Contract Law 101
Within the vast picture of the legal system, contract law stands out by its omnipresence. Every agreement that is recognized by a court is regulated under contract law. A contract is simply an agreement that can be enforced in court. Although in the law school classroom it appears that every legal idea is shrouded in mystery, such is not the case with contract law. Just as parties negotiate deals every day, contract law acts similarly. The law only asks for two things. The first is that the parties actually reach an agreement. Any idea or "bare bone" agreement will do. The second element that the court looks at is whether the parties’ agreement is "reasonable" or "in the public’s best interest." In other words, courts are unwilling to enforce every agreement. If a tobacco company has an agreement with a minor to sell him cigarettes, a court is unlikely to enforce that agreement . This is probably because the court determines that enforcing such an agreement is not in the public’s best interest. The court will look to existing statutes, common law, and public policy to determine if enforcing an agreement is reasonable.
The history of contract law dates back to Roman Times when they codified commercial and contract law. In the United States, various contracts are enforced at federal and state levels. The UCC governs contracts that involve sale of goods over $500. Restate 2d and Restate 2nd Torts govern contracts where goods are sold for $500 or less. Courts often mix and match these various contracts when determining whether an agreement is enforceable. The requirement of consideration and mutuality of obligation are some of the most important principles of contract law. Of course, the ever important Statute of Frauds requirements for contract formation should not be ignored. Enforcement of contract law is very broad and almost limitless.
Key Ideas in Contract Law
When two parties form a contract, they must agree to the terms fo what they are going to do and what they are going to get from it. This is called an offer. After one party composes the offer, the other must make a formal acceptance of it. The terms of the offer and the acceptance need to be consistent in order to form a valid contract. A counteroffer, in which one party attempts to alter the deal slightly, generally voids the original offer.
Usually both parties enter into the contract expecting some sort of compensation for the services they will perform. The exchange of benefits is called consideration. When both parties agree to the same deal, and both are protected from any form of severe harm or penalty from the other, we call this mutual assent. Without mutual assent, there can be no real understanding of the binding nature of the deal and how their respective duties are carried out.
All of these concepts are the backbone of the validity of a contract. Simply saying "You do this, and I’ll do that" is not enough. Both parties have to understand what each other is offering, the benefits and compromises that will occur, and that their agreement to exchange these things is valid. Courts generally see the following as key elements of a contract:
Analysis of Classic Cases in Contract Law
To fully understand the breadth of contract law, it is essential to not only understand the theoretical concepts but also where those concepts derived from. The most important consideration of a case should always be how that case currently is or might affect current business practices. Two excellent examples of this are the two discussed below.
Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256
The circumstances of this case relate to a reliable offer by the Carbolic Smoke Ball Company (the defendants) through its advert as follows:
"£100 reward will be paid to any person who contracts the disease of influenza after having used three Balls within the period of two weeks, according to the printed directions on the Box. This offer will be kept open for one month after the dosing of this paper."
The judge undertook a long discussion of the theory of illusory promises in this case, but the most relevant idea here is that the offeror can impliedly reserve the right to revoke the offer. In this case the company did reserve their right to revoke the offer and deposit £1000 with their bank so that awards could be paid out if necessary. The company made it clear that they were trying to establish a fund from which to pay rewards and not trying to make a gift. As the writing in the ad pointed out the money would be available for use, therefore the company’s actions satisfied the objective test for intention to create binding legal relations.
The company argued that a mere puff was not meant to create a legally enforceable obligation and cited the Court of Appeal case of Gottlieb v Ghellas [1986] 1 All ER 561 as authority for this proposition. However, it was decided that "this [advertisement] was not a mere communicating of one’s intent to contract generally with the world at large" and it was decided that the offer was binding between both parties.
Hyde v Wrench (1840) 49 ER 132
The defendant (Wrench) advertised the sale of his estate as follows:
"An extensive freehold estate situated at Preston, and a milk and butter dairy on Longford Hall Tow Path, together with implements, cows, utensils, and all other effects, lately in the occupation of John Wrench, which will be sold in one or two lots, by private contract; and may be viewed at any time on application at the house in Longford Hallier’s yard. Immediate possession may be had."
Hyde made a written offer to buy the property at a fixed price. The defendant counter-offered stating that he would only sell at an increased price. Hyde was unhappy with the offered price and so refused to buy the property. Wrench then sought to accept Hyde’s original offer. It was the opinion of the court that the counter-offer destroyed the original offer. The defendant was found liable for damages.
