Contract

A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties.[1] A contract typically involves the exchange of goods, services, money, or a promise of any of those. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or cancellation.[2] Contract law, the field of the law of obligations concerned with contracts, is based on the principle expressed in the Latin phrase pacta sunt servanda, ( "agreements must be kept").[3]

Contract law, like other areas of private law, varies between jurisdictions. The various systems of contract law can broadly be split between common law jurisdictions, civil law jurisdictions, and mixed law jurisdictions which combine elements of both common and civil law. Common law jurisdictions typically require contracts to include consideration in order to be valid, whereas civil and most mixed law jurisdictions solely require a meeting of the minds between the parties. Within the overarching category of civil law jurisdictions, there are several distinct varieties of contract law with their own distinct criteria: the German tradition is characterised by the unique doctrine of abstraction, systems based on the Napoleonic Code are characterised by their systematic distinction between different types of contracts, and Roman-Dutch law is largely based on the writings of renaissance era Dutch jurists and case law applying general principles of Roman law prior to the Netherlands' adoption of the Napoleonic Code. The majority of Southern Africa uses a mixed law system under which private law, including contract law, is largely drawn from Roman-Dutch law while public law is drawn from English common law, while several former British colonies which were previously French apply a system in which private law is drawn from the French legal tradition.

The UNIDROIT Principles of International Commercial Contracts, published in 2016, aim to provide a general harmonised framework for international contracts independent of the divergences between national laws as well as a statement of common contractual principles for arbitrators and judges to apply where national laws are lacking. Notably, the Principles reject the doctrine of consideration, under the grounds that the elimination of the doctrine "can only bring about greater certainty and reduce litigation" in international trade.[4] The principles also reject the abstraction principle integral to German law on the grounds that it and similar doctrines are "not easily compatible with modern business perceptions and practice".[4]

Contract law can be contrasted with tort law (also referred to in some but not all civil and mixed jurisdictions as the law of delicts), the other major area of the law of obligations. While tort law generally deals with private duties and obligations that exist by operation of law and provide remedies for civil wrongs committed between individuals not in a pre-existing legal relationship, contract law provides for the creation and enforcement of duties and obligations created by a prior agreement between parties. The emergence of quasi-contracts, quasi-torts, and quasi-delicts renders the boundary between tort and contract law somewhat uncertain. Other areas of the law of obligations which are occasionally treated as separate from both contract and tort law include the law of unjust enrichment.[5]

Overview

Contracts are widely used in commercial law, and form the legal foundation for transactions across the world. Common examples include contracts for the sale of services and goods (both wholesale and retail), construction contracts, contracts of carriage, software licenses, employment contracts, insurance policies, sale or lease of land, and various other uses.

The importance of contracts in contemporary commercial law has given rise to the field of contract theory, an expansive body of legal theory that addresses normative and conceptual questions in contract law. One of the most important questions asked in contract theory is why contracts are enforced. One prominent answer to this question focuses on the economic benefits of enforcing bargains. Another approach, associated with Charles Fried, maintains that the purpose of contract law is to enforce promises. This theory is developed in Fried's book, Contract as Promise. Other approaches to contract theory are found in the writings of legal realists and critical legal studies theorists. More generally, writers have propounded Marxist and feminist interpretations of contract. Attempts at overarching understandings of the purpose and nature of contract as a phenomenon have been made, notably relational contract theory originally developed by U.S. contracts scholars Ian Roderick Macneil and Stewart Macaulay, building at least in part on the contract theory work of U.S. scholar Lon L. Fuller, while U.S. scholars have been at the forefront of developing economic theories of contract focussing on questions of transaction cost and so-called 'efficient breach' theory. Another dimension of the theoretical debate in contract is its place within, and relationship to a wider law of obligations. Obligations have traditionally been divided into contracts, which are voluntarily undertaken and owed to a specific person or persons, and obligations in tort which are based on the wrongful infliction of harm to certain protected interests, primarily imposed by the law, and typically owed to a wider class of persons. Research in business and management has also paid attention to the influence of contracts on relationship development and performance.[6][7]

Each jurisdiction recognised by private international law has its own distinct contract law shaped by differences in public policy, judicial tradition, and the practices of local businesses. Consequently, while all systems of contract law serve the same overarching purpose of enabling the creation of legally enforceable obligations, they may contain significant differences. Accordingly, many contracts contain a choice of law clause and a jurisdiction clause. These provisions set the jurisdiction whose system of contract law will govern the contract, and the court or other forum in which disputes will be resolved, respectively. Failing express agreement on such matters in the contract itself, countries have rules to determine the law governing the contract and the jurisdiction for disputes. For example, European Union Member States apply Article 4 of the Rome I Regulation to decide the law governing the contract, and the Brussels I Regulation to decide jurisdiction.

With the rise of the internet and the corresponding emergence of e-commerce and electronic securities trading, electronic contracts have risen to prominence over the first two decades of the twenty first century. Many jurisdictions have passed e-signature laws that have made the electronic contract and signature as legally valid as a paper contract. In Singapore, the Electronic Transactions Act (implementing the United Nations Convention on the Use of Electronic Communications in International Contracts and the UNCITRAL Model Law on Electronic Transferable Records) provides for the validity of electronic records, signatures, and contracts, while additionally prescribing specific criteria for electronic transferable records.[8] In order to promote and simplify the use of electronic contracts and related documents, the act provides for broad recognition of electronic signatures and expressly declares that electronic documents satisfy any legal requirement for a contract or other document to be "written".[8]

In India, electronic contracts are governed by the Indian Contract Act (1872), per which certain conditions need to be fulfilled while formulating a valid contact. Certain sections in information Technology Act (2000) also provide for validity of online contract.[9] In some U.S. states, email exchanges have become binding contracts. New York courts in 2016 held that the principles of real estate contracts to apply equally to electronic communications and electronic signatures, so long as "its contents and subscription meet all requirements of the governing statute" and pursuant to the Electronic Signatures and Records Act (ESRA).[10][11]

An emerging category of electronic contracts is the smart contract, which consists of computer program or a transaction protocol capable of automatically executing, controlling, or documenting legally relevant events and actions according to the terms of a contract or an agreement.[12][13][14][15] The objectives of smart contracts are the reduction of need in trusted intermediators, arbitrations and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions.[16][13]

History

Contracts have existed since antiquity, forming the basis of trade since the dawn of commerce and sedentism during the Neolithic Revolution. A notable early modern development in contract law was the emergence of the hawala system in the Indian subcontinent[17] and the Arab world, under which a series of contractual relationships formed the basis of an informal value transfer system spanning the Silk Road. The hawala system influenced the development of the agency in common law and in civil laws, such as the aval in French law and the avallo in Italian law.[18] The transfer of debt, which was "not permissible under Roman law but became widely practised in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages". The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent". In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him". On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general".[19] In the Indian subcontinent, the hawala system gave rise to the hundi, a transferrable contract entitling its holder in due course to obtain money from its issuer or an agent thereof.

Since the nineteenth century, two distinct traditions of contract law emerged. On one hand, jurisdictions with roots in the British Empire (including the USA and the Dominions) generally adopted English common law. On the other hand, other jurisdictions largely adopted the civil law tradition, either inheriting a civil law legal system at independence or adopting civil and commercial codes based on German or French law. While jurisdictions such as Japan, South Korea, and the Republic of China modelled their contract law after the German pandectist tradition, the Arab world largely modelled its legal framework after the Napoleonic Code. While the Netherlands adopted a legal system based on the Napoleonic Code in the early 19th century, Dutch colonies retained the precedent-based Roman-Dutch law and British colonies in Southern Africa adopted Roman-Dutch principles in areas of private law via reception statutes adopting South African law, which retains Roman-Dutch law for most matters of private law while applying English common law principles in most matters of public law. Saint Lucia, Mauritius, Seychelles, and the Canadian province of Quebec are mixed law jurisdictions which primarily adhere to French legal tradition with regard to contract law and other principles of private law. In the 20th century, the growth of export trade led to countries adopting international conventions, such as the Hague-Visby Rules and the UN Convention on Contracts for the International Sale of Goods,[20] bringing the various legal traditions closer together.

Over the course of the nineteenth and twentieth century, the majority of jurisdictions in the Middle East and East Asia adopted civil law legal frameworks based on the Napoleonic, German, or Swiss model. In 1926, Turkey replaced its Ottoman-era mixture of Islamic and secular laws with a secular civil code modelled after that of Switzerland and its contract and commercial law is thus modelled after the Swiss Code of Obligations, which was influenced by both German and French legal traditions. Following the Meiji Restoration, Japan adopted a series of legal codes modelled primarily after German law, adopting its commercial code in 1899. The Japanese adaptation of German civil law was spread to the Korean Peninsula and China as a result of Japanese occupation and influence, respectively, and continues to form the basis of the legal system in South Korea and the Republic of China. In 1949, Abd El-Razzak El-Sanhuri and Edouard Lambert drafted the Egyptian Civil Code, which was modelled after the Napoleonic Code but contains provisions designed to better fit Arab and Islamic society.[a] The Egyptian Civil Code was subsequently used as a model for the majority of Arab states which thus follow the contract law established under the Napoleonic Code. Consequently, the Napoleonic Code shapes contract law across much of the Middle East while contract law in Japan, South Korea, and the Republic of China is rooted in the German pandectist tradition.

Notably, unlike common law jurisdictions, civil and mixed law jurisdictions do not require consideration for a contract to be binding.[22] In systems based on the Napoleonic Code (including Québec and Saint Lucia whose law of obligations is based on the Civil Code of Lower Canada as well as Arab jurisdictions whose legal systems are based on the Egyptian Civil Code), an ordinary contract is said to form simply on the basis of a "meeting of the minds" or a "concurrence of wills". The Law of Germany (though not necessarily that of jurisdictions such as Japan who modelled their legal system after that of Prussia), while also rooted in the "meeting of the minds" principle, follows the 'abstraction principle' with regard to both personal and real property (Abstraktionsprinzip) under which the personal obligation of contract forms separately from the title of property being conferred and thus when contracts are invalidated for some reason (e.g. a car buyer is so drunk that he lacks legal capacity to contract)[23] the contractual obligation to pay can be invalidated separately from the proprietary title of the car. Unjust enrichment law, rather than contract law, is then used to restore title to the rightful owner.[24]

Bill of sale of a male slave and a building in Shuruppak, Sumerian tablet, circa 2600 BC

Civil law jurisdictions based on the Napoleonic Code or the Bürgerliches Gesetzbuch treat contracts differently, providing for a more interventionist role for the state in both the formation and enforcement of contracts than in common law jurisdictions or Scots law, Roman-Dutch law, and other civil or mixed law jurisdictions.[25] Such systems incorporate more terms implied by law into contracts, allow greater latitude for courts to interpret and revise contract terms, and impose a stronger duty of good faith.[25]

In 2021, Mainland China adopted the Civil Code of the People's Republic of China, which codifies its contract law in book three. While generally classified as a civil law jurisdiction, contract law in Mainland China has been influenced by a number of sources, including traditional Chinese views toward the role of law, the PRC's socialist background, the Japanese/German-based law of the Republic of China on Taiwan, and the English-based common law used in Hong Kong. Consequently, contract law in the Chinese mainland functions as a de facto mixed system. The 2021 civil code provides for the regulation of nominate contracts in a manner similar to that of jurisdictions such as Japan, Germany, France, and Québec.

