The rules governing contracts vary between jurisdictions. In the majority of English-speaking countries, the rules are derived from
English contract law which emerged as a result of precedents established by various courts in England over the centuries. Meanwhile,
civil law jurisdictions generally derive their contract law from
Roman law, although there are differences between
German contract law, legal systems inspired by the
Napoleonic Code or the
Civil Code of Lower Canada (e.g.
Québec and
Saint Lucia), and jurisdictions following
Roman-Dutch law (e.g.
Indonesia and
Suriname) or a mixture of Roman-Dutch law and English common law (e.g.
South Africa and neighbouring countries).
Formation In
common law jurisdictions, the formation of a contract generally requires an
offer, acceptance,
consideration, and
mutual intent to be bound. The concept of contract law as a distinct area of law in common law jurisdictions originated with the now-defunct writ of
assumpsit, which was originally a
tort action based on reliance. Although verbal contracts are generally binding in most common law jurisdictions, some types of contracts may require
formalities such as being in writing or by
deed. A contract cannot be formed without assent of the two parties to be bound by its terms. Normally this is by written
signature (which may include an electronic signature), but the assent may also be oral or by conduct. Assent may be given by an
agent for a party. Remedies for
breach of contract include damages (monetary compensation for loss) and, for serious breaches only, cancellation.
Specific performance and
injunction may also be available if damages are insufficient.
Offer, acceptance, and invitation to treat In order for a legally enforceable contract to be formed, the parties must reach mutual assent (also called a
meeting of the minds). This is typically reached through an offer and an acceptance which does not vary the offer's terms, which is known as the "
mirror image rule". An offer is defined as a promise that is dependent on a certain act, promise, or forbearance given in exchange for the initial promise. An acceptance is simply the assent of the other contracting party or parties to the terms stipulated in the contract. As an offer states the offeror's willingness to be bound to the terms proposed therein, a purported acceptance that varies the terms of an offer is not an acceptance but a counteroffer and hence a rejection of the original offer. The principle of offer and acceptance has been codified under the
Indian Contract Act, 1872. In determining if a meeting of the minds has occurred, the intention of contracting parties is interpreted
objectively from the perspective of a
reasonable person. The "objective" approach towards contractual intent was first used in the English case of
Smith v Hughes in 1871. Where an offer specifies a particular mode of acceptance, only acceptance communicated via that method will be valid. Contracts may be
bilateral or
unilateral. A bilateral contract is an agreement in which each of the parties to the contract makes a
promise or set of promises to each other. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property. Bilateral contracts commonly take place in the daily flow of
commercial transactions. Less common are unilateral contracts, in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. On the other hand, advertisements which promise bargains are generally regarded not as offers for unilateral contracts but merely "invitations to treat". Some have criticised the categorisation of contracts into bilateral and unilateral ones. For example, the High Court of Australia stated that the term unilateral contract is "unscientific and misleading". In certain circumstances, an
implied contract may be created. A contract is
implied in fact if the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, if a patient refuses to pay after being examined by a doctor, the patient has breached a contract implied in fact. A contract which is
implied in law is sometimes called a
quasi-contract. Such contracts are means for
courts to remedy situations in which one party would be
unjustly enriched were he or she not required to compensate the other.
Quantum meruit claims are an example. Where something is advertised in a newspaper or on a poster, the advertisement will not normally constitute an offer but will instead be an
invitation to treat, an indication that one or both parties are prepared to negotiate a deal. An exception arises if the advertisement makes a unilateral promise, such as the offer of a reward, as in the case of
Carlill v Carbolic Smoke Ball Co, decided in
nineteenth-century England. The company, a pharmaceutical manufacturer, advertised a smoke ball that would, if sniffed "three times daily for two weeks", prevent users from catching the
flu. If it failed to do so, the company promised to pay the user
£100, adding that they had "deposited £1,000 in the Alliance Bank to show [their] sincerity in the matter". When the company was sued for the money, they argued the advert should not have been taken as a serious,
legally binding offer but a
puff. The
Court of Appeal held that it would appear to a
reasonable man that Carbolic had made a serious offer and determined that the reward was a contractual promise. As decided in the case of
Pharmaceutical Society of Great Britain v Boots Cash Chemists, an offer that is made in response to an invitation to treat, without any negotiation or explicit modification of terms, is presumed to incorporate the terms of the invitation to treat.
