (meeting of the minds) of two or more parties. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention: see Smith v. Hughes. Richard Austen-Baker has suggested that the perpetuation of the idea of 'meeting of minds' may come from a misunderstanding of the Latin term 'consensus ad idem', which actually means 'agreement to the [same] thing'. There must be evidence that the parties had each, from an objective perspective, engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.
The case of Carlill v Carbolic Smoke Ball Company is an example of a 'unilateral contract'. The term unilateral contract is used in contract law although ultimately there is an offerer and an offeree and a consideration (which may be an act), and in Australian Mills v The Commonwealth, the High Court of Australia considered the term "unscientific and misleading".
Obligations are only imposed upon one party upon acceptance by performance of a condition. In the United States, the general rule is that in "case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses."
Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one refuses to pay after being examined, the patient has breached a contract implied in fact. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill. Will the man be held liable for payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be liable. Such a claim is also referred to as "quantum meruit".
Consideration is something of value given by a promissor to a promisee in exchange for something of value given by a promisee to a promissor. Typically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking.
Consideration consists of a legal detriment and a bargain. A legal detriment is a promise to do something or refrain from doing something that you have the legal right to do, or voluntarily doing or refraining from doing something, in the context of an agreement. A bargain is something the promisor (the party making promise or offer) wants, usually being one of the legal detriments. The legal detriment and bargain principles come together in consideration and create an exchange relationship, where both parties agree to exchange something that the other wishes to have.
The purpose of consideration is to ensure that there is a present bargain, that the promises of the parties are reciprocally induced. The classic theory of consideration required that a promise be of detriment to the promissor or benefit to the promisee. This is no longer the case in the USA; typically, courts will look to a bargained-for exchange, rather than making inquiries into whether an individual was subject to a detriment or not. The emphasis is on the bargaining process, not an inquiry into the relative value of consideration. This principle was articulated in Hamer v. Sidway. Yet in cases of ambiguity, courts will occasionally turn to the common law benefit/detriment analysis to aid in the determination of the enforceability of a contract.
Consideration must be sufficient, but courts will not weigh the adequacy of consideration. For instance, agreeing to sell a car for a penny may constitute a binding contract. All that must be shown is that the seller actually wanted the penny.
This is known as the peppercorn rule. Otherwise, depending the jurisdiction, the penny would constitute legally insufficient nominal consideration. Parties may do this for tax purposes, attempting to disguise gift transactions as contracts.
Consideration is "sufficient" if it meets the test of law, whereas "adequacy" would require an additional and subjective element of fairness or equivalence.
Transfer of money is typically recognized as an example of sufficient consideration, but in some cases it will not suffice, for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount.
Past consideration is not sufficient. Indeed, it is an oxymoron. For instance, in Eastwood v. Kenyon, the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration—it was completed before the husband promised to repay it.
The insufficiency of past consideration is related to the preexisting duty rule. The classic instance is Stilk v. Myrick, in which a captain's promise to divide the wages of two deserters among the remaining crew if they would sail home from the Baltic short-handed, was found unenforceable on the grounds that the crew were already contracted to sail the ship through all perils of the sea.
The preexisting duty rule also extends beyond an underlying contract. It would not constitute sufficient consideration for a party to promise to refrain from committing a tort or crime, for example. However, a promise from A to do something for B if B will perform a contractual obligation B owes to C, will be enforceable - B is suffering a legal detriment by making his performance of his contract with A enforceable by C as well as by A.
Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.
Roman law-based systems (including Scotland) do not require consideration, and some commentators consider it unnecessary—the requirement of intent by both parties to create legal relations by both parties performs the same function under contract. The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, which had grown up in the Middle Ages and remained the normal action for breach of a simple contract in England & Wales until 1884, when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, promoted by the 18th century French writer Pothier in his Traite des Obligations, much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.
Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations. Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and the other has relied on the assurance to his detriment.
A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts. However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind."