Contract law forms the basis of nearly all commercial interactions in modern society. Although many people do not realize it, they enter into several contracts each day.

Contracts include the obvious examples, such as leases, rental agreements, employment contracts, and real estate sales, but also include the purchase of a soda from the neighborhood convenience store. It would be very difficult to imagine a modern society that was not dominated by contracts in the way that the United States and much of the world is currently.

Contract law takes its basis from the Latin phrase pacta sunt servanda, which means “agreements are to be kept.” The understanding of contract law that is held in the United States is based on the British common law system and has been modified by the Uniform Commercial Code.

 

Contract law places obligations on all parties that enter into contracts which are mutually binding. In most circumstances, these contracts cannot be broken without the breaking party being required to provide compensation to the other party. To learn more about the history of contract law, please read this link.

Contract law is based on a common law heritage inherited by America from Great Britain. Under the common law system, the laws governing contracts were not codified as they are today. Instead, the governance of contracts was based on previous rulings by the justices. Contract law is based in both the common law and equity court systems of England.

 

As a result, American contract law is concerned both with ensuring that contracts are enforced when the fairest course of action is to enforce the contract, but when it would place an unreasonable burden on one of the parties, the courts often abridge contracts. The preference of non-interference in contractual relationships is found in the Contract Clause of the Constitution.

The UCC, or Uniform Commercial Code, is a national attempt to streamline the laws governing commerce across the United States. It consists of 11 Articles. Ten of these Articles have been adopted in every State. Louisiana is the only State that has not adopted every Article.

Although the UCC is not the specific law in any jurisdiction, it does provide the basis for each State’s commercial laws. Each State adjusts the organization of the Code to adhere to its particular tradition, but the essential elements remain the same from State to State. For more information on the UCC, please click the link.

Contract law exists to record the obligations each party to a contract has to the other party. Contracts also are meant to protect the rights of both parties to the contract. In addition to laying out the responsibilities of the contracted parties, contract laws also assign each party with rights. Contract laws also lay out penalties in the event a contractual obligation is not upheld. To learn more about the fundamentals of contract law, please click the link.

The objective theory of contracts states that contracts will only be enforceable if a reasonable observer watching contractual negotiations would believe the terms being laid out are fair.

This is an essential element of contract law because it serves a court examining a contract with a reasonable baseline against which to compare the terms of a contract. It allows an advertisement of ridiculous terms to not be considered a serious invitation to treat. For a more thorough examination of the theory please follow the link.

There are five common elements that must be present to form a legally enforceable contract. These elements are agreement (which constitutes offer and acceptance), consideration, the intention to be bound by the contract, the legal capacity to enter into a contract, and the formalization of the contract. It is also essential that the contract be for a legal purpose. For a more thorough examination of these aspects, click the link.

There are six different types of contract. These contract types constitute three different categories. There are bilateral and unilateral contracts. Formal and informal contracts form the next classification. The final category of contracts is express contracts and implied-in-fact contracts. Each type of contract can best be explained by following the comparisons found here.

When attempting to enforce a contract, the courts divide contracts into two broad categories of contracts. Valid contracts include enforceable contracts, voidable contracts, and unenforceable contracts. If a contract is not valid, it is considered a void contract.

A quasi-contract may be formed either through a statute that imposes contractual obligations between two parties or affords protections to circumstances that the Government finds needs the protection. For a more thorough examination of the ways in which contracts are enforced, follow the link.

When charged with interpreting contracts, the courts will usually attempt to interpret them in a manner that most clearly adheres to the original intentions of the parties at the time the contracts were formed. If the intentions of the contracting parties cannot be determined, the courts will attempt to base their interpretation on the fairest interpretation of the terms. 

In the event that evidence suggests that the party which drafted the terms of the contract left the wording intentionally vague, the courts will interpret the contract in a way most beneficial to the party which did not draft the contract. For an analysis of how the courts typically imbue meaning to the contracts before them, follow the link.

The legality of a contract can be attacked from several fronts by a litigant. A litigant may argue that a contract should be invalidated because it is a contract contrary to statute. A litigant may also claim that a contract they have entered into should be declared void or voidable because it is contrary to public policy.

At any point when a contract is before the court, the court can declare that a contract is illegal because it has been formed in order to engage in the commission an illegal act. If only a specific clause causes the contract to be illegal, and the clause can be stricken without fundamentally changing the contract, then the courts may enforce an existing severable clause or create one if it does not already exist.

The legality of a contract may also be disputed if a litigant claims that their assent was not genuine. There are several reasons that the courts may hold this to be an acceptable reason to rescind a contracts standing as valid. To examine the legal challenges that may be filed against a contract, please see the link.

The UCC, or Uniform Commercial Code, developed as an attempt to streamline business laws across different jurisdictions within the United States. The ten of the eleven Articles have been met with universal adoption.

The UCC was considered essential as a result of corporations engaging in interstate commerce more frequently throughout history. As interstate commerce proliferated, corporations complained about the fact that they were having to deal with what were sometimes radically different standards for completing a single commercial transaction. 