Consideration In contract law, consideration refers to something of value which is given in exchange for the fulfilment of a promise. In
Dunlop v. Selfridge,
Lord Dunedin described consideration "the price for which the promise of the other is bought". Consideration can take multiple forms and includes both benefits to the promisor and detriments to the promisee. Forbearance to act, for example, can constitute valid consideration, but only if a legal right is surrendered in the process. Common law jurisdictions require
consideration for a simple contract to be binding, but allow contracts by deed to not require consideration. Similarly, under the
Uniform Commercial Code, firm offers in most American jurisdictions are valid without consideration if signed by the offeror.
Rules applicable to consideration Consideration must be lawful for a contract to be binding. Applicable rules in determining if consideration is lawful exist both in case law and in the codes of some common law jurisdictions. The general principles of valid consideration in the common law tradition are that: • Consideration must be requested for. • Consideration must come from the promisee. • Consideration cannot have already occurred. It must be performed either at or after the formation of contract. • Consideration cannot be a pre-existing legal or contractual obligation. • Consideration need not be of the same value as the other party's promise. For example, a
peppercorn in contract law describes a very small and inadequate consideration. • Consideration must be legal i.e., not prohibited by the law. The insufficiency of past consideration is related to the
pre-existing duty rule. For example, in the early English case of
Eastwood v. Kenyon [1840], the guardian of a young girl took out a loan to educate her. After she was married, her husband promised to pay the debt but the loan was determined to be past consideration. In the early English case of
Stilk v. Myrick [1809], a captain promised to divide the wages of two deserters among the remaining crew if they agreed to sail home short-handed; however, this promise was found unenforceable as the crew were already contracted to sail the ship. The pre-existing duty rule also extends to general legal duties; for example, a promise to refrain from committing a tort or crime is not sufficient. Some jurisdictions have modified the English principle or adopted new ones. For example, in the
Indian Contract Act, 1872, past consideration constitutes valid consideration, and that consideration may be from any person even if not the promisee. The Indian Contract Act also codifies examples of when consideration is invalid, for example when it involves marriage or the provision of a public office.
Criticism The primary criticism of the doctrine of consideration is that it is purely a formality that merely serves to complicate commerce and create legal uncertainty by opening up otherwise simple contracts to scrutiny as to whether the consideration purportedly tendered satisfies the requirements of the law. While the purpose of the doctrine was ostensibly to protect parties seeking to void oppressive contracts, this is currently accomplished through the use of a sophisticated variety of
defences available to the party seeking to void a contract. In practice, the doctrine of consideration has resulted in a phenomenon similar to that of
Ḥiyal in Islamic contracts, whereby parties to a contract use
technicalities to satisfy requirements while in fact circumventing them in practice. Typically, this is in the form of
"peppercorn" consideration, i.e. consideration that is negligible but still satisfies the requirements of law. The doctrine of consideration has been expressly rejected by the
UNIDROIT Principles of International Commercial Contracts on the grounds that it yields uncertainty and unnecessary litigation, thereby hindering international trade.