Common law jurisdictions are generally associated with a high degree of freedom of contract, though this may be misleading. One example of the supposedly greater freedom of contract in American law, is the 1901 case of Hurley v. Eddingfield in which a physician was permitted to deny treatment to a patient despite the lack of other available medical assistance and the patient's subsequent death.[26] In civil law jurisdictions rooted in the French or British tradition, nominate contracts are regulated in order to prevent unfair terms and the law of obligations typically includes a duty to rescue which would make cases such as Hurley v. Eddingfield far less likely. Conversely, civil law jurisdictions are more likely to enforce penalty clauses and provide for the specific performance of contracts than their common law counterparts,[25] thus providing greater freedom of contract with regard to the types of terms that may be validly contracted.

Contract law in all jurisdictions, in response to the need to prevent discrimination or unfair business practices has eroded the full extent of freedom of contract. Legislation governing equality, equal pay, racial discrimination, disability discrimination and so on, has imposed limits of the full freedom of contract.[27] For example, the Civil Rights Act of 1964 restricted private racial discrimination against African-Americans.[28] Similarly, in the late twentieth and early twenty first century, consumer protection legislation, such as Singapore's Consumer Protection (Fair Trading) Act 2003 which aims to "protect consumers against unfair practices and to give consumers additional rights in respect of goods that do not conform to contract[ual obligations]"[29] and Consumer Protection (Trade Descriptions and Safety Requirements) Act 1975 which prohibits "misdescriptions of goods supplied in the course of trade",[30] progressively imposed limits upon freedom of contract in order to prevent businesses from exploiting consumers. While, in the early 20th century, the United States underwent the "Lochner era", in which the Supreme Court of the United States struck down economic regulations on the basis of freedom of contract and the Due Process Clause; these decisions were eventually overturned, and the Supreme Court established a deference to legislative statutes and regulations that restrict freedom of contract.[27] The US Constitution contains a Contract Clause, but this has been interpreted as only restricting the retroactive impairment of contracts.[27]

Although the European Union is fundamentally an economic community with a range of trade rules, there is no overarching "EU Law of Contract". In 1993, Harvey McGregor, a British barrister and academic, produced a "Contract Code" under the auspices of the English and Scottish Law Commissions, which was a proposal to both unify and codify the contract laws of England and Scotland. This document was offered as a possible "Contract Code for Europe", but tensions between English and German jurists meant that this proposal has so far come to naught.[31]

Traditionally, common law jurisdictions did not recognise the rights of third party beneficiaries. The common law doctrine of privity of contract provided that only those who are party to a contract may sue or be sued on it.[32][33] The leading case of Tweddle v Atkinson [1861] [34] immediately showed that the doctrine had the effect of defying the intent of the parties. In maritime law, the cases of Scruttons v Midland Silicones [1962] [35] and N.Z. Shipping v Satterthwaite [1975][36] established how third parties could gain the protection of limitation clauses within a bill of lading. Some common law exceptions such as agency, assignment and negligence allowed some circumvention of privity rules.[37] In England and Wales, the doctrine was abrogated by the Contracts (Rights of Third Parties) Act 1999, which was substantially replicated by the Contracts (Rights of Third Parties) Act 2004 adopted in Singapore. The statutes provide that "a person who is not a party to a contract (called in this Act a third party) may, in the third party's own right, enforce a term of the contract if (a) the contract expressly provides that the third party may; or (b) ..., the term purports to confer a benefit on the third party".[38] In New Zealand, section 12 of the Contract and Commercial Law Act 2017 provides that a "promisor is under an obligation, enforceable by the beneficiary, to perform the promise" thus decisively rejecting the doctrine of privity of contract.[39]

While the majority of common law jurisdictions continue to rely on precedent and unmodified principles to determine issues under contract law, a significant minority of common law jurisdictions have enacted statutes governing contract law either comprehensively or in part. Contract law in New Zealand is governed by the Contract and Commercial Law Act 2017, which comprehensively outlines rules regarding contracts and related areas of law.[40] Notably, contract law in India, the most populous common law jurisdiction, is codified in the Indian Contract Act, 1872, which comprehensively outlines issues of contract law and versions of which remain in force in Pakistan and in Bangladesh. Similarly, although it is not a comprehensive code, the Civil Law Act 1909 makes several provisions regarding contract law in Singapore.[41] In America, the Uniform Commercial Code codifies several provisions of commercial law, including the law of contracts.

Criteria for formation

The conditions required for a valid contract to be formed vary between jurisdictions. In the majority of English-speaking countries, the rules governing the formation of a valid contract are derived from English contract law which emerged as a result of precedents established by various courts in England over the centuries. Meanwhile, civil law jurisdictions generally derive their contract law from Roman law, although there are differences between German contract law (rooted in the Abstraction principle), legal systems inspired by the Napoleonic Code or the Civil Code of Lower Canada (e.g. Québec and Saint Lucia), and jurisdictions following Roman-Dutch law (e.g. Indonesia and Suriname) or a mixture of Roman-Dutch law and English common law (e.g. South Africa and neighbouring countries).

Common law

In common law jurisdictions, the formation of a contract generally requires an offer, acceptance, consideration, and mutual intent to be bound. The concept of contract law as a distinct area of law in common law jurisdictions originated with the now-defuct writ of assumpsit, which was originally a tort action based on reliance.[42] Although verbal contracts are generally binding in most common law jurisdictions, some types of contracts may require formalities such as being in writing or by deed.[43] Additionally, a contract must be signed (which may include an electronic signature) or otherwise assented (in the case of a verbal contract) to by each party bound by its terms or its lawful agent.[44] This contrasts with the doctrine in civil law jurisdictions whereby the creation of a contract typically only requires a meeting of the minds. Remedies for breach of contract include damages (monetary compensation for loss)[45] and, for serious breaches only, repudiation (i.e. cancellation).[46] Specific performance and injunction may be available if damages are insufficient.

In order for a legally enforceable contract to be formed, the parties must reach mutual assent (also called a meeting of the minds), and more contemporarily known as 'agreement'. This is typically reached through offer and an acceptance which does not vary the offer's terms, which is known as the "mirror image rule". An offer is a definite statement of the offeror's willingness to be bound should certain conditions be met.[47] 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. As a court cannot read minds, the intent of the parties is interpreted objectively from the perspective of a reasonable person,[48] as determined in the early English case of Smith v Hughes [1871]. It is important to note that where an offer specifies a particular mode of acceptance, only an acceptance communicated via that method will be valid.[49][50]

Contracts may be bilateral or unilateral. A bilateral contract is an agreement in which each of the parties to the contract makes a promise or set of promises to each other.[51] For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property. These common contracts take place in the daily flow of commerce transactions, and in cases with sophisticated or expensive precedent requirements, which are requirements that must be met for the contract to be fulfilled.

Less common are unilateral contracts in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. In the similar case of advertisements of deals or bargains, a general rule is that these are not contractual offers but merely an "invitation to treat" (or bargain), but the applicability of this rule is disputed and contains various exceptions.[52] The High Court of Australia stated that the term unilateral contract is "unscientific and misleading".[53]

In certain circumstances, an implied contract may be created. A contract is implied in fact if the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, John Smith, a former lawyer may implicitly enter a contract by visiting a doctor and being examined; if the patient 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. Quantum meruit claims are an example.

Under the Indian Contract Act, 1872, an offer (defined as a promise that is dependent on a certain act, promise, or forbearance given in exchange for the initial promise[54]) is deemed to become a legally enforceable promise when the person to whom the proposal is made, signifies their assent thereto and the proposal is then said to be accepted.[55] The same provisions continue in force in Pakistan and Bangladesh.

The Carbolic Smoke Ball offer

Where something is advertised in a newspaper or on a poster, the advertisement will not normally constitute an offer but will instead be an invitation to treat, an indication that one or both parties are prepared to negotiate a deal.[56][57][58] An exception arises if the advertisement makes a unilateral promise, such as the offer of a reward, as in the famous case of Carlill v Carbolic Smoke Ball Co,[59] decided in nineteenth-century England. The company, a pharmaceutical manufacturer, advertised a smoke ball that would, if sniffed "three times daily for two weeks", prevent users from catching the 'flu. If the smoke ball failed to prevent 'flu, the company promised that they would pay the user £100, adding that they had "deposited £1,000 in the Alliance Bank to show our sincerity in the matter". When Mrs Carlill sued for the money, the company argued the advert should not be taken as a serious, legally binding offer; instead it was a "mere puff"; but the Court of Appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, and determined that the reward was a contractual promise. In general, where an offer is made in response to an invitation to treat, the offer may incorporate the terms of the invitation to treat (unless the offer expressly incorporates different terms). If, as in the Boots case,[60] the offer is made by an action without any negotiations (such as presenting goods to a cashier), the offer will be presumed to be on the terms of the invitation to treat.

In common law jurisdictions consideration is required for simple contracts but not for special contracts (contracts by deed). The court in Currie v Misa [61] declared consideration to be a "Right, Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility". Thus, consideration is a promise of something of value given by a promissor in exchange for something of value given by a promisee; and typically the thing of value is goods, money, or an act. Forbearance to act, such as an adult promising to refrain from smoking, is enforceable only if one is thereby surrendering a legal right.[62][63][64] In Dunlop v. Selfridge Lord Dunedin described consideration 'the price for which the promise of the other is bought'.[65]

According to section 2d of the Indian Contract Act, 1872, valid consideration exists when "When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something"[66] or, in other words, when each party receives something in return for entering into a contractual obligation. An agreement must be supported by a lawful consideration on both sides. Under the act, valid consideration must satisfy the following criteria:

  • It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be good consideration. For example, "A" saves "B"'s goods from fire without being ask him to do so. "A" cannot demand payment for his service.
  • Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e., even a stranger. This means that as long as there is consideration for the promisee, it is immaterial who has furnished it.
  • Consideration must be an act, abstinence or forbearance or a returned promise.
  • Consideration may be past, present or future. Past consideration is not consideration according to English law. However it is a consideration as per Indian law. Example of past consideration is, "A" renders some service to "B" at latter's desire. After a month "B" promises to compensate "A" for service rendered to him earlier. When consideration is given simultaneously with promise, it is said to be present consideration .. For example, "A" receives Rs.50/- in return for which he promises to deliver certain goods to "B". The money "A" receives is the present consideration. When consideration to one party to other is to pass subsequently to the maker of the contract, is said to be future consideration. For example. "A" promises to deliver certain goods to "B" after a week. "B" promises to pay the price after a fortnight, such consideration is future.
  • Consideration must be real. Consideration must be real, competent and having some value in the eyes of law. For example, "A" promises to put life to "B"'s dead wife, if "B" pay him Rs.1000/-. "A"'s promise is physically impossible of performance hence there is no real consideration.
  • Consideration must be something which the promisor is not already bound to do. A promise to do something what one is already bound to do, either by law, is not a good consideration., since it adds nothing to the previous existing legal consideration.
  • Consideration need not be adequate. Consideration need not necessarily be equal in value to something given. So long as consideration exists, the courts are not concerned as to adequacy, provided it is for some value.

