contract

IntroductionA contract is an exchange of promises between two or more parties to do, or refrain from doing, which is enforceable in a court of law. It is a binding legal agreement. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy. Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be trifling, indeterminate, impossible or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually translated "pacts must be kept", but more literally "agreements are to be kept"). Breach of contract is recognized by the law and remedies can be provided. Technically, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdictions for certain types of agreement. For example when buying a house or land.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 or restitution).As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms.Historical developmentContract law is the product of a business civilization. It will not be found, in any significant degree, in precommercial societies. Most primitive societies have other ways of enforcing the commitments of individuals; for example, through ties of kinship or by the authority of religion. In an economy based on barter, most transactions are self-enforcing because the transaction is complete on both sides at the same moment. Problems may arise if the goods exchanged are later found to be defective, but these problems will be handled through property law—with its penalties for taking or spoiling the property of another—rather than through contract law. Even when transactions do not take the form of barter, primitive societies continue to work with notions of property rather than of promise. In early forms of credit transactions, kinship ties secured the debt, as when a tribe or a community gave hostages until the debt was paid. Other forms of security took the form of pledging land or pawning an individual into “debt slavery.” Some credit arrangements were essentially self-enforcing: livestock, for example, might be entrusted to a caretaker who received for his services a fixed percentage of the offspring. In other cases—constructing a hut, clearing a field, or building a boat—enforcement of the promise to pay was more difficult but still was based on concepts of property. In other words, the claim for payment was based not on the existence of a bargain or promise but on the unjust detention of another’s money or goods. When a worker sought to obtain his wages, the tendency was to argue in terms of his right to the product of his labour.A true law of contracts—that is, of enforceable promises—implies the development of a market economy. Where a commitment’s value is not seen to vary with time, ideas of property and injury are adequate and there will be no enforcement of an agreement if neither party has performed, since in property terms no wrong has been done. In a market economy, on the other hand, a person may seek a commitment today to guard against a change in value tomorrow; the person obtaining such a commitment feels harmed by a failure to honour it to the extent that the market value differs from the agreed price.Roman lawThe Roman law of contracts, as found in Justinian’s law books of the 6th century ad, reflected a long economic, social, and legal evolution. It recognized various types of contracts and agreements, some of them enforceable, others not. A good deal of legal history turns upon the classifications and distinctions of the Roman law. Only at its final stage of development did Roman law enforce, in general terms, informal executory contracts—that is, agreements to be carried out after they were made. This stage of development was lost with the breakup of the empire. As western Europe declined from an urbanized, commercial society into a localized, agrarian society, the Roman courts and administrators were replaced by relatively weak and imperfect institutions.The rebirth and development of contract law was a part of the economic, political, and intellectual renaissance of western Europe. It was everywhere accompanied by a commercial revival and the rise of national authority. Both in England and on the Continent, the customary arrangements were found to be unsuited to the commercial and industrial societies that were emerging. The informal agreement, so necessary for trade and commerce in market economies, was not enforceable at law. The economic life of England and the Continent flowed, even after a trading economy began to develop, within the legal framework of the formal contract and ofthe half-executed transaction (that is, a transaction already fully performed on one side). Neither in continental Europe nor in England was the task of developing a law of contracts an easy one. Ultimately, both legal systems succeeded in producing what was needed: a body of contract doctrine by which ordinary business agreements, involving a future exchange of values, could be made enforceable.The new contract law began to grow up throughout Europe through the practices of merchants; these were at first outside the legal order and could not be upheld in courts of law. Merchants developed informal and flexible practices appropriate for active commercial life. By the 13th century, merchants’ courts had been established at the international trade fairs. The merchant courts provided expeditious procedures and prompt justice and were administered by men who were themselves merchants and thus fully aware of mercantile problems and customs.In the 12th and 13th centuries the development of the law of contracts on the Continent and in England began to diverge. In England the common law of contracts developed pragmatically through the courts. On the Continent the process was very different, with speculative and systematic thinkers playing a much larger role.Common lawFrom perhaps the 13th century on, English common law dealt with contractual problems primarily through two actions: debt and covenant. When