Written and oral contracts A contract is often evidenced in writing or by
deed. The general rule is that a person who signs a contractual document will be bound by the terms in that document. This rule is referred to as the rule in ''
L'Estrange v Graucob or the "signature rule". This rule was approved by the High Court of Australia in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd''. The rule typically binds a signatory to a contract regardless of whether they have actually read it, However, defences such as duress or unconscionability may enable the signer to avoid the obligation. Further, reasonable notice of a contract's terms must be given to the other party prior to their entry into the contract. Written contracts have typically been preferred in
common law legal systems. In 1677 England passed the
Statute of Frauds which influenced similar
statute of frauds laws in the United States and other countries such as Australia. In general, the
Uniform Commercial Code as adopted in the United States requires a written contract for tangible product sales in excess of $500, and for real estate contracts to be written. If the contract is not required by law to be written, an oral contract is generally valid and legally binding. The United Kingdom has since replaced the original Statute of Frauds, but written contracts are still required for various circumstances such as land (through the
Law of Property Act 1925). Apart from using a written document, a valid contract may generally be made orally or even by conduct. An
oral contract may also be called a parol contract or a verbal contract, with "verbal" meaning "spoken" rather than "in words", an established usage in
British English with regards to contracts and agreements, and common although somewhat deprecated as "loose" in
American English. An unwritten, unspoken contract, also known as "a contract implied by the acts of the parties", which can be legally implied either
from the facts or
as required in law. Implied-in-fact contracts are real contracts under which parties receive the "benefit of the bargain". However, contracts implied in law are also known as quasi-contracts, and the remedy is
quantum meruit, the fair market value of goods or services rendered.
Certainty, completeness, and intention of parties In commercial agreements it is presumed that parties intend to be legally bound unless the parties expressly state the opposite. For example, in
Rose & Frank Co v JR Crompton & Bros Ltd, an agreement between two business parties was not enforced because an "honour clause" in the document stated "this is not a commercial or
legal agreement, but is only a statement of the intention of the parties". In contrast, domestic and social agreements such as those between children and parents are typically unenforceable on the basis of
public policy. For example, in the English case
Balfour v. Balfour a husband agreed to give his wife £30 a month while he was away from home, but the court refused to enforce the agreement when the husband stopped paying. In contrast, in
Merritt v Merritt the court enforced an agreement between an estranged couple because the circumstances suggested their agreement was intended to have legal consequences. If the terms of a contract are so uncertain or incomplete as to elude reasonable interpretation, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as
price or safety, may cause an entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract. In New South Wales, even if there is uncertainty or incompleteness in a contract, the contract may still be binding on the parties if there is a sufficiently certain and complete clause requiring the parties to undergo arbitration, negotiation or mediation. Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by
common practice in a certain field. In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique. If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a
severability clause. The test of whether a clause is severable is an objective test—whether a
reasonable person would see the contract standing even without the clauses. Typically, non-severable contracts only require the substantial performance of a promise rather than the whole or complete performance of a promise to warrant payment. However, express clauses may be included in a non-severable contract to explicitly require the full performance of an obligation. English courts have established that any intention to make the contract a "complete code", so as to exclude any option to resort to a common law or extra-contractual remedy, must be evidenced in "clear express words": otherwise a "presumption that each party to a contract is entitled to all remedies which arise by operation of law" will be honoured by the courts.
Conditions, warranties, and representations Common law jurisdictions typically distinguish three different categories of contractual terms, conditions, warranties and intermediate terms, which vary in the extent of their enforceability as part of a contract. English common law distinguishes between important
conditions and
warranties, with a breach of a condition by one party allowing the other to repudiate and be discharged while a warranty allows for remedies and damages but not complete discharge. In modern United States law the distinction is less clear but warranties may be enforced more strictly. Whether or not a term is a
condition is determined in part by the parties' intent. In a less technical sense, however, a condition is a generic term and a warranty is a promise. In general insurance law, a warranty is a promise that must be complied with.
