Introduction to Contract Law

• Contract law consists of legal rules that regulate contracts.
• Contracts are enforceable agreements between two or more parties, and include the conditions surrounding these agreements, their validity, conclusion, and termination.

Why Contract Law is Important

• Enforceability ensures parties fulfill promises, with courts able to intervene if breached.
  • Example: A supplier fails to deliver goods, this allows the buyer to sue for damages.
• Clarity and Certainty defines rights, obligations, and terms to avoid misunderstandings.
  • Example: A written employment contract states salary, job role, and termination rules.
• Risk Management allocates risks, such as liability for delays or defects.
  • Example: A construction contract specifies who pays if materials are delayed.
• Trust in Transactions encourages commerce by making agreements legally binding.
  • Example: A business invests in a startup only after signing a shareholder agreement.
• Dispute Resolution provides remedies, such as compensation or contract termination, for breaches.
  • Example: A tenant breaks a lease early, allowing the landlord to keep the security deposit.
• Economic Stability supports markets by ensuring deals are reliable.
  • Example: Banks require loan contracts before lending money.
• Without contract law, one would experience chaos in business with no consequences for broken promises, increased fraud, and reduced investments due to a lack of trust.

Sources of Contract Law

• Common Law: Judge-made rulings (precedents) in court cases, such as breach of contract disputes.
• Statutory Law: Laws passed by legislatures, such as the U.S. Uniform Commercial Code (UCC) for sales of goods.
• Restatements of Law: Summaries of legal principles, such as the Restatement (Second) of Contracts.
• International Treaties: Agreements like the UN Convention on Contracts for the International Sale of Goods (CISG).
• Custom and Trade Usage: Industry practices that shape interpretations, such as shipping terms in commerce.

Common Types of Contracts

• Lease Agreement: Governs rental of property/assets between owner and tenant, setting rent, duration, and usage rules.
  • Example: Apartment lease for 1 year at $1,200/month.
• Employment Contract: Outlines terms of work between employer and employee, defining salary, role, and termination clauses.
  • Example: CEO contract with a 2-year term and severance terms.
• Partnership Agreement: Formalizes business partnership terms, including rights, profits, and duties, to prevent disputes among co-owners.
  • Example: Two founders agreeing to split profits 50/50.
• Franchise Agreement: Allows a party to operate under an established brand’s rules, expanding brands while controlling quality.
  • Example: McDonald’s franchisee paying royalties.
• Sales Contract: Documents the sale of goods/services, ensuring payment and delivery terms.
  • Example: Buying 100 laptops with a 30-day payment term.
• NDA (Non-Disclosure Agreement): Protects confidential information, preventing the sharing of trade secrets.
  • Example: Employee signing an NDA for tech patents.
• Service Contract: Covers service provision, such as consulting or repairs, defining scope, deadlines, and fees.
  • Example: Hiring a marketing agency for a 6-month campaign.
• Loan Agreement: Formalizes a loan’s terms, including amount, interest, and repayment, securing lender’s rights.
  • Example: Bank lending $50,000 with 5% annual interest.
• Licensing Agreement: Grants rights to use intellectual property (IP), monetizing IP, for example, software or patents.
  • Example: Microsoft licensing Windows to a PC maker.
• MOU (Memorandum of Understanding): Non-binding agreement to explore collaboration, establishing intent before formal deals.
  • Example: Two companies agreeing to discuss a joint venture.

Form of Contract

• Oral
• In writing (for many contracts this may be mandatory)
• Using electronic means
• Special requirements may be necessary

Contract Validity

• Null and void: The contract has never existed under the law.
  • The requirements to the making of the contract specified above have not been met (eg, no consideration in common law contract)
  • A contract against the public law or public order (eg, contract to kill someone)
  • An impossible contract (eg, a contract to send someone to space without any transport)
• Voidable: Contract is lawfully made but a party disadvantaged by it may claim it to be turned void or changed:
  • One party lacks legal capacity (in some systems may be null and void and in others – voidable)
  • Mistake by one or both parties
  • Misrepresentation and abuse
  • Duress

Conditions - Freedom of Contract

• The freedom of contract principle says that parties are generally free to agree on any conditions of the contract.
• Common limitations include:
  • The requirements to the validity should be met so the contract cannot contradict public law and public order.
  • The mandatory (essential) conditions must be included if established.

Conditions - Mandatory and Default

• Mandatory conditions must be included by the parties to prevent the contract being null and void, especially in civil law countries where civil codes often establish a set of mandatory conditions for certain contracts; in common law countries, such conditions may be established by the case law.
• Default conditions apply if the parties did not agree to change them.
  • The law provides for a set of “default rules”, especially in civil law countries, and parties are free to change them but if they forget about certain aspects of the contract, the default rules help to compensate for the gaps and misses.

Conditions - Performance and Liability

• Common law emphasizes good faith, and the party who awaits performance can claim damages right away.
• Civil law also emphasizes good faith, but the party who awaits performance can claim specific performance of the contractual obligation and damages can also be claimed.

Conditions - Termination

• Contracts can be terminated:
  • Because of its performance and/or expiration
  • By mutual agreement of the parties
  • By one party because of the breach of the contract by another party
  • By one party without other party’s default, also know as for convenience termination

Rights: Contract vs. Tort Law

• When someone’s rights are violated, the law provides two ways to hold the wrongdoer accountable:
  • Right from a Contract: The violated right is written in an agreement between parties.
    • Example: A tenant sues a landlord for not fixing a leaking roof as promised in the lease.
  • Right NOT from a Contract: The violated right exists even without a contract.
    • Example: A pedestrian hit by a reckless driver sues for injuries, even without a contract.
• Key Difference:
  • Contract-Based Claims: Breach of a specific promise, like unpaid wages in an employment contract.
  • Tort Law Claims: Address harm from wrongdoing, even without a contract, like defamation or negligence.
• Contracts enforce agreed terms, while torts punish harmful behavior.

Rights from a Contract (Breach of Contract)

• When performance is impossible, damages are awarded unless there is force majeure.
  • Example: A wedding venue burns down before the event, so couple gets refund unless it was a hurricane.
• When performance is possible, demand performance and damages.
  • Example: A freelancer misses a project deadline, so client demands delivery and compensation for delays.

Rights NOT from a Contract (Tort Law)

• Fault-Based Liability requires a violation, fault, damage, and causation.
  • Example: A store owner forgets to salt icy stairs, so a customer slips and sues for medical bills.
• Strict Liability requires no fault, as the law assigns liability.
  • Example: A soda bottle explodes in your hand, so the manufacturer pays even if no negligence.