Additionally, under the Indian Contract Act 1872, any consideration is invalid if it is:

  1. Forbidden by law[b]
  2. It involves injury to a person or property of another[c]
  3. Courts regards it as immoral
  4. It is of such nature that, if permitted, it would defeat the provisions of any law
  5. It is fraudulent, or involves or implies injury to the person or property of another, or
  6. It is opposed to public policy[d]
  7. The consideration conveyed by at least one side seeks to restrain legal proceedings[e]
  8. The consideration includes public offices or titles[f]
  9. The consideration involves involuntary labour or otherwise infringes upon the personal liberty of a party to the contract[g]
  10. The consideration includes a marriage or a pecuniary inducement to marry.

In common law jurisdictions other than those in the Indian subcontinent, consideration cannot include a debt or obligation that is already owed. The insufficiency of past consideration is related to the pre-existing duty rule. For example, in the early English case of Eastwood v. Kenyon [1840], the guardian of a young girl took out a loan to educate her. After she was married, her husband promised to pay the debt but the loan was determined to be past consideration. In the early English case of Stilk v. Myrick [1809], a captain promised to divide the wages of two deserters among the remaining crew if they agreed to sail home short-handed; however, this promise was found unenforceable as the crew were already contracted to sail the ship. The pre-existing duty rule also extends to general legal duties; for example, a promise to refrain from committing a tort or crime is not sufficient.[68]

The doctrine of consideration does not generally exist in civil or mixed law jurisdictions such as Scotland and does not apply to contracts made by deed in common law jurisdictions. Similarly, under the Uniform Commercial Code, firm offers in most American jurisdictions are valid and binding without consideration if signed by the offeror, and are irrevocable for the time stated on the purchase order (but no longer than three months), or, if no time is stated, for a reasonable time.[69]

The primary criticism of the doctrine of consideration is that, in its present form, it is purely a formality that merely serves to complicate commerce and create legal uncertainty by opening up otherwise simple contracts to scrutiny as to whether the consideration purportedly tendered satisfies the requirements of the law. While the purpose of the doctrine was ostensibly to protect parties seeking to void oppressive contracts, this is currently accomplished through the use of a sophisticated variety of defences available to the party seeking to void a contract. In practice, the doctrine of consideration has resulted in a phenomenon similar to that of Ḥiyal in Islamic contracts, whereby parties to a contract use technicalities to satisfy requirements while in actual fact circumventing them in practice. Typically, this is in the form of "peppercorn" consideration, i.e. consideration that is negligible but still satisfies the requirements of law.[h]

The doctrine of consideration is expressly rejected by the UNIDROIT Principles of International Commercial Contracts on the grounds that it yields uncertainty and unnecessary litigation, thereby hindering international trade.[4] Similarly, the United Nations Convention on Contracts for the International Sale of Goods similarly does not require consideration for a contract to be valid, thereby excluding the doctrine with regard to contracts covered by the convention even in common law jurisdictions where it would otherwise apply. Consequently, the continued existence of the doctrine in common law jurisdictions is controversial. Scots lawyer Harvey McGregor's "Contract Code", a Law Commission-sponsored proposal to both unite and codify English and Scots Law, proposed the abolition of consideration. Some commentators have suggested that consideration be replaced by estoppel as a basis for contracts.[71] However, any change to the doctrine of consideration in the jurisdictions in which it exists would need to implemented by legislation[i]

A contract is often evidenced in writing or by deed. The general rule is that a person who signs a contractual document will be bound by the terms in that document. This rule is referred to as the rule in L'Estrange v Graucob.[73] This rule was approved by the High Court of Australia in Toll(FGCT) Pty Ltd v Alphapharm Pty Ltd.[74] But a valid contract may (with some exceptions) be made orally or even by conduct.[j]

Typically, contracts are oral or written, but written contracts have typically been preferred in common law legal systems;[75] in 1677 England passed the Statute of Frauds which influenced similar statute of frauds laws[76] in the United States and other countries such as Australia.[k] In general, the Uniform Commercial Code as adopted in the United States requires a written contract for tangible product sales in excess of $500, and real estate contracts are required to be written. If the contract is not required by law to be written, an oral contract is valid and therefore legally binding.[78] The United Kingdom has since replaced the original Statute of Frauds, but written contracts are still required for various circumstances such as land (through the Law of Property Act 1925).

An oral contract may also be called a parol contract or a verbal contract, with "verbal" meaning "spoken" rather than "in words", an established usage in British English with regards to contracts and agreements,[79] and common although somewhat deprecated as "loose" in American English.[80]

If a contract is in a written form, and somebody signs it, then the signer is typically bound by its terms regardless of whether they have actually read it [73][74] provided the document is contractual in nature.[81] However, affirmative defences such as duress or unconscionability may enable the signer to avoid the obligation. Further, reasonable notice of a contract's terms must be given to the other party prior to their entry into the contract.[82][83]

An unwritten, unspoken contract, also known as "a contract implied by the acts of the parties", which can be either an implied-in-fact contract or implied-in-law contract, may also be legally binding. Implied-in-fact contracts are real contracts under which the parties receive the "benefit of the bargain".[84] However, contracts implied in law are also known as quasi-contracts, and the remedy is quantum meruit, the fair market value of goods or services rendered.

In commercial agreements it is presumed that parties intend to be legally bound unless the parties expressly state the opposite as in a heads of agreement document. For example, in Rose & Frank Co v JR Crompton & Bros Ltd, an agreement between two business parties was not enforced because an "honour clause" in the document stated "this is not a commercial or legal agreement, but is only a statement of the intention of the parties". In contrast, domestic and social agreements such as those between children and parents are typically unenforceable on the basis of public policy. For example, in the English case Balfour v. Balfour a husband agreed to give his wife £30 a month while he was away from home, but the court refused to enforce the agreement when the husband stopped paying. In contrast, in Merritt v Merritt the court enforced an agreement between an estranged couple because the circumstances suggested their agreement was intended to have legal consequences.

If the terms of a contract are so uncertain or incomplete as to elude any reasonable interpretation, the parties cannot have reached an agreement in the eyes of the law.[85] 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.[86] In New South Wales, even if there is uncertainty or incompleteness in a contract, the contract may still be binding on the parties if there is a sufficiently certain and complete clause requiring the parties to undergo arbitration, negotiation or mediation.[87]

Courts may also look to external standards, which are either mentioned explicitly in the contract[88] or implied by common practice in a certain field.[89] 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. Typically, non-severable contracts only require the substantial performance of a promise rather than the whole or complete performance of a promise to warrant payment. However, express clauses may be included in a non-severable contract to explicitly require the full performance of an obligation.[90]

Civil and mixed law jurisdictions

The primary factor distinguishing civil law and mixed law jurisdictions from their common law counterparts is the absence of the requirement of consideration and thus the absence of any legal distinction between contracts by deed and other written contracts. Contract law in the majority of civil law jurisdictions is part of the broader law of obligations codified in a civl or commercial code clearly outlining the extent to which public policy goals limit freedom to contract and adhering to the general principle that the sole formal requirement for a contract to be formed is the existence of a meeting of the minds between the two parties at the time the contract is purported to have been formed.

Civil law jurisdictions with codified laws of obligations distinguish between nominate and innominate contracts. Nominate contracts are standardised categories of contracts which are closely regulated in form and substance by law. Contracts for sale, gift, lease, and insurance are generally regulated as nominate contracts.[91][92][93] The obligor and obligee under nominate contracts have rights and obligations specially prescribed by law. Nominate contracts are usually statutorily required to include certain express terms (essentialia) and are construed to include terms implied in law.

Unlike civil law jurisdictions with codified laws of obligations, jurisdictions following Roman Dutch law or Scandinavian law typically lack specific provisions for nominate contracts as their law of obligations is largely determined by judicial precedent and individual statutes, similar to common law jurisdictions. Nevertheless, the principles underlying the formation of contracts in these jurisdictions are closely related to those of other civil law jurisdictions.

In jurisdictions whose system of contract law is derived from the Napoleonic Code (or from its derivatives, e.g. the Civil Code of Lower Canada or the Egyptian Civil Code), contracts can be divided into their negotium (the substantive content of the contract) and their instrumentum (the formal significance attached to the existence of the contract itself). In principle, only the negotium is essential to the formation of a valid contract, in line with the principle of substance over form. In France, under article 1128 of the French Civil Code, the principle of the parties' mutual assent is codified as the primary doctrine underlying French contract law.[94] Similarly, article 1385 of the Civil Code of Quebec codifies the principle that, in general, contracts are formed by the exchange of consent between natural or juridical persons possessing capacity to contract.[95] Following the collapse of the Soviet Union, the Russian Federation's new civil code adopted in 1994 replaced its previous system of socialist law with a system similar to the French Civil Code and is therefore also based largely on the exchange of mutual assent.

Contracts in systems based on the Napoleonic code can typically be categorised as consensual contracts, which are formed solely on the basis of the parties' exchange of consent to form legal relations;[96] real contracts, which are concluded not by an explicit exchange of mutual assent but by the handing over of a chose; or contrats solonnels, which are analogous to deeds in common law jurisdictions and require notarial formalities to be concluded. Thus, while consensual contracts and real contracts can be formed solely by the actions of the parties, contrats solonnels can only be formed via specified formal processes. Nevertheless, all three categories of contracts are based solely on the exchange of mutual assent, differing only in the manner in which assent is expressed.

In Swiss law, which also forms the basis for the Turkish civil code, contracts are defined by article 1 of the Code of Obligations: "a contract is formed when the parties have, reciprocally and in a concordant manner, expressed their intention to form a contract". As in other continental civil law jurisdictions, contracts under Swiss law are thus formed by the exchange of at least two expressions of intent, an offer and an acceptance, per which the parties agree to enter into legal relations. The Code of Obligations, adopted in 1911, consists of two categories of rules governing contracts:

  • General rules, which are applicable to all categories of contracts and are outlined in articles 1 through 39 of the code; and
  • Special rules, which are applicable to specific types of nominate contracts.

Aside from the rules specified in the Code of Obligations, the Swiss Civil Code contains separate provisions governing contracts of marriage and inheritance while separate enactments govern contracts concerning private insurance, consumer credit, and travel packages.

The Roman-Dutch law of contract is based on canon and natural laws. Adopting the canonist position, all contracts were said to be an exchange of promises that were consensual and bonae fidei, that is, based simply on mutual assent and good faith. Taking the Christian view that it is a sin to break one's promise, canon lawyers developed the pacta sunt servanda principle under which all serious agreements ought to be enforced, regardless of whether there had been compliance with strict formalities as prescribed by secular law.[97] Under the causa theory, for the contract to be binding it had to have a iusta causa, or lawful motive in line with Christian moral imperatives, arising not only from a lawful or just right, title, or cause of action, but also from love and affection, moral consideration, or past services.[98] A nudum pactum was redefined as any agreement unenforceable for lack of causa. All of these principles were applied uniformly through European ecclesiastical courts.

