2 Contracts

Contract law and governing rules

Contract law addresses when promises are legally enforceable, what the parties agreed to do, and what remedies may follow if an obligation is not met. In the United States, most contract rules come from state common law. Article 2 of the Uniform Commercial Code (UCC), as adopted and sometimes amended by each state, generally governs sales of goods, so applicable rules can vary by jurisdiction.

Formation of an enforceable contract

A typical enforceable contract requires mutual assent, consideration, capacity, and a lawful purpose. A defect or defense may affect whether an agreement can be enforced, and the result depends on the facts and governing law.

Offer and acceptance

An offer is a sufficiently definite proposal that invites acceptance and signals willingness to be bound. Advertisements are often invitations to negotiate rather than offers, though context matters. An offer generally may be revoked before acceptance unless an option or another applicable rule makes it irrevocable.

Acceptance is assent in a manner invited or reasonably expected by the offeror. Under common law, acceptance generally must match the offer; a changed term is ordinarily a counteroffer. For sales of goods, UCC rules can allow a contract to form despite some differing terms. An order may be accepted by a promise to ship or by shipment.

Exchange and required form

Consideration is a bargained-for exchange of a promise, act, or forbearance. For example, a homeowner’s promise to pay in exchange for a painter’s promise to paint is consideration. A bare promise to make a gift usually is not. Courts generally do not require equal economic value, though extreme disparity may be evidence of another problem.

Promissory estoppel may allow enforcement without ordinary consideration when reasonable, foreseeable reliance makes enforcement necessary to avoid injustice. A court may limit relief to the loss caused by reliance.

Some agreements must satisfy a statute of frauds, which requires a signed writing or other qualifying record for specified kinds of contracts. Common examples include many land-sale agreements and, under the UCC, sales of goods above the applicable statutory threshold. Requirements and exceptions vary by state.

Defenses to enforcement

Recognized defenses may make an agreement void, voidable, or unenforceable. Some defects make an agreement void, while others give an affected party the option to avoid it; availability and effect depend on the facts and governing law.

Common defenses include:

• Lack of capacity: A person without legally sufficient capacity, such as a minor in many circumstances, may have a right to avoid the agreement, subject to exceptions.

• Fraud or material misrepresentation: A party may seek to avoid a contract induced by a material false statement, subject to applicable rules on reliance and remedy.

• Duress or undue influence: Improper pressure may undermine voluntary assent.

• Mistake: A material shared mistake about a basic assumption may justify avoiding a contract in some circumstances. Relief for a one-sided mistake is generally narrower.

• Illegality or unconscionability: A court may refuse to enforce an agreement or term that violates law or is sufficiently unfair under the governing jurisdiction’s test.

Interpreting contract terms

Courts seek the parties’ objectively expressed agreement. They read the document as a whole and give its words their ordinary meaning in context. If a term is reasonably open to more than one meaning, a court may consider relevant evidence outside the writing, such as the parties’ conduct or established trade practices, depending on governing law.

The parol evidence rule limits the use of prior or contemporaneous statements to contradict or vary a writing that the parties intended as their final expression of the agreement. It does not categorically exclude all outside evidence: such evidence may, for example, be allowed to interpret an ambiguity or establish a recognized defense.

Under UCC § 2-202, a final written sales agreement may be explained or supplemented by course of performance, course of dealing, or usage of trade, subject to the statute’s limits.

Performance, conditions, and breach

Parties must perform their promises and satisfy applicable conditions. A condition is an event specified in the contract that triggers, suspends, or discharges a duty. A party may be excused from performance when a recognized doctrine, such as impossibility or frustration of purpose, applies; the test is jurisdiction-specific.

Under common law, substantial performance may count as sufficient when a party has fulfilled the contract’s central purpose despite a minor defect, though the other party may still recover for that defect. For example, a contractor who completes a house but uses a slightly different, equivalent pipe may have substantially performed. Abandoning the project halfway through may instead be a material breach, serious enough to undermine the bargain and potentially excuse the other party’s remaining performance.

For sales of goods, the UCC generally gives a buyer a right to reject a nonconforming delivery, subject to rules on notice, cure, acceptance, and other qualifications. A party’s clear advance statement that it will not perform may amount to anticipatory repudiation, allowing the other party to pursue remedies under applicable law.

Remedies for breach

Contract remedies usually aim to protect the nonbreaching party’s expectation interest: the value of the promised performance, less costs saved, plus qualifying losses. For example, if a seller fails to deliver goods and the buyer reasonably pays more to obtain replacements, the reasonable price difference may be part of the buyer’s damages.

Consequential damages may also be available when the loss was sufficiently foreseeable at contracting and can be proven. The injured party generally must take reasonable steps to limit avoidable losses.

Other possible remedies include:

• Reliance damages: Reasonable expenditures made because of the promise, often used when expectation damages are difficult to establish.

• Restitution: Return or payment for a benefit conferred, aimed at preventing unjust enrichment.

• Specific performance: A court order to perform, generally reserved for circumstances where money damages are inadequate, such as some disputes over unique property.

• Liquidated damages: An amount set by the contract in advance, enforceable when permitted by law. A provision functioning as an unlawful penalty may be rejected.

Punitive damages are generally unavailable for an ordinary breach of contract, although a separate legal claim or statute may produce a different result. The same loss cannot ordinarily be recovered twice.

A practical order of analysis

Analyze a contract by identifying the governing law and asking whether an enforceable agreement formed. Consider offer and acceptance, consideration, capacity, and legality; then assess any defense and interpret the terms in context. Determine whether performance was due, whether it occurred, and whether a breach or excuse applies. Finally, select a remedy that addresses proven loss without providing an improper windfall. State law and the exact contract terms can change the outcome.