There are eleven Articles which comprise the Uniform Commercial Code. Article 1 of the UCC is known as the General Provisions of the UCC, and the other Articles are: Article 2, Sales; Article 2a, Leases; Article 3, Negotiable Instruments; Article 4, Bank Deposits; Article 4a, Funds Transfers; Article 5, Letters of Credit; Article 6, Bulk Transfers and Bulk Sales; Article 7, Warehouse Receipts, Bills of Lading and Other Documents of Title; Article 8, Investment Securities; and Article 9, Secured Transactions.

In 2003, Article 2 and Article 7 were modernized in a major revision, though the revisions to Article 2 have not been adopted by any states yet. Although Article 6 is considered obsolete by the National Conference of Commissioners on Uniform State Laws, it remains in effect in many jurisdictions.

Despite being present in one document, each Article of the UCC bears only the slightest connection to any other. Most Articles bear little relevance on the others. The exception is that each Article uses terms defined in Article 1, and Article 9 covers the paperwork required to support the intermediate Articles.

When a principal agent relationship is created based on an arrangement of a contract, the power of attorney rights are automatically conveyed to the agent. The power of attorney held by the agent, is clearly specified within the contract on how to act on behalf of the principal. The agent in this case may also be referred to as an attorney-in-fact. The term attorney-in-fact has been implemented to decipher between them and attorneys of the law. The fact is represented by the fiduciary duty labeled based on the facts of the contract arranged.

The power of attorney is usually stated separately from the contract. This is due to the fact that others are to be shown that the agent has the right to act on behalf of his or her principal. Although the general power of attorney may be either written or oral, most entities require it to be in writing. When an attorney-in-fact, the agent has to be completely loyal and honest with his or her principal. There are many examples of principal agent relationships within real property law. 

Power of attorney is granted to a real estate broker to place offers on a house, when the principal is buying; or when accepting an offer on behalf of the principal, when the principal is the seller. An attorney becomes the agent when overlooking and creating the various contracts required, since the principal may not have the knowledge to do so, hence he relies on the attorney while the attorney is being compensated.

General power of attorney can be granted in most circumstances. For each industry, there are specified state laws regarding the guidelines on the ethical and procedural behavior the power of attorney must abide by. Each agent within various industries, are specialized, that is the benefit of why principals seek agents to perform their duties based on credentials and competence. The power of attorney will automatically be revoked upon the death of the principal, or if he or she become mentally ill. 

The only exception to such revocation is if it is clearly stated within the contract, that the agent was granted a “durable” power of attorney, in which there is no revocation involved. Majority of the time, it is more than beneficial for the agent to have insurance when catering to fiduciary duties towards others. This is in case the principal feels as if there was a breach of contract in where the agent had performed acts which were not specifically stated within the contract. The outcome would be a lawsuit in which in the best interest of the agent is to obtain insurance covering his or her agent responsibilities.

Contract law is based in three different areas. The first, and rarer, basis for contract law is a specific statute governing a contract. The second area is the Uniform Commercial Code. The more pervasive foundation of contract law is common law. Common law is not written down or codified in any particular place. Common law is instead the tradition of law in a particular jurisdiction.

Common law as it reflects on contract law is influenced by the findings of British common law in effect at the time of the American Revolution in 1775. The common law decisions that have been handed down by individual states since British common law ceased to be the governing principle of the location and any relevant finding by a Federal judge.

Common law is a general term for any legal precedent that is taken from a judge’s individual ruling. The main statute which provides the foundation of English common law is based on the interpretation of the 1677 Statute of Frauds. It has been incorporated into the common law heritage of all fifty states in the United States at some point.

The main concern in a common law system regarding contracts is if one party is allowed to sue another person. Contract law in a common law system calls this idea the concept of privity of contract. In contract law, privity answers the question of whether an individual party has the legal standing to sue another party, as well as what the responsibility is of the party being sued. Privity in contract law says that rights cannot be extended to an individual who has not entered into the contract in question, and that a third party not involved in the contract has no liability for the terms of the contract.

Privity is a complicated but essential aspect in contract law in common law systems. The 1968 English case of Beswick v. Beswick examines the complications when two parties enter into a contract to provide for the welfare of a third party. The elderly Mr. Beswick and his nephew created a contract in which Mr. Beswick sold his company to his nephew. One of the terms of the contract was that Mr. Beswick’s would-be widow, Mrs. Beswick, be provided with stipend after Mr. Beswick’s death.

The nephew agreed to the contract, but after the death of his uncle declined to provide the stipend. The nephew claimed he was under no obligation to provide the stipend because his aunt had not been involved in the original contract. The court in this case upheld the nephew’s contention. However, because Mrs. Beswick was the administrix of his estate, and thus a party to the contract because the estate maintained an interest in the contract he was still compelled to uphold the terms of the contract.

Outside of circumstances such as that in Beswick v. Beswick where the third party assumes the interests in one of the original parties, the only other time a third party can become directly involved in a contract under the concept of privity inherent in a common law system is when one of the original parties to the contract has been acting on behalf of the third party from the beginning.

For instance, John is working for Joe. Joe and Jack enter into a contract. John would then be able to compel Jack to fulfill the contract because the duties in a contract can be transferred. If Joe were not working for John, John would be unable to force Jack to complete the contract.