In keeping with Enlightenment values, natural lawyers stripped away the Christian morality from contract law. They redefined a contract as a concurrence of wills, and each party's "promise" was now seen as a declaration of will devoid of moral obligation (will theory). In place of iusta causa developed a general principle of binding force under which any valid contract was both binding and actionable. Canonist substantive fairness shifted to procedural fairness, so good faith and mutual assent were retained as requirements, but just price and laesio enormis were not. In African states which were previously under English or South African rule, public policy was substituted for bonos mores, though this shift did not affect other Roman-Dutch law jurisdictions.

In jurisdictions following Roman Dutch Law, including mixed systems in South Africa and neighbouring countries in which contract law continues to adhere to Roman Dutch tradition, the following requirements must be met for a contract to be considered valid:

  1. There must be consensus ad idem between the contracting parties.
  2. The parties must have seriously intended the agreement to result in terms which can be enforced.
  3. The parties must have the capacity to contract.
  4. The agreement must have certain and definite terms.
  5. The necessary formalities must be observed.
  6. The agreement must be lawful.[99]
  7. The contractual obligations must be possible of performance.
  8. The content of the agreement must be certain.

In such jurisdictions, a contract has certain characteristic features:

  • It can be unilateral, i.e. one party has a duty to perform, or bilateral or multilateral, i.e. both parties have a duty to perform.[100]
  • It is an obligationary agreement. It entails undertakings or forbearances, on one or both sides, to tender certain performances: that is, to give (dare), to do (facere) or not to do (non-facere). Alternatively, it may be a warranty that a certain state of affairs exists.
  • If bilateral, it is usually synallagmatic (or reciprocal), meaning that one party's performance is promised in exchange for the performance of the other party.

The modern concept of contract is generalised so that an agreement does not have to conform to a specific type to be enforced, but contracting parties are required to conduct their relationship in good faith (bona fides).

Under Scots law, a contract is created by bilateral agreement and should be distinguished from a unilateral promise, the latter being recognised as a distinct and enforceable species of obligation in Scots Law. The English requirement for consideration does not apply in Scotland, so it is possible to have a gratuitous contract, i.e. a contract where only one of the parties comes under any duties to the other (e.g. a contract to perform services for no consideration). If, however, consideration is given, as for example in a sales contract, the contract is said to be onerous. Traditionally, a promise had to be proved by writ or oath. However, after the introduction of the Requirements of Writing (Scotland) Act 1995, a promise need only be evidenced in writing for:

  • the creation, transfer, variation or extinction of a real right in land (s 1(2) (a)(i) of Requirements of Writing (Scotland) Act 1995); and
  • a gratuitous unilateral obligation except an obligation undertaken in the course of business (s 1(2)(a)(ii) of Requirements of Writing (Scotland) Act 1995.) [Note that this section has caused great debate amongst academics as to the meanings of 'unilateral' and 'gratuitous'. Some believe that the inclusion of the two terms in this section points to a desire of the drafters that they be given different meanings. This would allow some promises to be unilateral but not gratuitous. This argument was particularly discussed by both Martin Hogg (University of Edinburgh) and Joe Thomson (University of Glasgow) in articles for the Scots Law Times (News) in 1998 and 1997 respectively.

As in systems based on English common law, a contract is formed by the acceptance of an offer; an offer can be constituted by responding to an invitation to treat.

Under the Civil Code of the People's Republic of China, "the parties may conclude a contract by making an offer and acceptance or through other means".[101] An offer is defined as "an expression of intent to conclude a contract with another person" and is required to "be specific and definite" and to expressly indicate that "the offeror is to be bound by his expression of intent upon acceptance thereof by an offeree".[102] The code further provides that an offer may be revoked unless "the offeror has explicitly indicated that the offer is irrevocable by specifying a time limit for acceptance or in any other manner" or "the offeree has reasons to believe that the offer is irrevocable and has made reasonable preparations for performing the contract".[103] An acceptance, defined as "an expression of intent of the offeree to accept the offer"[104] and a contract is legally formed when the acceptance becomes effective under the provisions of the code.[105] Consequently, the formation of a contract under Mainland Chinese law is governed by the mutual assent principle but is subject to the additional criterion that a valid offer expressly state that it is irrevocable.

Based on the common law concept of an invitation to treat, Mainland Chinese law recognises the notion of an invitation to offer. An invitation to offer is defined as "a manifestation that a person expects another person to make an offer" and the code specifically provides that "Auction announcements, bidding announcements, stock prospectuses, bond prospectuses, fund prospectuses, commercial advertisements and promotions, mailed price catalogs, and the like, are invitations to offer" and that "commercial advertisement and promotion constitute an offer if their content satisfies the conditions for an offer".[106]

Mainland Chinese law takes a liberal approach to the manner in which a contract is recorded, with the civil code providing that "parties may conclude a contract in writing,[l] orally, or in other forms" and that "a data message in any form...that renders the content contained therein capable of being represented in a tangible form and accessible for reference and use at any time is deemed as a writing."[107] Nevertheless, the code provides for specific requirements as to the contents of a contract[m]

Islamic law

While the majority of Muslim-majority jurisdictions primarily use civil or common law for most aspects of contemporary contract law, Islamic law regarding contracts remains relevant in the area of marriage law and Islamic finance. There are differences between the criteria for formation of contracts under Islamic law and criteria under civil and common law. For example, Sharia classically recognises only natural persons, and never developed the concept of a legal person, or corporation, i.e., a legal entity that limits the liabilities of its managers, shareholders, and employees; exists beyond the lifetimes of its founders; and that can own assets, sign contracts, and appear in court through representatives.[109] Additionally, a contract under Islamic law may be voided for gharar (i.e. speculation and uncertainty) and riba (i.e. usury).

Islamic marriages are typically solemnised as a written financial contract, typically in the presence of two Muslim male witnesses, and it may include a brideprice (Mahr) payable from a Muslim man to a Muslim woman. The brideprice is considered by a Sharia court as a form of debt. Written contracts were traditionally considered paramount in Sharia courts in the matters of dispute that are debt-related, which includes marriage contracts.[110] In Singapore, the contract-based Islamic marriage law is governed by the Administration of Muslim Law Act[111] and coexists with the secular system of marriage registration established under the Women's Charter. Meanwhile in India, Muslim personal law is a distinct branch of law governed by a variety of statutes and Islamic customs that vary from community to community.

In contemporary Islamic finance and banking, a variety of nominate contracts are used to comply with the Islamic prohibition on gharar and riba. These include profit and loss sharing contracts such as Mudarabah, Musharakah, and Diminishing Musharaka; as well as a variety of asset-backed contracts. The most common contract used in modern Islamic finance is the Murabaha, which was originally a term of fiqh for a sales contract in which the buyer and seller agree on the markup (profit) or "cost-plus" price[112] for the item(s) being sold.[113] In recent decades it has become a term for a very common form of Islamic (i.e., "shariah compliant") financing, where the price is marked up in exchange for allowing the buyer to pay over time—for example with monthly payments (a contract with deferred payment being known as bai-muajjal).

Additionally, Islamic law imposes several legal conditions on the process of establishing a waqf, a type of patrimony of affectation similar to a trust. A waqf is a contract, therefore the founder (called al-wāqif or al-muḥabbis in Arabic) must be of the capacity to enter into a contract. For this the founder must:

  • be an adult
  • be sound of mind
  • capable of handling financial affairs
  • not under interdiction for bankruptcy

Although waqf is an Islamic institution, being a Muslim is not required to establish a waqf, and dhimmis may establish a waqf. Finally if a person is fatally ill, the waqf is subject to the same restrictions as a will in Islam.[114] Furthermore, the property (called al-mawqūf or al-muḥabbas) used to found a waqf must be objects of a valid contract. The objects should not themselves be haram (e.g. wine or pork). These objects should not already be in the public domain: public property cannot be used to establish a waqf. The founder cannot also have pledged the property previously to someone else. These conditions are generally true for contracts in Islam.[114] The beneficiaries of the waqf can be persons and public utilities. The founder can specify which persons are eligible for benefit (such the founder's family, entire community, only the poor, travelers). Public utilities such as mosques, schools, bridges, graveyards and drinking fountains can be the beneficiaries of a waqf. Modern legislation divides the waqf as "charitable causes", in which the beneficiaries are the public or the poor) and "family" waqf, in which the founder makes the beneficiaries his relatives. There can also be multiple beneficiaries. For example, the founder may stipulate that half the proceeds go to their family, while the other half go to the poor.[114] Valid beneficiaries must satisfy the following conditions:[114]

  • They must be identifiable. At least some of the beneficiaries must also exist at the time of the founding of the waqf. The Mālikīs, however, hold that a waqf may exist for some time without beneficiaries, whence the proceeds accumulate are given to beneficiaries once they come into existence. An example of a non-existent beneficiary is an unborn child.
  • The beneficiaries must not be at war with the Muslims. Scholars stress that non-Muslim citizens of the Islamic state (dhimmi) can definitely be beneficiaries.
  • The beneficiaries may not use the waqf for a purpose in contradiction of Islamic principles.

A waqf's declaration of founding is usually a written document, accompanied by a verbal declaration, though neither are required by most scholars. Whatever the declaration, most scholars (those of the Hanafi, Shafi'i, some of the Hanbali and the Imami Shi'a schools) hold that it is not binding and irrevocable until actually delivered to the beneficiaries or put in their use. Once in their use, however, the waqf becomes an institution in its own right.[114] Under Singaporean law, every mosque is required to be created and administered as a waqf, and rules governing waqfs are prescribed in the Administration of Muslim Law Sct. [111]

Convention on Contracts for the International Sale of Goods

In the vast majority of jurisdictions, the Convention on Contracts for the International Sale of Goods (CISG) governs contracts concerning the international sale of goods. The CISG facilitates international trade by removing legal barriers among state parties (known as "Contracting States") and providing uniform rules that govern most aspects of a commercial transactions, such as contract formation, the means of delivery, parties' obligations, and remedies for breach of contract.[115] Unless expressly excluded by the contract,[116] the convention is automatically incorporated into the domestic laws of Contracting States. Consequently, the criteria for the creation of contracts for the international sale of goods are substantially harmonised among civil, common, and mixed law jurisdictions around the world.