Statute may also declare a term or nature of term to be a condition or warranty. For example, the
Sale of Goods Act 1979 s15A provides that terms as to title, description, quality and sample are generally
conditions. The United Kingdom has also developed the concept of an "intermediate term" (also called innominate terms), first established in
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]. Traditionally, while warranties are contractual promises which are enforced through legal action, regardless of materiality, intent, or reliance, In U.S. law, the distinction between the two is somewhat unclear. English courts may weigh parties' emphasis in determining whether a non-contractual statement is enforceable as part of the contract. In the English case of
Bannerman v White, the court upheld a rejection by a buyer of hops which had been treated with sulphur since the buyer explicitly expressed the importance of this requirement. The relative knowledge of the parties may also be a factor, as in English case of
Bissett v Wilkinson, where the court did not find misrepresentation when a seller said that farmland being sold would carry 2000 sheep if worked by one team; the buyer was considered sufficiently knowledgeable to accept or reject the seller's opinion. According to
Andrew Tettenborn et al, there are five differing circumstances under which a contractual term will become a condition:
Capacity In all systems of contract law, the capacity of a variety of
natural or
juristic persons to enter into contracts, enforce contractual obligations, or have contracts enforced against them is restricted on public policy grounds. Consequently, the validity and enforceability of a contract depends not only on whether a jurisdiction is a common, civil, or mixed law jurisdiction but also on the jurisdiction's particular policies regarding capacity. For instance, very small children may not be held to bargains they have made, on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company, because they have acted
ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness. Specifics vary between jurisdictions, for example article 39 of the
Philippine Civil Code provides a comprehensive overview of the most typical circumstances resulting in lost or diminished juridical capacity: age, mental disability, the state of being a
deaf-mute, penalty, absence, insolvency, and
trusteeship. Each contractual party must be a "competent person" having legal capacity. The parties may be natural persons ("individuals") or
juristic persons ("
corporations"). An agreement is formed when an "offer" is accepted. The parties must have an
intention to be legally bound; and to be valid, the agreement must have both proper
"form" and a lawful object. In
England (and in
jurisdictions using English contract principles), the parties must also exchange "
consideration" to create a "mutuality of obligation", as in
Simpkins v Pays. In the United States, persons under 18 are typically
minor and their contracts are considered
voidable; however, if the minor voids the contract and benefits received by the minor are returnable, those benefits must be returned. The minor can enforce breaches of contract by an adult while, absent ratification upon the minor's reaching adulthood, the adult's enforcement may be more limited. Meanwhile, in
Singapore, while individuals under the age of 21 are regarded as minors, sections 35 and 36 of the Civil Law Act 1909 provide that certain contracts entered into by minors aged 18 and above are to be treated as though they were adults. Additionally, the Minors' Contracts Act 1987 as applicable in Singapore and in
England and Wales provides that a contract entered into by a minor is not automatically unenforceable and that a "court may, if it is just and equitable to do so, require the [minor] defendant to transfer to the plaintiff any property acquired by the defendant under the contract, or any property representing it". In addition to age, a party to a contract may lack capacity on the grounds of mental illness or senility. Under Singapore's Mental Capacity Act 2008, for example, "a person lacks capacity in relation to a matter if at the material time the person is unable to make a decision for himself or herself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain". Where an individual lacks capacity on grounds of mental illness or senility, a relative or other responsible person may obtain a lasting
power of attorney to make decisions concerning the "personal welfare" of the person lacking capacity, the "property and [financial] affairs" of the person, or both. Questions as to whether an individual has the capacity to make decisions either generally or with regard to a particular matter or class of matters are generally resolved by a
judicial declaration and the court making the declaration may appoint one or more individuals to act as
conservators (American English) or deputies (Commonwealth English) for the person lacking capacity.
Implied terms While an express term is stated by parties during negotiation or written in a contractual document, implied terms are not stated but nevertheless form a provision of the contract. Implied terms are fully enforceable and, depending on the jurisdiction, may arise as a result of the conduct or expectations of the parties, by virtue of custom (i.e. general unspoken
norms within a particular industry), or by operation of law.