a fixed sum of money was owed, under an express or implied agreement, for a thing or a benefit given, the money was recoverable through a simple action at debt. Other debt action was available for breach of a promise, made in an instrument with a seal, to pay a fixed sum of money. A so-called action at covenant could also be brought, but only for breach of a promise under seal. These actions did not, however, provide a remedy for the breach of an informal agreement to do something. In the 15th century the common-law courts started to develop a form of action that would render such agreements enforceable, and by the middle of the 16th century they had done so through the form of action known as assumpsit (“he has undertaken”). Originating as a form of recovery for the negligent performance of an undertaking, it came step by step to cover the many kinds of agreement called for by expanding commerce and technology. Having established in principle a comprehensive remedy, it was necessary for the courts to limit its scope. The courts found the limiting principle in the doctrine of “consideration,” according to which a promise as a general rule is not binding unless something is given or promised in exchange. This consideration need not be of commensurate value, but it must be of some value, must be bargained for, and cannot be simply a formality.Civil lawOn the Continent, the revived study of classical Roman law had an immense influence upon the developing law of contract. It stimulated the rediscovery or construction of a general law concerning the validity of agr eements. The Roman law, however, as crystallized in Justinian’s law books, tended to confirm the notion that something more than an informal expression of agreement was required if a contract was to be upheld by a court. Another significant influence in the development of contract law on the Continent was the Roman Catholic Church. The church in its own law (canon law) strongly supported the proposition that a simple, informal promise should be binding (pacta sunt servanda). This attitude was to encourage the development of informal contracts. The natural-law philosophers took up such ideas as pactasunt servanda, although they were slow to abandon the view that some contracts, especially contracts of exchange, should require part performance if they were to be held enforceable. By the 18th century the speculative and systematic thought of jurists and philosophers had finally and fully carried the day. The legal writers and legislators of the period generally considered informal contracts as enforceable in the courts. Thus in the French Civil Code of 1804, contract was approached essentially in terms of agreement; obligations freely assumed were enforceable except when the welfare of society or the need to protect certain categories of persons, such as minors, dictated otherwise. With the generalization that contract rests ultimately on agreement, the civil-law systems achieved a foundation quite different from the common law’s view that contract is basically a promise supported by a consideration.All the Western systems of modern contract law provide mechanisms through which individuals can voluntarily assume, vis-à-vis others, legally binding obligations enforceable by the other person. Contract law strives to give legal expression to the endlessly varying desires and purposes that human beings seek to express and forward by assuming legal obligations. The resulting system is open-ended; in principle, no limits are set in modern contract law to the number of possible variations of contracts.Contractual formationIn common law systems, the five key requirements for the creation of a contract are: 1. offer and acceptance (agreement) 2. consideration 3. an intention to create legal relations 4. legal capacity 5. formalitiesIn civil law systems, the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.Where a product in large quantities is advertised in a newspaper or on a poster, it may be an offer, but generally speaking it will be regarded as an invitation to treat, since even when large stock is held it is still limited, whilst the response to an advertisement may be unlimited.1.O FFER AND ACCEPTANCEThe 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 '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. 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.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.2.C ONSIDERATION AND ESTOPPELConsideration is known as 'the price of a promise' and is a controversial requirement for contracts under common law. It is not necessary in all common law or civil law systems, and is considered by some to be unnecessary as the requirement of intention to create legal relations by both parties meets the same requirement under contract.The idea is that both parties to a contract must bring something to the bargain, that both parties must confer some benefit or detriment (for example, money, however in some cases money will not suffice as consideration - e.g., when one party agrees to make part payment of a debt in exchange for being released from the full amount). This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience towards oneself. Three rules govern consideration.Consideration must be real, but need not be adequate. For instance, agreeing to buy a car for a penny may constitute a binding contract. While consideration need not be adequate, contracts in which the consideration of one party greatly exceeds that of another may nevertheless be held invalid for lack of real consideration. In such cases, the fact that the consideration is exceedingly inadequate can be evidence that there was no consideration at all. Such contracts may also be held invalid for other reasons such as fraud, duress, or being contrary to public policy. In some situations, a collateral contract may exist, whereby the existence of one contract provides consideration for another. Critics say consideration can be so small as to make the requirement of any consideration meaningless.Consideration must not be from the past and must move from the promisee.