A contract may be defined as a legally binding agreement or, in the words of Sir Frederick Pollock:
A promise or set of promises which the law will enforce
The agreement will create rights and obligations that may be enforced in the courts. The normal method of enforcement is an action for damages for breach of contract, though in some cases the court may order performance by the party in default.
Contracts may be divided into two broad classes:
- 1. Contracts by deed
- A deed is a formal legal document signed, witnessed and delivered to effect a conveyance or transfer of property or to create a legal obligation or contract.
- 2. Simple contracts
- Contracts which are not deeds are known as simple contracts. They are informal contracts and may be made in any way – in writing, orally or they may be implied from conduct.
Another way of classifying contracts is according to whether they are “bilateral” or “unilateral”.
- 1. Bilateral contracts
- A bilateral contract is one where a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render them both enforceable. Thus in a contract for the sale of goods, the buyer promises to pay the price and the seller promises to deliver the goods.
- 2. Unilateral contracts
- A unilateral contract is one where one party promises to do something in return for an act of the other party, as opposed to a promise, eg, where X promises a reward to anyone who will find his lost wallet. The essence of the unilateral contract is that only one party, X, is bound to do anything. No one is bound to search for the lost wallet, but if Y, having seen the offer, recovers the wallet and returns it, he/she is entitled to the reward.
The essential elements of a contract are:
- 1. Agreement
- An agreement is formed when one party accepts the offer of another and involves a “meeting of the minds”.
- 2. Consideration
- Both parties must have provided consideration, ie, each side must promise to give or do something for the other.
- 3. Intention to create legal relations
- The parties must have intended their agreement to have legal consequences. The law will not concern itself with purely domestic or social agreements.
- In some cases, certain formalities (that is, writing) must be observed.
- 5. Capacity
- The parties must be legally capable of entering into a contract.
- 6. Consent
- 7. Legality
- The purpose of the agreement must not be illegal or contrary to public policy.
A contract which possesses all these requirements is said to be valid. The absence of an essential element will render the contract either void, voidable or unenforceable (as to which see below).
In addition, a contract consists of various terms, both express and implied. A term may be inserted into the contract to exclude or limit one party’s liability (the so-called “small print”). A term may also be regarded as unfair. A contract may be invalidated by a mistake and where the contract has been induced by misrepresentation the innocent party may have the right to set it aside. As a general rule, third parties have no rights under a contract but there are exceptions to the doctrine of privity. There are different ways of discharging a contract and remedies are available for breach of contract at common law and in equity.
- 1. Void contracts
- A “void contract” is one where the whole transaction is regarded as a nullity. It means that at no time has there been a contract between the parties. Any goods or money obtained under the agreement must be returned. Where items have been resold to a third party, they may be recovered by the original owner.
- 2. Voidable contracts
- A contract which is voidable operates in every respect as a valid contract unless and until one of the parties takes steps to avoid it. Anything obtained under the contract must be returned, insofar as this is possible. If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them.
- 3. Unenforceable contracts
- An unenforceable contract is a valid contract but it cannot be enforced in the courts if one of the parties refuses to carry out its terms. Items received under the contract cannot generally be reclaimed.
- 48 For more on the difference between conventional and nonconventional speech acts,
- see, for example, KENT BACH & ROBERT M. HARNISH, LINGUISTIC COMMUNICATION AND
- SPEECH ACTS 120–34 (1979), and P.F. Strawson, Intention and Convention in Speech Acts,
- 73 PHIL. REV. 439, 441 (1964).
Legal rules defining the ways in which valid contracts or wills or marriages are made provide individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law.
The answer requires a more general account of the difference between power-conferring and duty-imposing rules and of how we identify a given law as of one or the other type. The function of a duty-imposing law is to give persons subject to it a new reason to act in accordance with the rule—in Hart’s words, “whether they wish to or not. The function of a power-conferring law, by contrast, is to enable persons to determine, within bounds, what the law is or requires. As Joseph Raz puts it, power-conferring laws attach legal consequences to certain acts because “it is desirable to enable people to affect norms and their application in such a way if they desire to do so for this purpose. These different functions impose different design requirements on duty-imposing and on power-conferring rules.
Evidence that power-conferring laws anticipate and facilitate their purposive use can often be found in rules that condition an act’s legal consequences on evidence of the actor’s legal purpose. Many power-conferring laws require for their exercise the performance of conventional legal speech acts or legal formalities. Legislators use ritualized procedures to vote, judges use special words and writings to announce holdings, a will must be witnessed and delivered, a power of attorney must be in a proscribed form. Such conventional speech acts function, among other things, to ensure that the legal actor who performs them expects and intends the relevant legal consequences. Other power-conferring laws require other sorts of evidence of legal purpose. Thus the effectiveness of a deed depends on an expression of the right legal intention, “which is found upon examination of the whole instrument to be plainly though unethically expressed. Along similar lines, the Office of Legal Counsel has opined that the effectiveness of a presidential order does not depend on “the form or caption of the written document” but on the substance of what is said. Here a requirement that the actor perform an act with the right meaning—that she express the right illocutionary intent—ensures, inter alia, that she intends the legal consequences of her act.