Statutes or
precedent may create implied contractual terms, particularly in standardised relationships such as employment or shipping contracts. The Uniform Commercial Code of the United States also imposes an implied covenant of good faith and fair dealing in performance and enforcement of contracts covered by the Code. In addition,
Australia,
Israel and
India imply a similar good faith term through laws while the
Supreme Court of Canada has developed a doctrine of
honest contractual performance. While English law does not impose such a requirement, there is nevertheless an overarching concept of "
legitimate expectation" in most common law jurisdictions. Most jurisdictions have specific legal provisions which deal directly with sale of goods, lease transactions, and trade practices. In the United States, prominent examples include, in the case of products, an implied
warranty of merchantability and fitness for a particular purpose, and in the case of homes an implied warranty of habitability. In the United Kingdom, implied terms may be created by statute (e.g.
Sale of Goods Act 1979, the
Consumer Rights Act 2015 and the
Hague-Visby Rules), common law (e.g.
The Moorcock, which introduced the "business efficacy" test), previous dealings (e.g.
Spurling v Bradshaw), or custom (e.g.
Hutton v Warren). In many common law jurisdictions, insurance contracts are subject to a term implied in law of
utmost good faith, and this is codified (for example) in section 17 of Singapore's Marine Insurance Act 1909. Additionally, depending on jurisdiction, marine and life insurance contracts may require the policyholder to have an
insurable interest in the asset or life insured. In contrast, instead of requiring a policyholder to hold an insurable interest in the life insured, German law merely requires the policyholder to obtain the consent of the person whose life is insured. the requirements for a term to be implied by custom were set out. For a term to be implied by custom it needs to be "so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract".
Performance Performance refers to the completion of the tasks or obligations anticipated by the contract. In some cases, such as a retail purchase transaction, the formation and performance of the contract occur at the same time, but when a contract involves a promise to do something in the future, performance refers to the later fulfillment of that promise. Performance varies according to the particular circumstances. While a contract is being performed, it is called an
executory contract, and when it is completed it is an executed contract: "performance" may also be referred to as the "execution" of a contract. In some cases there may have been
substantial performance but not complete performance, which allows the performing party to be partially compensated.
Remedies Remedies for breach of contract generally include
damages or forms of specific relief, including but not limited to:
specific performance,
injunctions,
declaratory relief, and
rescission. The availability of different remedies varies from jurisdiction to jurisdiction, with common law jurisprudence preferring to award damages where possible while civil law jurisdictions are more inclined toward specific relief. In the United Kingdom and Singapore, breach of contract is defined in the
Unfair Contract Terms Act 1977 as: [i] non-performance, [ii] poor performance, [iii] part-performance, or [iv] performance which is substantially different from what was reasonably expected. Innocent parties may repudiate (cancel) the contract only for a major breach (breach of condition), but they may always recover compensatory damages, provided that the breach has caused foreseeable loss.