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. 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."3.I NTENTION TO BE LEGALLY BOUNDThere is a presumption for commercial agreements that parties intend to be legally bound (unless the parties expressly state that they do not want to be bound, like in heads of agreement). On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy.4.T HIRD PARTIESThe doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. There are two times where third party beneficiaries are allowed to fall under the contract. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party. The intent to benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to third party beneficiaries5.F ORMALITIES AND WRITINGContrary to common wisdom, an exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might be considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts. This is in contrast to a "non-verbal, non-oral contract," also known as "a contract implied by the acts of the parties", which can be either implied in fact or implied in law.Most jurisdictions have rules of law or statutes which may render otherwise valid oral contracts unenforceable. This is especially true regarding oral contracts involving large amounts of money or real estate.If a contract is in a written form, and somebody signs the contract, then the person is bound by its terms regardless of whether they have read it or not, provided the document is contractual in nature. Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract. This includes such things as tickets issued at parking stations.C ONTRACTS1.B ILATERAL V. UNILATERAL CONTRACTSContracts may be bilateral or unilateral. The more common of the two [citation needed], a bilateral contract, is an agreement in which each of the parties to the contract makes a promise or promises to the other party.In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog.An offer of a unilateral contract may often be made to many people by means of an advertisement. In that situation, acceptance will only occur on satisfaction of the condition. If the condition is something that only one party can perform, both the offeror and offeree are protected – the offeror is protected because he will only ever be contractually obliged to one of the many offerees; and the offeree is protected, because if she does perform the condition, the offeror will be contractually obliged to pay her.In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree's performance is also treated as the price, or consideration, for the offeror's promise.2.F ACTORS IN SELECTING CONTRACT TYPES.There are many factors that the contracting officer should consider in selecting and negotiating the contract type. They include the following:✓Price competition. Normally, effective price competition results in realistic pricing, and a fixed-price contract is ordinarily in the Government’s interest.✓Price analysis. Price analysis, with or without competition, may provide a basis for selecting the contract type. The degree to which price analysis can provide a realistic pricing standard should be carefully considered.✓Cost analysis. In the absence of effective price competition and if price analysis is not sufficient, the cost estimates of the offeror and the Government provide the bases for negotiating contract pricing arrangements. It is essential that the uncertainties involved in performance and their possible impact upon costs be identified and evaluated, so that a contract type that places a reasonable degree of cost responsibility upon the contractor can be negotiated.✓Type and complexity of the requirement. Complex requirements, particularly those unique to the Government, usually result in greater risk assumption by the Government.This is especially true for complex research and development contracts, when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. As a requirement recurs or as quantity production begins, the cost risk should shift to the contractor, and a fixed-price contract should be considered.✓Urgency of the requirement. If urgency is a primary factor, the Government may choose to assume a greater proportion of risk or it may offer incentives to ensure timely contract performance.✓Period of performance or length of production run. In times of economic uncertainty, contracts extending over a relatively long period may require economic price adjustment terms.✓Contractor’s technical capability and financial responsibility.✓Adequacy of the contractor’s accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical when the contract type requires price revision while performance is in progress, or when a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis.✓Concurrent contracts. If performance under the proposed contract involves concurrent operations under other contracts, the impact of those contracts, including their pricing arrangements, should be considered.✓Extent and nature of proposed subcontracting. If the contractor proposes extensive subcontracting, a contract type reflecting the actual risks to the prime contractor should be selected.