The CISG applies to contracts of the sale of goods between parties whose places of business are in different States, when the States are Contracting States (United Nations Convention on Contracts for the International Sale of Goods, Article 1(1)(a)). Given the significant number of Contracting States, this is the usual path to the CISG's applicability. The CISG also applies if the parties are situated in different countries (which need not be Contracting States) and the conflict of law rules lead to the application of the law of a Contracting State.[117] For example, a contract between a Japanese trader and a Brazilian trader may contain a clause that arbitration will be in Sydney under Australian law[118] with the consequence that the CISG would apply. A number of States have declared they will not be bound by this condition.[119] The CISG is intended to apply to commercial goods and products only. With some limited exceptions, it does not apply to personal, family, or household goods, nor does it apply to auctions, ships, aircraft,[120] or intangibles[121] and services.[122] The position of computer software is 'controversial' and will depend upon various conditions and situations.[123][124] Importantly, parties to a contract may exclude or vary the application of the CISG.[125]

Under the CISG, an offer to contract must be addressed to a person, be sufficiently definite – that is, describe the goods, quantity, and price – and indicate an intention for the offeror to be bound on acceptance.[126] The CISG does not appear to recognise common law unilateral contracts[127] but, subject to clear indication by the offeror, treats any proposal not addressed to a specific person as only an invitation to make an offer.[128] Further, where there is no explicit price or procedure to implicitly determine price, then the parties are assumed to have agreed upon a price based upon that 'generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances'.[129] Generally, an offer may be revoked provided the withdrawal reaches the offeree before or at the same time as the offer, or before the offeree has sent an acceptance.[130] Some offers may not be revoked; for example when the offeree reasonably relied upon the offer as being irrevocable.[131] The CISG requires a positive act to indicate acceptance; silence or inactivity are not an acceptance.[132]

The CISG attempts to resolve the common situation where an offeree's reply to an offer accepts the original offer, but attempts to change the conditions. The CISG says that any change to the original conditions is a rejection of the offer—it is a counter-offer—unless the modified terms do not materially alter the terms of the offer. Changes to price, payment, quality, quantity, delivery, liability of the parties, and arbitration conditions may all materially alter the terms of the offer.[133]

Capacity

In all systems of contract law, the capacity of a variety of natural or juristic persons to enter into contracts, enforce contractual obligations, or have contracts enforced against them is restricted on public policy grounds. Consequently, the validity and enforceability of a contract depends not only on whether a jurisdiction is a common, civil, or mixed law jurisdiction but also on the jurisdiction's particular policies regarding capacity. For instance, very small children may not be held to bargains they have made, on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness.[134]

Each contractual party must be a "competent person" having legal capacity. The parties may be natural persons ("individuals") or juristic persons ("corporations"). An agreement is formed when an "offer" is accepted. The parties must have an intention to be legally bound; and to be valid, the agreement must have both proper "form" and a lawful object. In England (and in jurisdictions using English contract principles), the parties must also exchange "consideration" to create a "mutuality of obligation," as in Simpkins v Pays.[135]

In the United States, persons under 18 are typically minor and their contracts are considered voidable; however, if the minor voids the contract, benefits received by the minor must be returned. The minor can enforce breaches of contract by an adult while the adult's enforcement may be more limited under the bargain principle.[citation needed] Promissory estoppel or unjust enrichment may be available, but generally are not.

Meanwhile, in Singapore, while individuals under the age of 21 are regarded as minors, sections 35 and 36 of the Civil Law Act 1909 provide that certain contracts entered into by minors aged 18 and above are to be treated as though they were adults.[136] Additionally, the Minors' Contracts Act 1987 as applicable in Singapore and in England and Wales provides that a contract entered into by a minor is not automatically unenforceable and that a "court may, if it is just and equitable to do so, require the [minor] defendant to transfer to the plaintiff any property acquired by the defendant under the contract, or any property representing it".[137]

In addition to age, a party to a contract may lack capacity on the grounds of mental illness or senility. Under Singapore's Mental Capacity Act 2008, for example, "a person lacks capacity in relation to a matter if at the material time the person is unable to make a decision for himself or herself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain".[138] Where an individual lacks capacity on grounds of mental illness or senility, a relative or other responsible person may obtain a lasting power of attorney to make decisions concerning the "personal welfare" of the person lacking capacity, the "property and [financial] affairs" of the person, or both.[139] Questions as to whether an individual has the capacity to make decisions either generally or with regard to a particular matter or class of matters are generally resolved by a judicial declaration and the court making the declaration may appoint one or more individuals to act as conservators (American English) or deputies (Commonwealth English) for the person lacking capacity.[140]

Contractual terms

A contractual term is a "provision forming part of a contract".[141] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms may carry less legal weight as they are peripheral to the objectives of the contract.[142]

Classification of terms

Contractual terms may be given different names or require different content, depending upon the context or jurisdiction.[143] Terms establish conditions precedent. English (but not necessarily non-English) common law distinguishes between important conditions and warranties, with a breach of a condition by one party allowing the other to repudiate and be discharged while a warranty allows for remedies and damages but not complete discharge.[144][145] Whether or not a term is a condition is determined in part by the parties' intent.[145][146]

In a less technical sense, however, a condition is a generic term and a warranty is a promise.[144] Not all language in the contract is determined to be a contractual term. Representations, which are often precontractual, are typically less strictly enforced than terms, and material misrepresentations historically was a cause of action for the tort of deceit. Warranties were enforced regardless of materiality; in modern United States law the distinction is less clear but warranties may be enforced more strictly.[147] Statements of opinion may be viewed as "mere puff".

In specific circumstances these terms are used differently. For example, in English insurance law, violation of a "condition precedent" by an insured is a complete defence against the payment of claims.[148]: 160  In general insurance law, a warranty is a promise that must be complied with.[148] In product transactions, warranties promise that the product will continue to function for a certain period of time.

In the United Kingdom, the courts determine whether a term is a condition or warranty; for example, an actress' obligation to perform the opening night of a theatrical production is a condition,[149] but a singer's obligation to rehearse may be a warranty.[150] Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A[151] provides that terms as to title, description, quality and sample are generally conditions. The United Kingdom has also contrived the concept of an "intermediate term" (also called innominate), first established in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962].

Representations versus warranties

Statements of fact in a contract or in obtaining the contract are considered to be either warranties or representations. Traditionally, warranties are factual promises which are enforced through a contract legal action, regardless of materiality, intent, or reliance.[147] Representations are traditionally precontractual statements that allow for a tort-based action (such as the tort of deceit) if the misrepresentation is negligent or fraudulent;[152] historically, a tort was the only action available, but by 1778, breach of warranty became a separate legal contractual action.[147] In U.S. law, the distinction between the two is somewhat unclear;[147] warranties are viewed as primarily contract-based legal action while negligent or fraudulent misrepresentations are tort-based, but there is a confusing mix of case law in the United States.[147] In modern English law, sellers often avoid using the term 'represents' in order to avoid claims under the Misrepresentation Act 1967, while in America 'warrants and represents' is relatively common.[153] Some modern commentators suggest avoiding the words and substituting 'state' or 'agree', and some model forms do not use the words;[152] however, others disagree.[154]

Statements in a contract may not be upheld if the court finds that the statements are subjective or promotional puffery. English courts may weigh the emphasis or relative knowledge in determining whether a statement is enforceable as part of the contract. In the English case of Bannerman v White[155] the court upheld a rejection by a buyer of hops which had been treated with sulphur since the buyer explicitly expressed the importance of this requirement. The relative knowledge of the parties may also be a factor, as in English case of Bissett v Wilkinson[156] where the court did not find misrepresentation when a seller said that farmland being sold would carry 2000 sheep if worked by one team; the buyer was considered sufficiently knowledgeable to accept or reject the seller's opinion.

Standard terms and contracts of adhesion

Standard form contracts contain "boilerplate", which is a set of "one size fits all" contract provisions. However, the term may also narrowly refer to conditions at the end of the contract which specify the governing law provision, venue, assignment and delegation, waiver of jury trial, notice, and escape clauses ("get-out clauses") such as force majeure. Restrictive provisions in contracts where the consumer has little negotiating power ("contracts of adhesion") attract consumer protection scrutiny.

Implied terms

A term may either be express or implied.[157] An express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract. Terms may be implied in fact, in law, or in custom.

Terms may be implied due to the factual circumstances or conduct of the parties. In the case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings,[84] the UK Privy Council, on appeal from Australia, proposed a five-stage test to determine situations where the facts of a case may imply terms. The classic tests have been the "business efficacy test" and the "officious bystander test". Under the "business efficacy test" first proposed in The Moorcock [1889], the minimum terms necessary to give business efficacy to the contract will be implied. Under the officious bystander test (named in Southern Foundries (1926) Ltd v Shirlaw [1940] but actually originating in Reigate v. Union Manufacturing Co (Ramsbottom) Ltd [1918]), a term can only be implied in fact if an "officious bystander" listening to the contract negotiations suggested that the term be included the parties would promptly agree. The difference between these tests is questionable.

Statutes or judicial rulings may create implied contractual terms, particularly in standardised relationships such as employment or shipping contracts. The Uniform Commercial Code of the United States also imposes an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by the Code. In addition, Australia, Israel and India imply a similar good faith term through laws while the Supreme Court of Canada has developed a doctrine of honest contractual performance. While English law does not impose such a requirement, there is nevertheless an overarching concept of "legitimate expectation" in most common law jurisdictions.

Under the Civil Code of the People's Republic of China, contracts governed by the law of Mainland China carry an implied term that, in addition to performing "their respective obligations as agreed in the contract", "the parties shall comply with the principle of good faith, and perform such obligations as sending notification, rendering assistance, and keeping confidentiality in accordance with the nature and purpose of the contract and the course of dealing".[158] Additionally, the code imposes an implied term that "the parties shall avoid wasting the resources, polluting the environment, or damaging the ecology in the course of performance of the contract".[158] The inclusion of an implied term protecting the environment under Mainland Chinese contract law is analogous to the imposition under Indian tort law of absolute liability for enterprises that cause pollution or other harm to property or individuals when conducting hazardous activities under the rule in M. C. Mehta v. Union of India and to the sui generis rights of personhood accorded to the environment under the laws of several jurisdictions. While other jurisdictions impose protections for the environment through tort law, regulations, or environmental personhood, Mainland Chinese law thus utilises contractual terms implied in law.

Most jurisdictions have specific legal provisions which deal directly with sale of goods, lease transactions, and trade practices. In the United States, prominent examples include, in the case of products, an implied warranty of merchantability and fitness for a particular purpose, and in the case of homes an implied warranty of habitability. In the United Kingdom, implied terms may be created by statute (e.g. Sale of Goods Act 1979, the Consumer Rights Act 2015 and the Hague-Visby Rules), Common Law (e.g.The Moorcock,[159] which introduced the "business efficacy" test), Previous Dealings,(e.g.Spurling v Bradshaw.[160]) or custom (e.g.Hutton v Warren[161]). Nominate contracts in civil law jurisdictions and contracts subject to the United Nations Convention on Contracts for the International Sale of Goods (CISG) are subject to terms implied by the appropriate civil or commercial code or by the convention, respectively. Many civil law jurisdictions impose a legal duty of good faith which extends to the negotiation as well as performance of contracts.