Both of these cases are recognised as being very important to the development of contract law as it exists today.
Breach of Contract and Potential Remedies
A breach of contract occurs when a party to the contract fails, without lawful excuse, to perform their contractual obligations. The non-performance can be material or immaterial (minor). In the case of an immaterial breach the aggrieved party is not entitled to any legal remedy but it could form the basis of a claim for damages. A material breach on the other hand will entitle the aggrieved party to exercise their legal rights against the defaulting party.
The remedies for breach of contract include:
Recision
If there has been a material breach of the contract that goes to the root of the agreement the aggrieved party can cancel (rescind) the contract. The remedy discharges the parties from all further obligations relating to the contract and restores to them any benefits already received under the contract. The parties are returned to the position they were in prior to the conclusion of the contract. In this regard it is not sufficient for the innocent party to simply choose to not renew the contract.
Damages
Damages is a sum of money recoverable in the courts by a person for some loss suffered by them. It is the most common remedy for breach of contract. Claiming damages is often seen as a more equitable remedy as it preserves the parties’ relationship and compensates them for losses suffered in performance of their contract rather than releasing them from their obligations. An award of damages aims to put the aggrieved party in the position they would have been in had the contract been duly performed. The innocent party cannot claim for losses which are too remote , that is, losses which could not reasonably have been foreseen as a result of the breach. In this regard there are two categories of losses:
Specific Performance
Specific performance is a court order requiring the defaulting party to perform their contractual obligations. It is a discretionary remedy and will only be ordered in exceptional circumstances because the innocent party cannot always be forced to accept performance. The remedy is granted where damages would be an inadequate remedy and the relief will not impose an unreasonable burden on the party in breach. The court will take into account the fairness and justness of granting the order. An applicant for specific performance must show that they are able to perform their obligations and that they intend to perform. Specific performance will not be granted for the performance of future obligations.
Modern Trends in Contract Law
Among the recent developments in contract law is the evolution of the interpretation of arbitration clauses and express authorizations of electronic contracting. For example, courts continue to enforce arbitration provisions contained within binding contracts and have rejected arguments that an arbitration provision located in a contract that purports to bind third parties, does not apply to a specific third party. For a recent decision on this topic, please see, Mack v. Kauffman, 2017 ONSC 7084 (CanLii).
With respect to this decision, the Ontario Superior Court ruled that the arbitration provision in a contract governed a conflict between parties to this contract. Other decisions that speak to this issue are: Pileggi v. Jones (2015), 129 O.R. 3d 683 (Ont. C.A.), and Anderson v. Christian Labour Assn of Canada, Calgary & Southern Alberta (2014), 95 R.F.L. (6th) 249 (Ont. S.C.).
The evolution of electronic contracting has also had a profound impact on the interpretation of provisions contained within a contract that contemplate digital signatures. For example, C. A. v. M. A., 2017 ONSC 7111 (CanLii) reviews: 1) instant touch signatures; 2) digital signatures obtained through a private key/password and 3) digital signatures obtained through a flow signature. These and other forms of electronic signing are becoming increasingly commonplace.
In addition to the above, there has been a continuing trend of courts enforcing forum selection clauses which dictate the proper jurisdiction or place for a party to file a lawsuit. As long as both parties agreed to this provision as part of a contract, courts have followed governing contract principles and normally will enforce this clause. In addition, the use of choice of law provisions continues to gain momentum and can produce very distinct results based on the governing contractual law that is selected; the more specific a governing law provision is, the greater likelihood that it will be enforced.
Conclusion: The Direction of Contract Law
The digital age has introduced new complexities into the world of contract law. From the rise of ecommerce and global trade to the advent of smart contracts, legal professionals must navigate a rapidly changing landscape that looks vastly different from a decade ago. Some of these changes are good for business, but they present significant new challenges for lawyers.
With the introduction of artificial intelligence come new challenges as well. Machine-learning and natural language processing are two of the technologies that have transformed the field of contract law rapidly. As software replaces many of the traditional responsibilities of paralegals, the roles of lawyers will evolve as well . Since artificial intelligence is only as good as the data it’s trained on, lawyers will need a deeper understanding than ever to make sure that the algorithms work.
Lawyers in the digital world will need to anticipate the many changes that are coming down the line. Will artificial intelligence thoroughly replace junior associates? What are the necessary qualifications for more senior roles in the workplace of the future? One core principle tends to be true no matter what changes may come: lawyers who don’t have a strong foundation in the essential principles of contract law will find it increasingly difficult to adapt to the future.