Damages There are several different types of damages that may be awarded for breach of contract. • Compensatory damages are given to the party injured by the breach of contract. With compensatory damages, there are two
heads of loss, consequential damage and direct damage. In theory, compensatory damages are designed to put the injured party in his or her rightful position, usually through an award of expectation damages. • Liquidated damages are an estimate of loss agreed to in the contract, so that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may serve either a compensatory or a punitive purpose and, when aimed at the latter, may be referred to as "penalty clauses". Penalty clauses serving a purely punitive purpose are void or limited on public policy grounds in most (though not all) common law and civil law jurisdictions, although jurisdictions which recognise penalty clauses may nevertheless permit courts to intervene in cases where enforcement would be inequitable. • Nominal damages consist of a small cash amount where the court concludes that the defendant is in breach but the plaintiff has suffered no quantifiable pecuniary loss, and may be sought to obtain a legal record of who was at fault. • Punitive or exemplary damages are used to punish the party at fault. Even though such damages are not intended primarily to compensate, nevertheless the claimant (and not the state) receives the award. Exemplary damages are not recognised nor permitted in some jurisdictions. In common law jurisdictions, exemplary damages are not available for breach of contract, but are possible after fraud. Although vitiating factors (such as misrepresentation, mistake, undue influence and duress) relate to contracts, they are not contractual actions in themselves. Nevertheless, they allow a claimant in contract to get exemplary damages for breach. Compensatory damages compensate the plaintiff for actual losses suffered as accurately as possible. They may be expectation damages, reliance damages or
restitutionary damages. Expectation damages are awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised. Reliance damages are usually awarded where no reasonably reliable estimate of expectation loss can be arrived at or at the option of the plaintiff. Reliance losses cover expense suffered in reliance to the promise. Examples where reliance damages have been awarded because profits are too speculative include the Australian case of
McRae v Commonwealth Disposals Commission which concerned a contract for the rights to salvage a ship. In
Anglia Television Ltd v. Reed the English Court of Appeal awarded the plaintiff expenditures incurred prior to the contract in preparation of performance. Common law jurisdictions traditionally distinguish between legitimate liquidated damages, which are valid and enforceable and penalties, which are usually prohibited as against public policy. The traditional test to determine which category a clause falls into was established by the English House of Lords in
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd In Canadian common law provinces, penalty clauses are considered valid and enforceable provided that they are not unconscionable. The Canadian position is similar to the middle-ground approach taken under Philippine contract law, which provides that a penalty clause providing for liquidated damages is enforceable unless either the clause is "iniquitous or unconscionable" or the breach of contract in question is not one that was envisioned by the parties when they concluded the contract. A similar approach has been adopted by the
High Court of Australia and the
Supreme Court of the United Kingdom over the first few decades of the twenty-first century; whereby a penalty clause is unenforceable only if it is disproportionate to the "legitimate interests", not restricted to seeking compensation, of the non-infringing party. After a breach has occurred, the innocent party has a duty to mitigate loss by taking any reasonable steps. Failure to mitigate means that damages may be reduced or even denied altogether. However,
Michael Furmston has argued that "it is wrong to express (the mitigation) rule by stating that the plaintiff is under a duty to mitigate his loss", citing
Sotiros Shipping Inc v Sameiet, The Solholt. If a party provides notice that the contract will not be completed, an
anticipatory breach occurs. Damages may be general or consequential. General damages are those damages which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. To recover damages, a claimant must show that the breach of contract caused foreseeable loss.
Hadley v Baxendale established that the test of foreseeability is both objective or subjective. In other words, is it foreseeable to the objective bystander, or to the contracting parties, who may have special knowledge? On the facts of
Hadley, where a miller lost production because a carrier delayed taking broken mill parts for repair, the court held that no damages were payable since the loss was foreseeable neither by the "reasonable man" nor by the carrier, both of whom would have expected the miller to have a spare part in store.
Specific relief There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages — for example, where an art collector purchases a rare painting and the vendor refuses to deliver. In most common law jurisdictions, such circumstances are dealt with by court orders for "specific performance", requiring that the contract or a part thereof be performed. In some circumstances a court will order a party to perform his or her promise or issue an injunction requiring a party refrain from doing something that would breach the contract. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value. In the
United States by way of the
13th Amendment to the United States Constitution, specific performance in personal service contracts is only legal "
as punishment for a crime whereof the party shall have been duly convicted". Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in
equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defences to an action in equity (such as
laches, the
bona fide purchaser rule, or
unclean hands) may act as a bar to specific performance. In Indian law, the
Specific Relief Act 1963 codifies the rules surrounding specific performance and other remedies aside from damages. Relief available under the act is limited to recovery of possession of property, specific performance of contracts, rectification of instruments, rescission of contracts, cancellation of instruments,
declaratory relief, and injunctions. Where appropriate, courts in most common and civil law jurisdictions may permit
declaratory relief or
rescission of contracts. To rescind is to set aside or unmake a contract. There are four different ways in which contracts can be set aside. A contract may be deemed '
void', '
voidable' or '
unenforceable', or declared "ineffective". Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Ineffectiveness arises when a contract is terminated by order of a court, where a public body has failed to satisfy the requirements of
public procurement law.
