The Importance of Contract Law.docx
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TheImportanceofContractLaw
TheImportanceofContractLaw
Contractlawdealswith,amongotherthings,theformationandkeepingofpromises.Thelawencouragescompetentpartiestoformcontractsforlawfulobjectives.Noaspectofmodernlifeisentirelyfreeofcontractualrelationships.Indeed,eventheordinaryconsumerinhisdailyactivitiesacquiresrightsandobligationsbasedoncontractlaw.Youacquirerightsandobligations,forexample,whenyouborrowmoneytomakeapurchaseorwhenyoubuyahouse.Contractlawisdesignedtoprovidestabilityandpredictabilityaswellascertainty,forbothbuyersandsellers.
Thestudyofcontractlawisimportantbecauseitisthebasisforallcommerciallaw.Thelawdescribedinthefollowingchaptersisthebasisformuchofthelawinmorespecializedareas,suchasthesaleofgoods.InChapter1,youwillbeintroducedtothenatureandterminologyofcontracts.Asyouwillsay,therearemanytypesofcontracts.Therearealsobasicrequirementsthatmustbemetbeforeavalidcontractcomesintoexistence.Thesebasicrequirementsarediscussedindetailinchapters2through6.Sometimes,athirdparty(onewhoisnotadirectpartytothecontract)acquiresrightsunderthecontract.ThirdpartyrightsarecoveredinChapter7.Partiestoacontractneedtoknowwhentheirdutiesunderthecontracthavebeenfulfilled.TheperformanceanddischargeofcontractualdutiesarecoveredinChapter8.Finally,youwilllearninChapter9whatremediesareavailabletothenonbreachingpartywhentheotherpartybreachesthecontract.
Chapter1NatureandTerminology
1.1Introduction
Contractlawshowswhatpromisesorcommitmentsoursocietybelievesshouldbelegallybinding.Itshowswhatexcusesoursocietywillacceptforthebreakingofsuchpromises.Anditshowswhatkindsofpromiseswillbeconsideredasbeingagainstpublicpolicyandthereforelegallyvoid.
Acontractmaybedefinedasapromiseenforceableatlaw.Apromiseisanundertakingthatsomethingwillorwillnothappeninthefuture.Thus,acontractmaybeformedwhentwoormorepartieseachpromisetoperformorrefrainfromperformingsomeactnoworinthefuture.Thepromisesneednotbeinwritingtoconstituteacontract,althoughsomecontractsmustbeinwritingtobeenforceable.Onthecontract’sbreach(abreachofcontractoccurswhenacontractualpromisesisnotfulfilled),thebreachingpartymaybesubjecttosanctions.Thesesanctionsmayincludeapaymentofmoney(damages)tothenonbreachingpartyforthefailuretoperform.Undersuchcircumstances,thebreachingpartymayberequiredtorendertheperformancepromisedinthecontract.
Acontractualrelationshipinvolvesthegivingofapromiseinexchangeforeitheranactorantherpromise.Allcontractualrelationshipsthusinvolvepromises.Allpromises,however,donotestablishcontractualrelationships.Forexample,ifyourfriendpromisestogotothemovieswithyouandthendecidesnottogo,youcannotsueyourfriendforbreachofcontract.Althoughpromiseswereexchanged—togotothemoviestogether—thelegalsystemwillnotexpendresourcestoenforcethesepromises.Inessence,contractlawreflectssociety’sdeterminationofthekindsofpromisesthatshouldbelegallyenforced.
Theuseofcontractprinciplestogoverntherelationshipsofthosewhomakepromisestooneanotherdatesbackthousandsofyears.Earlyinhistorytheimportanceofcontractswasrecognizedandgivenlegaleffect.Thefollowingchapterswillexplainhowcontractsareformed,howtheyaredischarged,andwhathappenswhentheyarenotperformed.Therulesrelatingtotheformation,discharge,andbreachofenforceablepromisesarecalledthelawofcontract.
Societyasweknowittodaycouldnotexistwithoutthelawofcontracts.Thefoundationforalmostallcommercialactivityisthecontract.Thepurchaseofgoods,suchasautomobiles,isgovernedbyasalescontract;thehiringofpeopletoworkforustomakerepairs,byservicecontracts;thesharingofrisksonourproperty,byinsurancecontracts.Inshort,wecouldnotorderourdailyactivitieswithoutcontracts.
Contractlawisbasedonthecommonlawandgovernsallcontractsexceptwhenthecommonlawofcontractshasbeenmodifiedorreplacedbystatutorylaworadministrativeagencyregulations.Contractrelatingtoservices,realestate,employment,insurance,andsoongenerallyaregovernedbygeneralcontractlaw.Allcontractsforthesaleofgoods,however,aregovernedbystatutorylawintheUnitedStates–particularlytheUniformCommercialCode(UCC)—totheextentthatstatutorylawhasmodifiedorreplacedgeneralcontractlaw.Inthediscussionofgeneralcontractlawinthisunit,weindicatedtheareasinwhichtheUCChassignificantlyalteredcommonlawcontractprinciples.