Under the CISG, a variety of terms implied by law are prescribed for contracts involving the international sale of goods. Generally, the goods must be of the quality, quantity, and description required by the contract, be suitably packaged and fit for purpose.[162] The seller is obliged to deliver goods that are not subject to claims from a third party for infringement of industrial or intellectual property rights in the State where the goods are to be sold.[163] The buyer is obliged to promptly examine the goods and, subject to some qualifications, must advise the seller of any lack of conformity within 'a reasonable time' and no later than within two years of receipt.[164]

In many common law jurisdictions, insurance contracts are subject to a term implied in law of utmost good faith, and this is codified (for example) in section 17 of Singapore's Marine Insurance Act 1909.[165] Additionally, depending on jurisdiction, marine and life insurance contracts may require the policyholder to have an insurable interest in the asset or life insured.[166][167][168] In contrast, instead of requiring a policyholder to hold an insurable interest in the life insured, German law merely requires the policyholder to obtain the consent of the person whose life is insured.[168]

As opposed to being implied by law or fact, a term may be implied on the basis of custom or usage in a particular market or context. In the Australian case of Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Aust) Limited,[169] the requirements for a term to be implied by custom were set out. For a term to be implied by custom it needs to be "so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract".[169]: paras 8–9 

Contractual disputes

Procedure and choice of law

In both civil and common law jurisdictions, where no arbitration or mediation clause or agreement applies, a party seeking a remedy for breech of contract is typically required to file a civil (non-criminal) lawsuit in the court which has jurisdiction over the contract.[170] Where the courts of England and Wales, Singapore, India, or another common law jurisdiction within the Commonwealth have jurisdiction, a contract may be enforced by use of a claim, or in urgent cases by applying for an interim injunction to prevent a breach. Similarly, in the United States, an aggrieved party may apply for injunctive relief to prevent a threatened breach of contract, where such breach would result in irreparable harm that could not be adequately remedied by money damages.[171]

When a contract dispute arises between parties that are in different jurisdictions, law that is applicable to a contract is dependent on the conflict of laws analysis by the court where the breach of contract action is filed. In the absence of a choice of law clause, the court will normally apply either the law of the forum or the law of the jurisdiction that has the strongest connection to the subject matter of the contract. A choice of law clause allows the parties to agree in advance that their contract will be interpreted under the laws of a specific jurisdiction.[172]

Within the United States, choice of law clauses are generally enforceable, although exceptions based upon public policy may at times apply.[173] Within the European Union, even when the parties have negotiated a choice of law clause, conflict of law issues may be governed by the Rome I Regulation.[174]

Forum selection clauses

Commercial contracts, particularly those in which parties are located in different jurisdictions, frequently contain forum selection clauses which may be arbitration, mediation, or choice of court clauses depending on the contract in question.

Many contracts contain an exclusive choice of court agreement, setting out the jurisdiction in whose courts disputes in relation to the contract should be litigated. The clause may be general, requiring that any case arising from the contract be filed within a specific jurisdiction, or it may require that a case be filed in a specific court. For example, a choice of court clause may require that a case be filed in a Singaporean court, or it may require more specifically that the case be filed in the Singapore International Commercial Court.

Typically, either the doctrine of freedom of contract or multilateral instruments require non-chosen courts to dismiss cases and require the recognition of judgments made by courts designated by exclusive choice of court agreements. For example, the Brussels regime instruments (31 European states) and the Hague Choice of Court Agreements Convention (European Union, Mexico, Montenegro, Singapore), as well as several instruments related to a specific area of law, may require courts to enforce and recognise choice of law clauses and foreign judgments.

Under the Hague Choice of Court Agreements Convention, a court designated by an exclusive choice of court agreement has jurisdiction unless the contract is void under its domestic law and cannot decline to exercise jurisdiction on the grounds that another jurisdiction's court is a more appropriate venue.[175] Similarly a non-chosen court is required to refuse jurisdiction except where the agreement is null and void under the law of the chosen court, a party to the contract lacked capacity under the non-chosen court's domestic law, giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the non-chosen court's state, the agreement cannot be performed due to force majeure, or the chosen court has chosen not to hear the case.[176] Exclusive choice of court agreements under the Hague Choice of Court Agreements Convention solely apply to commercial matters and thus do not apply to any party dealing as a consumer, employment contracts or collective bargaining agreements, matters related to civil status or family law, or similar scenarios.[177]

In jurisdictions that are not party to the Hague Convention, an exclusive choice of court agreement may not necessarily binding upon a court. Based upon an analysis of the laws, rules of procedure and public policy of the state and court in which the case was filed, a court that is identified by the clause may find that it should not exercise jurisdiction, or a court in a different jurisdiction or venue may find that the litigation may proceed despite the clause.[178] As part of that analysis, a court may examine whether the clause conforms with the formal requirements of the jurisdiction in which the case was filed (in some jurisdictions a choice of forum or choice of venue clause only limits the parties if the word "exclusive" is explicitly included in the clause). Some jurisdictions will not accept an action that has no connection to the court that was chosen, and others will not enforce a choice of venue clause when they consider themselves to be a more convenient forum for the litigation.[179]

If the contract contains a valid arbitration clause, the aggrieved party must submit an arbitration claim in accordance with the procedures set forth in the clause subject to the arbitration law of the jurisdiction designated as the seat of the arbitration. Many international contracts provide that all disputes arising thereunder will be resolved by arbitration rather than litigated in courts. Arbitration judgments may generally be enforced in the same manner as ordinary court judgments, and are recognised and enforceable internationally under the New York Convention, which has 156 parties. However, in New York Convention states, arbitral decisions are generally immune unless there is a showing that the arbitrator's decision was irrational or tainted by fraud.[180]

Some arbitration clauses are not enforceable, and in other cases arbitration may not be sufficient to resolve a legal dispute. For example, except in Singapore,[181][182] disputes regarding validity of registered IP rights may need to be resolved by a public body within the national registration system.[183] For matters of significant public interest that go beyond the narrow interests of the parties to the agreement, such as claims that a party violated a contract by engaging in illegal anti-competitive conduct or committed civil rights violations, a court might find that the parties may litigate some or all of their claims even before completing a contractually agreed arbitration process.[184]

Most civil law jurisdictions and the majority of common law jurisdictions outside America either limit or prohibit the enforcement of arbitration clauses included in contracts of adhesion. For instance, in the 2020 case Uber Technologies Inc v Heller, the Supreme Court of Canada declared that an arbitration agreement included in contracts concluded by Uber with its drivers was unconscionable and thus unenforceable under the law of Ontario. Similarly the UNCITRAL Model Law on International Commercial Arbitration and legislation based on the model law restrict the applicability of the arbitration framework to commercial arbitration, expressly excluding parties dealing as consumers.[181][182]

In the United States, thirty-five states (notably not including New York)[185] and the District of Columbia have adopted the Uniform Arbitration Act to facilitate the enforcement of arbitrated judgments.[186] Unlike the UNCITRAL Model Law, the Uniform Arbitration Act expressly requires a court to confirm an arbitral award before it can be enforced.

Customer claims against securities brokers and dealers are almost always resolved pursuant to contractual arbitration clauses because securities dealers are required under the terms of their membership in self-regulatory organisations such as the Financial Industry Regulatory Authority (formerly the NASD) or NYSE to arbitrate disputes with their customers. The firms then began including arbitration agreements in their customer agreements, requiring their customers to arbitrate disputes.[187][188]

In addition to arbitration under the Uniform Arbitration Act, the State of Delaware maintains a second arbitration framework known as the Delaware Rapid Arbitration Act (DRAA).[189] The purpose of the DRAA is to provide for a "prompt, cost-effective, and efficient" method for "sophisticated entities" to resolve business disputes.[189] The DRAA accomplishes this through the use of expedited deadlines and financial penalties for arbitrators who fail to rule on disputes within the time allotted under the act.[189]

Presently, Singapore maintains two distinct frameworks under which contractual disputes can be arbitrated, which differ primarily in regard to the extent to which parties to the proceedings may resort to the courts. Under section 45 of the Arbitration Act 2001, either party or the arbitral tribunal itself may apply to the court to issue a ruling on "any question of law arising in the course of the proceedings which the Court is satisfied substantially affects the rights of one or more of the parties" and under section 49, either party may appeal an arbitral award on any question of law unless the parties have expressly excluded appeals the section.[182] Either action is only permitted with the consent of the other parties or either the arbitral tribunal (for rulings on preliminary points of law) or the Court (with regard to appeals. This is in contrast to the International Arbitration Act 1994, which generally replicates the provisions of the UNCITRAL Model Law on International Commercial Arbitration and provides more restricted access to the courts.[181]

In 2020, the Singapore Academy of Law published a report on the right of appeal in arbitral proceedings evaluating the advantages and disadvantages of the two distinct frameworks, concluding that the existence of appeals enables the development of case law and consequently provides greater certainty for parties to arbitral proceedings.[190] The report identifies the availability of appeals by default under section 69 of England's Arbitration Act 1996[191] as a factor contributing to the popularity of London as a seat of arbitration in international contract disputes.[190] Consequently, the report recommends amending the International Arbitration Act 1994 to enable parties to opt for a right of appeal in their arbitration agreement, thus enabling the development of case law and providing greater certainty for parties who desire it while maintaining an absence of appeals as the default position in order to cater to parties who desire a completely extrajudicial resolution of contractual disputes.[190]

Uniquely, both the International Arbitration Act 1994 and the Arbitration Act 2001 contain provisions (Part 2A and Part 9A, respectively) explicitly authorising the arbitration of intellectual property disputes regardless of the extent to which the law of Singapore or any other jurisdiction expressly confers jurisdiction upon any designated body.[181][182] This contrasts with the general approach taken by the majority of other jurisdictions and enables parties to foreign intellectual property disputes to seek resolution offshore without affecting the recognition of intellectual property rights in the jurisdictions in which they are issued.[183]

If a contract contains a valid mediation or negotiation clause, the parties will typically have to comply with the mediation or negotiation procedures specified by the contract before commencing arbitration or litigation. Mediation is a form of alternative dispute resolution aimed at addressing disputes between two or more parties in an amicable and non-adversarial manner and typically involves a third party (the mediator or conciliator) assisting the parties in reaching a settlement that, depending on the applicable law, may then be registered as an arbitral award or a judicial decision. Typically, courts will stay proceedings where a party successfully asserts the existence of a valid mediation or negotiation agreement.[192] It is generally permitted for an individual appointed as a mediator to serve as an arbitrator as per a hybrid mediation-arbitration clause if the parties are unable to reach a mediated settlement. [181] [182]

Typically, a mediated settlement may be recorded as an order of court in the jurisdiction under whose law it was concluded and the registration of a mediated settlement is sufficient to stay any arbitral or judicial proceedings addressing the same matters.[192] While arbitral awards are typically enforceable in third countries under the New York Convention, mediated settlements in international contractual disputes are enforceable under the Singapore Mediation Convention. A mediated settlement in an international contractual dispute is referred to as an international settlement agreement and, in jurisdictions where the Singapore Convention applies, international settlement agreements entered into in other member states may be registered by a court for domestic enforcement.[193] Additionally, courts in jurisdictions where the convention applies will stay proceedings where satisfied that a valid mediation agreement governed by the law of another state party covers the subject matter of the dispute, and international settlement agreement registered under the convention will be sufficient to preclude the commencement of domestic judicial or arbitral proceedings.[193]

While arbitral awards and mediated or negotiated settlements are invariably issued on the basis of an arbitration or mediation clause, court decisions are commonly issued in the absence of an exclusive choice of court agreement or even an explicit choice of law agreement from which the courts of another country may infer the legitimacy of the issuing court's jurisdiction. Consequently, most jurisdictions have enacted laws standardising the procedure for the recognition and enforcement of offshore judgments in the absence of an exclusive choice of court agreement. For example, Singapore's Reciprocal Enforcement of Foreign Judgements Act 1959, which only applies to countries the Minister of Law determines are likely to reciprocate, provides that a judgment creditor may apply to the General Division of the High Court to register a foreign judgment for the purpose of enforcement in Singapore.[194] Similarly, the Uniform Foreign Country Money Judgements Recognition Act enacted by the majority of American states and territories provides for the enforcement of judgments from outside America[195] while the Uniform Enforcement of Foreign Judgments Act provides for the enforcement of judgments issued by other American states and territories.[196]

Remedies

Remedies for breach of contract generally include damages or forms of specific relief, including but not limited to: specific performance, injunctions, declaratory relief, and rescission. The availability of different remedies varies from jurisdiction to jurisdiction, with common law jurisprudence preferring to award damages where possible while civil law jurisdictions are more inclined toward specific relief. Article 7.2.2 of the International Principles of Commercial Contracts takes a moderate approach, providing that "where a party who owes an obligation other than one to pay money does not perform, the other party may require performance" except where "performance is impossible in law or in fact" or "performance or, where relevant, enforcement is unreasonably burdensome or expensive".[4] Under the Principles, specific relief is thus preferred but courts and arbitrators may instead opt to award damages based on a contextual assessment of the complexity specific relief would result in.