✓Acquisition history. Contractor risk usually decreases as the requirement is repetitively acquired. Also, product descriptions or descriptions of services to be performed can be defined more clearly.3.T YPES OF CONTRACTSThere are a lot of types of contracts. They are:Fixed-Price ContractsFirm-fixed-price contractsFixed-price contracts with economic price adjustmentFixed-price incentive contractsFixed-price contracts with prospective price redeterminationFixed-ceiling-price contracts with retroactive price redeterminationFirm-fixed-price, level-of-effort term contractsCost-Reimbursement ContractsCost-sharing contractsCost-plus-fixed-fee contractsCost-plus-incentive-fee contractsIncentive ContractsStructuring multiple-incentive contractsFixed-price contracts with award feesCost-reimbursement incentive contractsIndefinite-Delivery ContractsDefinite-quantity contractsRequirements contractsTime-and-Materials, Labor-Hour, and Letter ContractsBut we are going to describe the most commonly used of them.1. Cost-Reimbursement Contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer. A cost-reimbursement contract may be used only when:The contractor’s accounting system is adequate for determining costs applicable to the contract; andAppropriate Government surveillance during performance will provide reasonable assurance that efficient methods and effective cost controls are used.The use of cost-reimbursement contracts is prohibited for the acquisition of commercial items.2. Incentive Contracts are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor’s performance. You can find:Cost incentivesPerformance incentivesDelivery incentives3. The purpose of Materials Contracts is: Direct materials means those materials that enter directly into the end product or that are used or consumed directly in connection with the furnishing of the end product or service.4. Labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor.5. A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.4.U NCERTAINTY, INCOMPLETENESS AND SEVERANCEIf the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by common practice in a certain field. In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique.If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a severability clause. The test of whether a clause is severable is an objective test — whether a reasonable person would see the contract standing even without the clauses.5. PerformanceContract law seeks to protect parties to an agreement not only by requiring formalities but in many other ways as well. Thus rules respecting deceit, fraud, and undue influence are designed to ensure that contractual obligations are assumed freely and without one party misleading the other. Other rules regulate the modification of ongoing contractual relations with a view to preventing a party with considerable bargaining power from unfairly imposing changes in the contract.The law also allows contractual relations to be adjusted when they have been thrown out of balance by unforeseen circumstances. The task of adjustment is relatively easy in cases in which both parties made a mistake or in which one party laboured under a mistaken assumption that was, or plainly should have been, known to the other. The problem of mistake becomes more intractable when the error is chargeable to only one party. The solutions reached for such situations are complex and defy general statement.Catastrophic events such as inflation, political upheaval, or natural disasters may upset the economy of a contract. In the case of natural catastrophes, relief is frequently available under theories of force majeure (action by a superior or irresistible force) and “act of God” (act ofnature that is unforeseeable and unpreventable by human intervention). When the unsettling circumstances are economic in their nature, as with severe inflation or deflation, a solution is difficult to find. A party who benefits from inflation in one contractual or economic relation may suffer from it in another. A general readjustment in contracts would be enormously complicated and time-consuming and would interject an undesirable element of uncertainty into economic and business activity. Only under exceptional circumstances—and usually in the form of special legislation—are contractual relations adjusted for the effects of severe economic dislocations.6. Failure to performAnother branch of contract law deals with the sanctions that are made available to a contracting party when the other party fails to perform his contractual obligations. When these sanctions take the form of money damages—as they usually do in practice, even though some civil-law systems have a theoretical preference for specific relief—the system must decide whether the plaintiff is to be put in the same position economically that he would have been in had the contract been performed (expectancy damages) or simply reimbursed for the actual losses, if any, flowing from his reliance on the contract (reliance damages). Reliance damages can, of course, be very large. A subcontractor who fails to deliver parts required for the construction of an ocean liner (or delivers faulty parts) may be responsible for heavy reliance damages resulting from delay in the work or actual damage to the vessel. Legal systems utilize various techniques to limit both reliance and expectancy damages when otherwise they would be unreasonably large.If a person has agreed to buy an article from a merchant, his refusing to take delivery will not ordinarily produce substantial reliance damages. Delivery costs will have been incurred, but the merchant will presumably not have lost sales elsewhere. In such circumstances, the merchant will seek to recover not his delivery costs but his lost profit—his expectancy damages. The law allows relief on the basis that the expectancy created by an enforceable promise has a current economic value, measured by the economic gain that the party would derive if the particular agreement were performed.In some circumstances, performance is not measurable in terms of market value—as, for example, when one relative has agreed to sell to another a family painting of sentimental value but of little intrinsic worth. Many legal systems in such a case require specific performance (that is, compliance with the precise terms agreed upon in the contract). The availability of specific relief varies among contemporary legal systems, for reasons that seem more historical and doctrinal than practical.。