Contracts and Economic Development

In this module, we will discuss the laws that govern the contracts that the courts will enforce. Remember that a contract is a promise the court will enforce. Research has shown that countries that consistently enforce valid contracts are more developed and have a more consistent rate of economic growth. In business many contracts are entered into and carried out by the parties without a problem occurring. Thus, many business persons and lawyers are able to bury flaws in contracts because no dispute occurs. Parties generally only refer to a contract when a dispute arises, therefore it is important to think of what promises is a party making and how might a party become unwilling or unable to perform the promise as you prepare the terms in a contract.

Integration of Treaties, Statutes and Common Law

Contracts is an area of the law that has been influenced by common law as inherited from England and developed in the United States. However, there are also statutes and treaties that vary the common law in order to harmonize the law of contracts in interstate or international transactions. Therefore, it is important that before attempting to determine how a court will decide a case involving a contract, you first stop and determine whether the matter will be decided under common law, a statute [such as the UCC] or a treaty [such as the UN CISG].

Once we have determined the applicable law that will apply to a contract, we will compare how the laws vary the common principles governing the formation, enforceability and remedies to which a party harmed by the failure of another person to fulfill their obligations. The common principles determine what is required to form a contract, when a contract will be enforced against persons given protected status [such as children - the age of majority varies by state], when the court will not enforce a promise [for reasons such as illegality, undue influence, force majeure or other instances in which the court determines that it is not fair to lend its power to assist a person even though there may be a contract.]

Please also note that each sovereign state or country has the power to determine its contract law, thus, the law in another country may be substantially different than the law in the United States.

Enforcing Contracts

We will look at if there is an enforceable contract. If there is an enforceable contract to what will a party, who has been harmed by the failure of a party to carry out their obligations under the contract, be entitled. We will see that the courts usually provide a party an amount of money that will put the person in the position they would have been if the other party had properly fulfilled their obligations. In some instances, money damages will not be a sufficient remedy and then the court may use one of its extraordinary powers [equitable remedies- such as an injunction or specific performance] to put the party in the position they would have been in if the contract had been fulfilled.

In some instances, the courts have also developed concepts that will allow the court to provide justice to a party who has relied [such as promissory estoppel] or who has received a benefit even if there is no contract [quasi-contract.] When the court finds there is no contract but it would be unfair to a party, the court may give the party 'quantum meruit'. Quantum meruit is an amount [not their full damages], that remedies the unfairness.

Remember our discussion in torts, that even if a party has defaulted on a contract, if that person is judgment proof it may not be worthwhile to assert a claim as there may be no assets from which to recover damages. In the US, unless there is a statute providing for the recovery of legal fees and expenses, the common law provides that each party bears its own legal fees and expenses. Thus, in a situation of a failure of a party to perform a contract, it may be costly to bring a lawsuit if you cannot recover your legal fees from the defaulting party.

What is an example of how the law of contracts may vary from state to state in the United States?