In the United Kingdom and Singapore, breach of contract is defined in the Unfair Contract Terms Act 1977 as: [i] non-performance, [ ii] poor performance, [iii] part-performance, or [iv] performance which is substantially different from what was reasonably expected.[197] Innocent parties may repudiate (cancel) the contract only for a major breach (breach of condition),[198][199] but they may always recover compensatory damages, provided that the breach has caused foreseeable loss. It was not possible to sue the Crown in the UK for breach of contract before 1948. However, it was appreciated that contractors might be reluctant to deal on such a basis and claims were entertained under a petition of right that needed to be endorsed by the Home Secretary and Attorney-General. S.1 Crown Proceedings Act 1947 opened the Crown to ordinary contractual claims through the courts as for any other person.

Under the United Nations Convention on Contracts for the International Sale of Goods (CISG), remedies of the buyer and seller depend upon the character of a breach of the contract. If the breach is fundamental, then the other party is substantially deprived of what it expected to receive under the contract. Provided that an objective test shows that the breach could not have been foreseen,[200] then the contract may be avoided[201] and the aggrieved party may claim damages.[202] Where part performance of a contract has occurred, then the performing party may recover any payment made or good supplied;[203] this contrasts with the common law where there is generally no right to recover a good supplied unless title has been retained or damages are inadequate, only a right to claim the value of the good.[204] If the breach is not fundamental, then the contract is not avoided and remedies may be sought including claiming damages, specific performance, and adjustment of price.[205] Damages that may be awarded conform to the common law rules in Hadley v Baxendale[206] but it has been argued the test of foreseeability is substantially broader[207] and consequently more generous to the aggrieved party.

There are several different types of damages.

  • Compensatory damages, which are given to the party injured by the breach of contract. With compensatory damages, there are two heads of loss, consequential damage and direct damage. In theory, compensatory damages are designed to put the injured party in his or her rightful position, usually through an award of expectation damages.
  • Liquidated damages are an estimate of loss agreed to in the contract, so that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may be called "penalty clauses" in ordinary language, but the law distinguishes between liquidated damages (legitimate) and penalties (invalid). A test for determining which category a clause falls into was established by the English House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd[208]
  • Nominal damages consist of a small cash amount where the court concludes that the defendant is in breach but the plaintiff has suffered no quantifiable pecuniary loss, and may be sought to obtain a legal record of who was at fault.
  • Punitive or exemplary damages are used to punish the party at fault; but even though such damages are not intended primarily to compensate, nevertheless the claimant (and not the state) receives the award. Exemplary damages are not recognised nor permitted in some jurisdictions. In the UK, exemplary damages are not available for breach of contract, but are possible after fraud. Although vitiating factors (such as misrepresentation, mistake, undue influence and duress) relate to contracts, they are not contractual actions, and so, in a roundabout way, a claimant in contract may be able to get exemplary damages.

Compensatory damages compensate the plaintiff for actual losses suffered as accurately as possible. They may be "expectation damages", "reliance damages" or "restitutionary damages". Expectation damages are awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised.[209] Reliance damages are usually awarded where no reasonably reliable estimate of expectation loss can be arrived at or at the option of the plaintiff. Reliance losses cover expense suffered in reliance to the promise. Examples where reliance damages have been awarded because profits are too speculative include the Australian case of McRae v Commonwealth Disposals Commission[210] which concerned a contract for the rights to salvage a ship. In Anglia Television Ltd v. Reed[211] the English Court of Appeal awarded the plaintiff expenditures incurred prior to the contract in preparation of performance.

After a breach has occurred, the innocent party has a duty to mitigate loss by taking any reasonable steps. Failure to mitigate means that damages may be reduced or even denied altogether.[212] However, Professor Michael Furmston [213] has argued that "it is wrong to express (the mitigation) rule by stating that the plaintiff is under a duty to mitigate his loss",[214] citing Sotiros Shipping Inc v Sameiet, The Solholt.[215] If a party provides notice that the contract will not be completed, an anticipatory breach occurs.

Damages may be general or consequential. General damages are those damages which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. However, there is still a duty to mitigate the losses. The fact that the car was not there does not give the party a right to not attempt to rent another car.

To recover damages, a claimant must show that the breach of contract caused foreseeable loss.[45][216] Hadley v Baxendale established that the test of foreseeability is both objective or subjective. In other words, is it foreseeable to the objective bystander, or to the contracting parties, who may have special knowledge? On the facts of this case, where a miller lost production because a carrier delayed taking broken mill parts for repair, the court held that no damages were payable since the loss was foreseeable neither by the "reasonable man" nor by the carrier, both of whom would have expected the miller to have a spare part in store.

There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. For example, where an art collector purchases a rare painting and the vendor refuses to deliver, the collector's damages would be equal to the sum paid.

In most common law jurisdictions, such circumstances are dealt with by court orders for "specific performance", requiring that the contract or a part thereof be performed. In some circumstances a court will order a party to perform his or her promise or issue an injunction requiring a party refrain from doing something that would breach the contract. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value. In the United States by way of the 13th Amendment to the United States Constitution, specific performance in personal service contracts is only legal "as punishment for a crime whereof the party shall have been duly convicted".[217] Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defences to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance.

In jurisdictions applying Roman-Dutch law, a claim for specific performance is the primary and obvious and most basic remedy for breach of contract, upholding as it does the expectation interest of the creditor: When one enters into a contract, one expects performance in terms of it. This approach is contrary to that taken under English law,[218] where damages are preferred, and where specific performance is a special discretionary remedy that may be sought only in certain circumstances.[219][220] A claim for specific performance may be for the payment of a sum of money (ad pecuniam solvendum), a claim for the performance of some positive act other than payment of money (ad factum praestandum) or a claim to enforce a negative obligation. The remedy of specific performance is not absolute and does not guarantee success. Even where it is shown that there has been a breach, the remedy is not granted unless the innocent party is ready to perform and performance is subjectively and objectively possible for the defendant. The courts have exercised an equitable discretion to refuse a claim for specific performance, usually on the grounds of impossibility, undue hardship or in claims for the enforcement of personal services. An order for specific performance is enforced in keeping with the ordinary rules of procedure. The cases of Benson v SA Mutual Life, Santos v Igesund and Haynes v King William's Town Municipality[221] set out guidelines to be taken into consideration where the court is asked to grant specific performance. A court does not make an order for specific performance in cases where:

  • Performance is personal.[222]
  • There is a relative impossibility, where the specific person (an injured pop star, for example) cannot perform.
  • Because it would have to supervise its decree, it would be difficult for the court to enforce it.
  • The defendant is insolvent.
  • Performance would severely prejudice third parties.
  • It conflicts with public policy and would be inappropriate.
  • As in Haynes, the cost to the defendant in being compelled to perform is out proportion to the corresponding benefit to the plaintiff, and the latter can equally well be compensated by an award of damages, an order is not made for specific performance. (The hardship of the contract at the time of its concluded, then, is not decisive of the matter; it may also be judged of at the time performance is claimed.)

In other civil law jurisdictions, the range of available remedies varies but typically includes provision for specific performance, rescission, declaratory relief, and injunctions although the distinction between specific performance and injunctions does not necessarily exist in all civil law jurisdictions. In jurisdictions with codified laws of obligations, the extent of remedies available and the circumstances in which they are provided is outlined in the civil or commercial code.

In Indian law, which like English law explicitly prefers awarding damages where this would be an adequate remedy, the Specific Relief Act 1963 codifies the rules surrounding specific performance and other remedies aside from damages. Relief available under the act is limited to recovery of possession of property, specific performance of contracts, rectification of instruments, rescission of contracts, cancellation of instruments, declaratory relief, and injunctions.

Where appropriate, courts in most common and civil law jurisdictions may permit declaratory relief or rescission of contracts. To rescind is to set aside or unmake a contract. There are four different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable' or 'unenforceable', or declared 'ineffective'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Kill fees are paid by magazine publishers to authors when their articles are submitted on time but are subsequently not used for publication. When this occurs, the magazine cannot claim copyright for the "killed" assignment. Unenforceability implies that neither party may have recourse to a court for a remedy. Ineffectiveness arises when a contract is terminated by order of a court, where a public body has failed to satisfy the requirements of public procurement law. This remedy was created by the Public Contracts (Amendments) Regulations 2009, (SI 2009–2992).

Defences

Defences to claims under contract law include vitiating factors, which defences operate to determine whether a purported contract is either (1) void or (2) voidable, or assertions that the other party failed to perform their obligations within a reasonable period of time. With regard to contracts of a commercial nature, the UNIDROIT Principles of International Commercial Contracts provides a general outline of the grounds under which a contract can be set aside. Where a contract or term is voidable, the party entitled to avoid may either conditionally or unconditionally choose to affirm the contract or term as outlined in Article 3.2.9 of the Principles which states that "if the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded".[4] Additionally, Article 3.2.13 provides that "where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract".[4]

Although provisions for the voidability of a contract for conduct of the other party are generally similar across jurisdictions, voidability on the grounds of a third party's conduct is more contentious. Article 3.2.8 of the Principles provides that where conduct constituting grounds for rescission "is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself". Similarly, while vitiating factors are similar across jurisdictions, the extent to which a failure by another party to a contract may form grounds for rescission or an early termination of contractual obligations varies between jurisdictions. For instance, Mainland Chinese law provides that a party may seek to rescind a contract or terminate its remaining obligations if the other party "expresses or indicates by act that it will not perform the principal obligation", "delays performance of the principal obligation and still fails to perform it within a reasonable period of time", or "delays performance of the obligation or has otherwise acted in breach of the contract, thus making it impossible to achieve the purpose of the contract".[223]

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation. Rescission is the principal remedy and damages are also available if a tort is established. Article 3.2.5 of the Principles of International Commercial Contracts provides that "a party may avoid the contract when it has been led to conclude the contract by the other party's fraudulent representation, including language or practices, or fraudulent non- disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed".[4]