ContractsfortheinternationalsaleofgoodsbetweenfirmsorindividualslocatedindifferentcountriesaregovernedbytheUnitedNationsConventiononContractfortheInternationalSaleofGoods(CISG,联合国国际商品买卖公约).ChineselawrelatingtothesaleofgoodsarecontainedinChapter2(ContractforSaleofGoods)ofContractLawofthePeople’sRepublicofChina(中华任命共和国合同法,第二章,买卖合同).
1.2TheFunctionofContract
Contractlawisnecessarytoensurecompliancewithapromiseortoentitleanonbreachingpartytosomeformofreliefwhenacontractisbreached.Byprovidingproceduresforenforcingprivateagreements,contractlawprovidesanessentialconditionfortheexistenceofamarketeconomy.Withoutalegalframeworkwithinwhichtoplan,businessmenwouldbeabletorelyonlyonthegoodfaithofothers.Dutyandgoodfaithareusuallysufficient,andmostcontractualpromisesarekeptsimplybecausekeepingthemisinthemutualself-interestofthepromiserandthepromisee.Butwhenpricechangesoradverseeconomicfactorsmakeitcostlyforoneofthepartiestocomplywithapromise,dutyorgoodfaithalonemaynotbeenough.
Contractlawprovidesamajorpartoffoundationonwhichmorespecializedareasofthelawhavebeenbuilt.Abasicunderstandingoftheprinciplesgoverningcontractsfacilitatesanunderstandingofthesalesofgoods;inthetransferoffundsbycheck,draft,note,orelectronicmeans;inrelationsbetweendebtorsandcreditors;inrelationsamongemployers,employees,andagents;inthecreation,operation,andterminationofpartnershipsandcorporations;intheregulationoftradeandmonopolies;andintransfersofpropertyotherthangoodsorbymeansotherthansalesorbetweenpartieswhoarenotmerchants.
1.3FreedomofContractandFreedomfromContract
Asageneralrule,thelawrecognizeseveryone’sabilitytoenterfreelyintocontractualarrangements.Thisrecognitioniscalledfreedomofcontract.Butasthecharacterofinstitutionsandsocietychanges,thefunctionsofcontractlawanditsenforcementmustalsochange,and,infact,therighttoapersontoenterintoacontractintheUnitedStatesisnodifferentthantherightundercurrentChineselaw.
Suchchangesincontractlawcanbeperceivedtodayinthefactthatcertaintypesofagreementsarenolongerconsideredvalid.Forexample,illegalbargains,betweenonepartywithagreatamountofbargainingpowerandanotherwithlittlepoweraregenerallynotenforced.Inaddition,certaincontractswithconsumers,aswellascertainclauseswithinthosecontracts,arenotenforceable,becausetheyhavecometobeconsideredincompatiblewithpublicpolicy,fairness,andjustice.Thelawofcontractsisbroadeningtoincludenewcontrolsonthemannerofcontractingandontheallowabletermsofagreements.Thesecontrolsaremeanttoprovidefreedomfromcontractforcertainmembersofsocietywhoheretoforemayevenhavebeenforcedintomakingcontractsunfavorabletothemselves.
1.4BasicRequirementsofaContract
Themanytopicsthatwillbediscussedinthisunitoncontractsrequireanunderstandingofthebasicrequirementsofacontractandtheprocessesbywhichacontractiscreated.Thefollowinglistbrieflydescribestheserequirements.Theywillbeexplainedmorefullyinsubsequentchapters.
1.Agreement.Anagreementincludesavalidofferandavalidacceptance.Onepartymustvoluntarilyoffertoenterintoalegalagreement,andanotherpartymustvoluntarilyacceptthetermsoftheoffer.
2.Consideration.Generally,considerationistheinducement(reason,cause,motiveorprice)toacontract.Anypromisesmadebythepartiesmustbesupportedbylegallysufficientandbargainedforconsideration.
3.ContractualCapacity.Bothpartiesenteringintothecontractmusthavethecontractualcapacitytodoso;theymustberecognizedbythelawaspossessingcharacteristicsthatqualifythemascompetentparties.
4.Legality.Thecontractmustbemadetoaccomplishsomegoalthatislegalandnotagainstpublicpolicy.
Thesefourrequirementsconstitutewhatareformallyknownastheelementsofacontract.Alsoimportantarepossibledefenses(thatis,reasonswhyapartyshouldnotbeawardedwhatheseeksinanactionorsuit)totheformationorenforcementofacontract.Theseincludingthefollowing:
1.GenuinenessofAssent.Apparentconsentofbothpartiesmustbegenuine.
2.Form.Thecontractmustbeinwhateverformthelawrequiressuchasinwriting—ifanyspecialformisrequired.
1.5ObjectiveTheoryofContract
Theintentorapparentintenttoenterintoacontractisofprimeimportanceintheformationofthecontract.Thisintentisdeterminedbywhatiscalledtheobjectivetheoryofcontracts,notbythepersonalorsubjectiveintent,orbelief,ofaparty.Thetheoryisthataparty’sintentiontoenterintoacontractisjudgedbyoutward,objectivefactsasthey