The law states that one who is a principal has a fiduciary duty owed to him by an agent. The agent receives this duty by being appointed by the principal. The purpose behind the appointment is for the agent to carry out special tasks on hand in which they are specialized. 

In return for a fee, the agent must perform his duties to the best of his ability in order to satisfy not only his principal, but also the guidelines of the law. The law that describes the ethical standards and duties of an agent towards his principal are located within the State laws as well as previous court opinions. 

Power of Attorney is granted through the consent of the principal given to the agent. The agent has the ability to be able to perform various duties which do not conflict with the interests of the principal since there is a fiduciary obligation. The agent must abide specifically to the terms set forth in the contract. 

A corporation, also referred to as an invisible hand, lacks no legal capacity since authority is granted to buy and sell real property. A corporation formed through state statutes, therefore, has jurisdiction within just the state unless there is a location of the corporation within another state. Since a corporation is an entity whose operations are performed by representatives, the authority of the corporation entering the contract, is performed by the representatives themselves by signing and accepting the contract on hand. 

In order for business contracts to be validated and completed, the representatives must receive the consent of the board of directors. You will never see one representative having the authority to complete business contracts for a corporation, there are checks and balances involved due to the size and legal compliance of a corporation in deeming business contracts.

The reasoning behind such checks and balances in the contract process is due to the interest of the amount of shareholders, directors, employees, creditors, and the community that receives direct impact based on the direction a corporation leads toward. There are five defining factors of a corporation; each factor plays a unique role in the formation and advancement of the corporation. 

(1) It has separate legal characteristics, meaning representatives of the corporation may will not be subjected to anything against the corporation unless committed upon personal interests. 

(2) Limited liability of the stockholders, meaning if bankruptcy occurs, stockholders are limited to receive what they initially inputted. 

(3) Being able to transfer shares through the stock exchange, this allows shares to bought, sold, or traded on the consent of the stockholder. 

(4) There is a delegated group of managment, also known as the board of directors, whose consent is needed whenever initiating a task on behalf of the corporation. 

(5) Interest of shareholders, which gives shareholders a piece of ownership of the corporation through their investments.

When an investor owns shares within a corporation, there needs to be some sort of perk involved other than collecting dividends off their stocks, which allows for the development of a sense of importance. Shareholders not only have the rights to dividends declared by the company, but they also have voting rights when there is a survey figuring out which direction to head in or what improvements may be enacted. They also have the rights to any return of capital upon advancement or bankruptcy of the corporation itself.

All in all, a corporation consists of the highest value out of all the forms of business in our modern times. A corporation is the only form in which the representatives are completely protected from being liable on behalf of anything the corporation itself is charged with, even within the business contracts realm.

This is primarily due to the fact that there is not one sole decision maker within the firm that may enforce the contract. Each decision on behalf of the corporation involves a body of individuals which hold authority with, and against each other. This is to promote the checks and balances the corporate figures hold over each other.

Reasonable outside observer would adhere. The law of contract prohibits the enforcement of contracts that appear to be too good to be true. Business contract law serves to prevent outrageous claims from being enforced. This interpretation of the law of contracts is known as the Objective Theory of Contracts.

The Objective Theory prevents the interpretations of any law of contract from enforcing ridiculously out-sized claims in advertisements as the offer of a contract. The most famous example of this in business contract law is the Pepsi Harrier Jet case. In a 1995 TV commercial Pepsi offered a Harrier jet as a reward for its Pepsi points customer give away. 

The ad said that the jet could be obtained for 7 million points. While the main method of obtaining Pepsi points was to drink Pepsi brand soda and redeem points from bottle caps, the company also allowed points to be purchased for ten cents each. John Leonard thought he saw a brilliant business opportunity.

The normal cost to obtain a Harrier jet was in excess of $23 million dollars. If Leonard bought all the points he would have needed to redeem for the jet it would cost him just $700,000. After raising money from friends and family, Leonard bought 7 million Pepsi points. 

Attempting to enforce what he thought was a valid law of contract, he sent the 7 million points he had purchased, as well as 15 Points he had obtained from other means, and an order form on which he demanded that Pepsi supply him with a Harrier jet.

In response, the company wrote him a letter giving him free coupons and a letter which claimed that business contract law did not oblige the company to provide the jet because it was obviously an outlandish claim, meant to be humorous and entertaining. Leonard took Pepsi to court, claiming that the advertisement of a Harrier jet for the 7 million Pepsi points he had purchased was a valid offer. 

Leonard said that when Pepsi did not reward him with the jet it had violated the law of contract. He claimed that by mailing in the points he had accepted their offer, the 7 million points were his consideration, and that the jet constituted Pepsi’s consideration. 

In rejecting Leonard’s claim, the judge laid out the Objective Theory of Contracts succinctly. The judge ruled that business contract law had not been violated because “no objective person” could have believed in good faith that the offer was serious. 

Due to the outrageous nature of the advertisement, the law of contract was determined to not have been violated. Business contract law is bound by a reasonable person test, that is, would a reasonable person examining the contract determine that the terms of the contract were realistic.