In common law jurisdictions, to prove misrepresentation and/or fraud, there traditionally must be evidence that shows a claim was made, said claim was false, the party making the claim knew the claim was false, and that party's intention was for a transaction to occur based upon the false claim.[224] In order to obtain relief, there must be a positive misrepresentation of law and also, the person to whom the representation was made must have been misled by and relied on this misrepresentation:Public Trustee v Taylor.[225] There are two types of misrepresentation: fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party alleging misrepresentation knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable. Assume two people, Party A and Party B, enter into a contract. Then, it is later determined that Party A did not fully understand the facts and information described within the contract. If Party B used this lack of understanding against Party A to enter into the contract, Party A has the right to void the contract.[226] According to Gordon v Selico [1986] it is possible to misrepresent either by words or conduct. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.[156] If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.[227]

In Singapore and the United Kingdom, the Misrepresentation Act 1967 provides that innocent misrepresentations can also be grounds for damages and remission of the relevant contract.[228] Section 35 of the Contract and Commercial Law Act 2017 similarly provides for damages in cases of both innocent and fraudulent misrepresentation in New Zealand.[229] In assessing remedies for an innocent misrepresentation, the judge takes into account the likelihood a party would rely on the false claim and how significant the false claim was.[230] Contract law does not delineate any clear boundary as to what is considered an acceptable false claim or what is unacceptable. Therefore, the question is what types of false claims (or deceptions) will be significant enough to void a contract based on said deception. Advertisements utilising "puffing," or the practice of exaggerating certain things, fall under this question of possible false claims.[226]

The foundational principle of "caveat emptor," which means "let the buyer beware," applies to all American transactions.[226] In Laidlaw v. Organ, the Supreme Court decided that the buyer did not have to inform the seller of information the buyer knew could affect the price of the product.[224]

It is a fallacy that an opinion cannot be a statement of fact. If a statement is the honest expression of an opinion honestly entertained, it cannot be said that it involves any fraudulent misrepresentations of fact.[231]

Section 2 of the UNIDROIT Principles of International Commercial Contracts defines the extent to which a mistake is typically accepted in most jurisdictions as grounds to avoid a contract. Under Article 3.1.2 of the Principles, a "mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded".[4] Article 3.1.3 of the Principles provides that "a party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known".[4] Additionally, Article 3.1.3 provides that a party seeking to avoid a contract must show that either "the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error" or "the other party had not at the time of avoidance reasonably acted in reliance on the contract."[4] However, a party cannot seek to avoid a contract on the grounds of a mistake if "it was grossly negligent in committing the mistake" or "the mistake relates to a matter in regard to which the risk of mistake ... should be borne by the mistaken party".[4]

Common law jurisdictions identify three types of mistake in contract: common mistake, mutual mistake, and unilateral mistake.

  • Common mistake occurs when both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd.,[232] which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.[233] In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd, the court held that the common law will grant relief against common mistake, if the test in Bell v. Lever Bros Ltd is made out.[234] If one party has knowledge and the other does not, and the party with the knowledge promises or guarantees the existence of the subject matter, that party will be in breach if the subject matter does not exist.[210]
  • Mutual mistake occurs when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. Courts usually try to uphold such mistakes if a reasonable interpretation of the terms can be found. However, a contract based on a mutual mistake in judgment does not cause the contract to be voidable by the party that is adversely affected. See Raffles v Wichelhaus.[235]
  • Unilateral mistake occurs when only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.[236][237] It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v Avery[238] where Lord Denning MR held that the contract can only be voided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient. In certain circumstances, the defence of non est factum can be utilised in common law jurisdictions to rescind a contract on the grounds of a substantial unilateral mistake.[239] Under Article 3.2.10 of the Principles, where a contract is voidable by a party on the grounds of a unilateral mistake but the other party "declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance", "the contract is considered to have been concluded as the [other] party understood it" and "the right to avoidance is lost".[4]

The UNIDROIT Principles of International Commercial Contracts outlines a comprehensive list of circumstances in which fraud committed by or threats made by a party constitute grounds for avoiding the contract. With regard to threats, Article 3.2.6 provides that "a party may avoid the contract when it has been led to conclude the contract by the other party's unjustified threat" if the action threatened is so severe as to "leave the first party no reasonable alternative".[4] A threat is considered "unjustified" under Article 3.2.6 if "the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract".[4] In common law jurisdictions, the notion of an unjustified threat is referred to as "duress". Black's Law Dictionary defines duress as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition" and constitutes grounds for setting aside a contract.[240] An example is in Barton v Armstrong [1976] in a person was threatened with death if they did not sign the contract. An innocent party wishing to set aside a contract for duress to the person only needs to prove that the threat was made and that it was a reason for entry into the contract; the burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, 'economic duress'.

Aside from fraud and unjustified threats, contracts can also generally be set aside on the grounds that one party exercised its superior bargaining power in order to impose inequitable terms upon the other party. Article 3.2.7 of the Principles provides that "a party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage" and specifies that, in determining whether the term was inequitable, a court or arbitrator should consider the extent to which "the other party has taken unfair advantage of the first party's dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill".[4] In addition to setting the contract aside, Article 3.2.7 also provides that courts may consider applying the blue pencil doctrine and modifying any inequitable terms and leaving the contract otherwise intact.[4] In common law jurisdictions, the related equitable doctrine of undue influence enables courts to provide a remedy in situations involving one person taking advantage of a position of power or influence over another person. Where a special relationship exists, such as between parent and child or solicitor and client, courts in common law jurisdictions have broad discretion as to whether a remedy is provided. When no special relationship exists, the question is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.[241][242][243] In Australian law, a contract can additionally be set aside due to unconscionable dealing.[244][245] Firstly, the claimant must show that they were under a special disability, the test for this being that they were unable to act in their best interest. Secondly, the claimant must show that the defendant took advantage of this special disability.[246][244]

If based on an illegal purpose or contrary to public policy, a contract is void. In the 1996 Canadian case of Royal Bank of Canada v. Newell[247] a woman forged her husband's signature, and her husband agreed to assume "all liability and responsibility" for the forged checks. However, the agreement was unenforceable as it was intended to "stifle a criminal prosecution", and the bank was forced to return the payments made by the husband.

In the U.S., one unusual type of unenforceable contract is a personal employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government's secrets during his/her lawsuit).[248] Other types of unenforceable employment contracts include contracts agreeing to work for less than minimum wage and forfeiting the right to workman's compensation in cases where workman's compensation is due.

All jurisdictions, civil and common law alike, typically provide for contractual obligations to be terminated or reduced in cases of force majeure or (in traditional common law terminology) frustration of purpose. Article 7.1.7 of the Principles provides that "Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences".[4] Under the Civil Code of the People's Republic of China, any party to a contract may rescind it if "the purpose of the contract cannot be achieved due to force majeure".[223] Similarly, the Frustrated Contracts Act 1959 (Singapore) and subpart 4 of the Contract and Commercial Law Act 2017 (New Zealand) provide remedies for parties to contracts that cannot be performed due to force majeure including rescission, compensation for goods or services already provided, and the severability of portions of the contract that can and cannot be performed.[249][250] Additionally, the Chinese civil code provides that a party may terminate its contractual obligations if the party to whom its obligations are owned is under financial distress.[251]

A partial defence available in a variety of civil, common, and mixed law jurisdictions is that of set-off or the netting of obligations. This entails forfeiting one or obligations owed by the other party in exchange for being excused for the performance of a party's own obligations toward the other party. It permits the rights to be used to discharge the liabilities where cross claims exist between a plaintiff and a respondent, the result being that the gross claims of mutual debt produce a single net claim.[252] The net claim is known as a net position. In other words, a set-off is the right of a debtor to balance mutual debts with a creditor. Any balance remaining due either of the parties is still owed, but the mutual debts have been set off. The power of net positions lies in reducing credit exposure, and also offers regulatory capital requirement and settlement advantages, which contribute to market stability.[253]

Modification and assignment of contracts

Laws regarding the modification of contracts or the assignment of rights under a contract are broadly similar across jurisdictions. Modification refers to any alteration to the terms of the contract, whereas Assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee.[254] In most jurisdictions, a contract may be modified simply by a subsequent contract or agreement between the parties to modify the terms governing their obligations to each other. This is reflected in Article 3.1.2 of the Principles of International Commercial Contracts, which states that "a contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement".[4] Assignments are subject to more restrictions, particularly with regard to the consent of the other party to the contract. While a party may typically assign monetary rights at their discretion provided that they notify the other party to the contract in a timely manner, most jurisdictions impose limitations on the ability of a party to assign non-monetary rights or to assign obligations they owe to the other party. In common law jurisdictions, an assignment may not transfer a duty, burden, or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift (such as a waiver) or it may be paid for with a contractual consideration such as money. Under Mainland Chinese law, a party to a contract may assign their rights "in whole or in part to a third person" except to the extent that a right is "not assignable by virtue of its nature", "in accordance with law", or due to the agreement between the parties.[255]

In the United States, there are various laws that limit the liability of an assignee, often to facilitate credit, as assignees are typically lenders.[256] Notable examples include a provision in the Truth in Lending Act[257] and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.[256]

In certain cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except that issues, such as lack of performance, by the assignor may not be a valid defence for the obligor.[258] In the United States, the Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defences", which "effectively abolished the [holder in due course] doctrine in consumer credit transactions".[258] In 2012, the commission reaffirmed the regulation.[259]

Freight and transport contracts

Contracts for the transport of goods and passengers are subject to a variety of distinct provisions both under international law and under the law of individual countries. Presently, different provisions apply at the international level to contracts for transport by maritime, land, and air transport. With regard to maritime transport, the Hague-Visby Rules currently govern contracts for the international carriage of goods by sea in the vast majority of jurisdictions. In Singapore and the United Kingdom, provisions of each of the two countries' Carriage of Goods by Sea Act additionally apply the Hague-Visby rules to the domestic transport of goods by sea.[260][261] Similarly, the Montréal Convention and the Warsaw Convention provide standardised terms for the transport of passengers' luggage by air. Contracts for the international transport of goods by air and legal provisions regarding the international transport of passengers by any mode of transport are currently governed by a variety of domestic and international laws.

In an attempt to harmonise the complicated system of international law governing transport contracts, members of the Association of South East Asian Nations have adopted the ASEAN Framework Agreement on Multimodal Transport providing for standardised terms governing multimodal transport contracts within the bloc.[262] The Civil Code of the People's Republic of China (CCPRC) makes similar provisions for multimodal transport contracts.[263] Both the CCPRC and the ASEAN Framework provide for the primary multimodal transport operator to bear overarching contractual responsibility for damage or loss to the goods carried and provide for operators of particular legs of the transport contract to be treated as agents of the primary multimodal transport operator.[263][262] In China, chapter nine of the civil code additionally provides standard terms for the carriage of both passengers and goods by each mode of transport.[264]

With regard to maritime transport, common law jurisdictions additionally maintain special legal provisions regarding insurance contracts. Such provisions typically provide for the prohibition of contracts "by gaming or wagering" and prescribe special rules for double insurance, determining the existence of insurable interest, and governing the provisions that a maritime insurance policy must include.[265][266]

Gallery

See also

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