Defences Defences to claims under contract law include
vitiating factors, which defences operate to determine whether a purported contract is either (1) void or (2) voidable, or assertions that the other party failed to perform their obligations within a reasonable period of time. With regard to contracts of a commercial nature, the
UNIDROIT Principles of International Commercial Contracts provides a general outline of the grounds under which a contract can be set aside. Where a contract or term is voidable, the party entitled to avoid may either conditionally or unconditionally choose to affirm the contract or term as outlined in Article 3.2.9 of the Principles which states that "if the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded".
Misrepresentation Misrepresentation means a false statement of fact that occurs prior to a contract made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of
rescission and sometimes damages depending on the type of misrepresentation. Rescission is the principal remedy and damages are also available if a tort is established. Article 3.2.5 of the Principles of International Commercial Contracts provides that "a party may avoid the contract when it has been led to conclude the contract by the other party's fraudulent representation, including language or practices, or fraudulent non- disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed". In order to obtain relief, there must be a positive misrepresentation of law and also, the person to whom the representation was made must have been misled by and relied on this misrepresentation:
Public Trustee v Taylor. There are two types of misrepresentation: fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party alleging misrepresentation knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable. Assume two people, Party A and Party B, enter into a contract. Then, it is later determined that Party A did not fully understand the facts and information described within the contract. If Party B used this lack of understanding against Party A to enter into the contract, Party A has the right to void the contract. According to
Gordon v Selico [1986] it is possible to misrepresent either by words or conduct. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. In Singapore and the United Kingdom, the Misrepresentation Act 1967 provides that innocent misrepresentations can also be grounds for damages and remission of the relevant contract. Section 35 of the Contract and Commercial Law Act 2017 similarly provides for damages in cases of both innocent and fraudulent misrepresentation in New Zealand. In assessing remedies for an innocent misrepresentation, the judge takes into account the likelihood a party would rely on the false claim and how significant the false claim was. Contract law does not delineate any clear boundary as to what is considered an acceptable false claim or what is unacceptable. Therefore, the question is what types of false claims (or deceptions) will be significant enough to void a contract based on said deception. Advertisements utilising "puffing", or the practice of exaggerating certain things, fall under this question of possible false claims.
Mistake Section 2 of the
UNIDROIT Principles of International Commercial Contracts defines the extent to which a mistake is
typically accepted in most jurisdictions as grounds to avoid a contract. Under Article 3.1.2 of the Principles, a "mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded". which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible. In
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd, the court held that the common law will grant relief against common mistake, if the test in
Bell v. Lever Bros Ltd is made out. If one party has knowledge and the other does not, and the party with the knowledge promises or guarantees the existence of the subject matter, that party will be in breach if the subject matter does not exist. •
Unilateral mistake occurs when only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in
Lewis v Avery where
Lord Denning MR held that the contract can only be voided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient. In certain circumstances, the defence of
non est factum can be utilised in common law jurisdictions to rescind a contract on the grounds of a substantial unilateral mistake. Under Article 3.2.10 of the Principles, where a contract is voidable by a party on the grounds of a unilateral mistake but the other party "declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance", "the contract is considered to have been concluded as the [other] party understood it" and "the right to avoidance is lost". An example is in
Barton v Armstrong [1976] in a person was threatened with death if they did not sign the contract. An innocent party wishing to set aside a contract for duress to the person only needs to prove that the threat was made and that it was a reason for entry into the contract; the
burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, "economic duress". Aside from fraud and unjustified threats, contracts can also generally be set aside on the grounds that one party exercised its superior bargaining power in order to impose inequitable terms upon the other party. Article 3.2.7 of the Principles provides that "a party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage" and specifies that, in determining whether the term was inequitable, a court or arbitrator should consider the extent to which "the other party has taken unfair advantage of the first party's dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill". In Australian law, a contract can additionally be set aside due to
unconscionable dealing. Firstly, the claimant must show that they were under a special disability, the test for this being that they were unable to act in their best interest. Secondly, the claimant must show that the defendant took advantage of this special disability. a woman forged her husband's signature, and her husband agreed to assume "all liability and responsibility" for the forged checks. However, the agreement was unenforceable as it was intended to "stifle a criminal prosecution", and the bank was forced to return the payments made by the husband. In the U.S., one unusual type of unenforceable contract is a personal
employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain
plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining
national security (since a disgruntled agent might try to reveal
all the government's secrets during his/her lawsuit). Other types of unenforceable employment contracts include contracts agreeing to work for less than
minimum wage and forfeiting the right to
workman's compensation in cases where workman's compensation is due.