Contract law contains no such rules. With the decline of the seal, there are no longer any purely formal conditions of contractual validity. In fact, as a result of the rules that govern implied-in-fact contracts, acceptance by performance, battles of the forms, the use of course of performance evidence, and the like, parties need not even express their agreement in so many words. Nor do courts commonly look for other evidence of the parties’ legal purpose. The Second Restatement of Contracts provides that “[n]either real nor apparent intention that a promise be legally binding is essential to the formation of a contract,” and the comments imagine a contract being formed despite both parties’ mistaken belief that their agreement is not legally enforceable. And while the black-letter rule in England states that “[a]n agreement, though supported by consideration, is not binding as a contract if it was made without any intention of creating legal relations, English courts adopt in most cases so strong a presumption of such intent that Atiyah concludes it is “more realistic to say that no positive intention to enter into legal relations needs to be shown, and that ‘a deliberate promise seriously made is enforced irrespective of the promisor’s views regarding his legal liability.
law’s sole function.
One way to try to rescue a power-conferring picture of contract is to argue that the consideration requirement is a validity condition of this sort. Thus Lon Fuller’s suggestion that consideration is a “natural formality, separating out for legal enforcement agreements in which “a legal transaction was intended. But this is hardly the only, or the most obvious, interpretation of the consideration rule. Fuller himself observed that exchange also marks agreements “of sufficient importance to our social and economic order to justify the expenditure of the time and energy necessary” for enforcement. Other explanations of consideration include the special moral qualities of exchange relationships, doubts about judicial competence to assess when to enforce gratuitous promises, and the argument that the rule is a historical anomaly, a myth created by Holmes and Williston that does not accurately describe how contract law functions. The consideration requirement provides, at best, equivocal support for an interpretation of contract law on the model of most power-conferring laws. More generally, it is simply not obvious that the conditions of contractual validity are designed to sort for legal purpose.
There is, however, another way to understand contract as a legal power, one that suggests an important difference between contract law and most power-conferring laws, and which expands our understanding of normative powers in general. The core thought is that it is possible for a law to anticipate and enable its purposive use without conditioning the legal effect of a person’s actions on evidence of her legal purpose. I suggest reserving the term “power-conferring” for laws that include validity conditions that sort for legal purpose, such as those discussed in the previous paragraphs. I use the term “compound law” for laws that do not condition the legal consequences of an act on evidence of the actor’s legal purpose but are structured in a way that both ensures that a significant proportion of actors subject to them are likely to have such a purpose and recognizes and facilitates that purposive use. As distinguished from power-conferring laws, the structure of compound laws suggests that they function both to impose duties and to create powers.
The analysis in the last section is not meant to endorse everything Raz has to say about contract law. I have doubts about the intelligibility of his claim that the law holds parties to their agreements in part to support or protect the social practice of undertaking and performing voluntary obligations.177 But the goal of this Article has not been to produce a general theory of contract law. Rather, the aim has been to distinguish two common pictures of contract law’s function, to analyze the empirical basis of each, and to suggest a third, underappreciated possibility. The two common pictures are contract as power and contract as duty. The third depicts contract law as a compound rule, both duty and power. Regardless of whether the above analysis definitively establishes the correctness of one or another picture (I am obviously attached to the compound picture), it at least explains why the duty-power distinction deserves a place at the center of contract theory. First, the legal relationship coincides with a constellation of similarly structured extralegal practices—such as agreement, exchange, cooperation, and promise—which suggests the duty-imposing picture. Second, with the decline of the seal, contracts are not marked out by formal or other conditions of validity that unequivocally sort for a legal purpose, rules that would clearly identify contract law as power conferring.
- FRIED, supra note 2, at 7–27; Markovits, supra note 98, at 1448, 1463; Shiffrin,
- Supra Note 134, at 749–53.
- 176 See supra notes 61–67 and accompanying text.
- And as I argued in Part III, even where we have a reason to expect speakers to want to be held legally liable for their misrepresentations, the law of fraud is not structured in a Way that manifests a legal expectation of the same. See supra notes 102–07 and accompanying Text.
- Shiffrin, supra note 134, at 709.
- David Charny, The New Formalism in Contract, 66 U. CHI. L. REV. 842 (1999)
- (discussing return to formalism among many contracts scholars); Schwartz & Scott.v