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Understanding Contract Law

Updated on September 7, 2009

In the 20th century the law of contract has been faced with different problems. The old law had developed in an age when both parties to a contract were of approximately equal power and members of a keenly competitive society. They therefore were able to negotiate freely the terms of their contracts. Those conditions are not always present in more modern societies. Thus railroads and public utilities are often monopolies, and the state commonly intervenes to dictate the terms of their contracts with members of the public. Also the state will prescribe other contracts, such as those with moneylenders and conditional sales arrangements, in order to prevent the strong from imposing harsh terms against the weak. Employment contracts have long been subject to legislative control. The field of contract generally, like that of land ownership, seems to be shifting increasingly from private initiative to public regulation.

Nevertheless, there still remain problems of a strictly technical and legal character, which any system of contract law must deal with. The most fundamental of these problems is this: how is the law to distinguish between a serious contract, an agreement that the courts should enforce, and mere expressions of intention, perhaps never meant as a binding obligation?

History of Contract Law

As has been noted, the law has thrown its net over a very large part of life, but can it usefully inquire into all sorts of casual expressions and treat them as constituting enforceable obligations? Clearly not, and so the search began for some test that would eliminate at the outset those cases not properly within the purview of a court of law. Two main approaches have been used, and the chief legal systems of the Western world have accepted one or the other for identifying a legally actionable contract.

The oldest test, and one that still prevails in civil-law countries, is the doctrine of 'cause'. In the lawbooks of Justinian, medieval lawyers found frequent use of the term 'causa'. The medieval civil and canon lawyers relied heavily on this concept of cause. Even if the parties to an agreement failed to execute a technically valid formal contract, the agreement, said the medieval lawyers, should be enforced by the courts if the parties to the agreement had a legitimate reason, or cause, for making their promises. Thus these early lawyers made the basis of contract consist of a union of the wills of the contracting parties directed toward a lawful object. By the end of the Middle Ages, French customary laws had generally adopted the concept of cause, whence it passed into the modern codes of the civil-law countries.

The common-law approach to a legally enforceable agreement, or contract, was very different. Throughout the Middle Ages, the common law retained its principal formal contract, the deed or other contract under seal. In a suit brought to enforce a contract under seal—a simple promise to pay—no kind of equitable defense was permitted, and the court would make no inquiry into the circumstances in which the formal contract had been entered into. For contracts under seal, it was unnecessary to formulate any general theory of contractual obligation. If a promisor had put his seal to his promise, enforcement followed automatically.

Other types of contract were less easy. The commonest were the "real" contracts in which a res, or thing, had passed from the plaintiff to the defendant—as when money had been lent, or goods sold and delivered. Here again the situation was so obvious that no theorizing was needed to reach the conclusion that money or chattels borrowed ought to be returned; that goods bought and received ought to be paid for; and that goods sold and paid for ought to be delivered.

A remarkable development occurred late in the 15th century when the courts began to enforce purely executory sales, where a bargain had been made but neither money nor goods had passed. This quiet appearance of a truly consensual contract produced little in the way of theory until the 17th century, when an ingenious manipulation of procedure took place. This consisted in using forms appropriate to tort (a. private or civil wrong, independent of contract) in order to enforce contracts. The reason was that the tort forms of action were quicker and free from the archaisms that clung to the action of debt. The general pattern was assumpsit, which alleged that the defendant had "undertaken" to do or to pay something but, intending to defraud and deceive the plaintiff, had failed to perform.

The almost accidental result of using this form of writ- indebitatus assumpsit, as it was called - was that a great variety of situations might figure in the preamble, "in consideration" of which a promise had been made. Finally a single formula was devised that would embrace all those situations in which the law would regard a promise as legally enforceable. Thus arose the doctrine of 'consideration', according to which an act of forbearance of one party, or the promise thereof, is the price for which the promise of the other party is bought, and the promise thus given for value is enforceable.

Though the details of this history are very complicated, and in some points still obscure, they sufficiently reveal the fundamental difference between the common-law approach and that of systems based on a Roman and a canonical background. The common lawyers looked at contracts objectively. They held a promisor to his promise if (a) he had received a benefit from the promise, or (b) he had caused a detriment to the promisee. These are often easily ascertainable lets. The civil-law theory, on the other hand, addresses itself immediately to a deeper problem, essentially subjective in nature, of the "cause" existing in the minds of the parties that set them in motion toward an "end" that they had in view.

With the complex relationships set up in the course of modern business, serious defects have been revealed in the practical working of the doctrine of consideration. Arrangements that businessmen make, knowing them to be useful and convenient, may yet fail to qualify as contracts enforceable in the courts because they lack the "consideration" required by the law.

During most of the history of the common law, the parties to suits on contracts and other civil litigation were barred from testifying as witnesses or otherwise giving evidence. Thus in a contract action, when the defendant's pleading denied that he had ever made the promise sued on by the plaintiff, it was often difficult to get the facts before the court. So legislators turned to the solution of imposing, as a requirement for a suit in contract, that there be some "memorandum or note... in writing... signed by the party to be charged". It is a sound policy that transactions of consequence should be committed to paper and not left to the chances of memory. The Statute of Frauds (1677), which set up this rule in England, was proceeding on the right lines, especially since at that date the parties themselves could not give evidence.

But the Statute of Frauds, drafted with great deliberation and after consultations with many experts, turned out in its final, much amended form, to be thoroughly unsatisfactory. It required a writing in connection with certain sorts of contracts but not others, and the statutory list was seemingly capricious. The statute's confusing and ambiguous phrase "not to be performed within the space of one year" has caused endless difficulty. The statute has occasioned a vast amount of litigation, and its effect all too often has been to assist rather than to prevent frauds.

In the 18th century, the lord chief justice, William Murray, 1st Earl of Mansfield, took the view that if a contract had complied with the Statute of Frauds, then it became enforceable, even though it lacked consideration. This way of using the statute to get around the doctrine of consideration was historically unsound and soon abandoned. In the 20th century, legislation, both in England and in the United States, has introduced substantial modifications in the doctrine of consideration and in the old Statute of Frauds, particularly in relation to commercial transactions. Nevertheless the doctrine of consideration and the Statute of Frauds figure frequently and prominently in modern contract litigation.

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