Force majeure All jurisdictions, civil and common law alike, typically provide for contractual obligations to be terminated or reduced in cases of
force majeure or (in traditional common law terminology)
frustration of purpose. Article 7.1.7 of the Principles provides that "Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences". Additionally, the Chinese civil code provides that a party may terminate its contractual obligations if the party to whom its obligations are owned is under
financial distress.
Hardship Subject to the laws of the jurisdiction in which a challenge is brought, contracts may in certain circumstances be modified or terminated on the basis of hardship to the party seeking relief from contractual obligations. Hardship is defined by Article 6.2.2 of the UNIDROIT Principles as "where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished" provided that either the risk of the events occurring was not assumed by the party alleging hardship or that the events' occurrence was "beyond the control of the disadvantaged party", unknown until after the conclusion of the contract, or "could not reasonably have been taken into account" by the party.
Set-off A partial defence available in a variety of civil-, common-, and mixed-law jurisdictions is that of set-off or the netting of obligations. This entails forfeiting one or obligations owed by the other party in exchange for being excused for the performance of a party's own obligations toward the other party. It permits the rights to be used to discharge the liabilities where cross claims exist between a
plaintiff and a
respondent, the result being that the gross claims of mutual debt produce a single net claim. The net claim is known as a
net position. In other words, a set-off is the right of a debtor to balance mutual debts with a creditor. Any balance remaining due either of the parties is still owed, but the mutual debts have been set off. The power of net positions lies in reducing
credit exposure, and also offers regulatory capital requirement and settlement advantages, which contribute to
market stability. As per Article 8.1 of the Principles, "where two parties owe each other money or other performances of the same kind, either of them ("the first party") may set off its obligation against that of its obligee" ("the other party") if when set-off is invoked: • The first party is entitled to perform its obligation • Where the obligations of the two parties do not arise from the same contract, the nature of the other party's obligation (i.e. existence and amount) is ascertained and performance is due • Where the obligations of the two parties arise from the same contract, the other party's performance is due (regardless of whether the obligation's nature is ascertained The requirement that the obligations be "of the same kind" is broader than the requirement in some legal systems that obligations being set-off be fungible, while still excluding obligations of a fundamentally personal nature. Where the obligations in question are owed in different currencies, Article 8.2 provides that set-off may be invoked if the currencies in question are freely convertible and the parties have not agreed that the first party may only pay in a specified currency. Rather than operating automatically or following a court's order, Article 8.3 provides that set-off may only be exercised by notice to the other party; furthermore, Article 8.4 further provides that if the notice does not specify the obligations to which it relates, the other party may do so by way of a declaration made within a reasonable time, failing which the set-off relates to all obligations proportionally. The effect of set-off, as per Article 8.5, is that: • The relevant obligations are discharged • If obligations differ in amount, set-off discharges the obligations up to the amount of the lesser obligation. • Set-off takes effect as from the time of notice. == Contracts in other jurisdictions ==