Law

The Extraordinary Importance of Contract Law:
Contract law lies at the heart of our system of laws and serves as the foundation of our entire society. This is not an exaggeration. It is a simple observation – one that too often goes unobserved.

Our society depends upon free exchange in the marketplace at every level. Contract law makes this possible. Exchanges in the marketplace always depend upon voluntary agreements between individuals or other “legal persons”. Such voluntary agreements could never work without contract law.

Contract law serves to make these agreements “enforceable”, which usually means that it allows one party to a contract to obtain money damages from the other party upon showing that the latter stands in breach.

Without contract law, these voluntary agreements would instantly become impractical and unworkable. Since such agreements lie at the very heart of our society and economy, and since they depend upon contract law, it is no exaggeration to say, as I have just done, that “contract law lies at the heart of our system of laws and serves as the foundation of our entire society.” Those were the very words that I used to begin this essay.

Stated more precisely, it is our system of contract law that underpins and makes possible the many private, voluntary agreements by which exchanges of goods and services are accomplished in our society at every level. No exchange is exempt from the contract law, which indeed can be rightly called the cornerstone of marketplace civilization.

In this article, I will briefly explain the different types of contracts that can be made, paying special attention to the common problems that arise in their formulation. I will also discuss how contracts are enforced or avoided, and how a wronged party to a contract can obtain recompense and other relief from the wrongdoing party. I will explain the principle of good faith, which in California is known as the “covenant of good faith and fair dealing”, and which has been too often overlooked by commentators and practitioners alike.

I do not aim to provide a comprehensive explanation of all the theoretical and practical difficulties. This is an overview, not an exhaustive treatise. Sometimes the overview will better help the reader understand the essential points, or the “forest” if you will, while the treatise is better for explaining the many intricacies and complexities that can be rightly called the “trees” of contract law.

Definition of a Contract:
A contract is nothing other than a voluntary, private agreement to exchange valuable things. It most often is an exchange of valuable promises. For example, a home-buyer might promise to pay $250,000 to the seller, who in exchange promises to deliver unencumbered title to the buyer.

Good Faith and Fair Dealing:
Most exchanges are straightforward matters that are self-executing and done without any problem at all. When I buy a cup of coffee at my local cafe (which I have just done so that I may enjoy it while I compose the present essay on my laptop), the cafe and I have made a self-executing exchange, which we have done without a hitch.

Ditto, if I buy a book at the local bookstore or have my car washed at the local car-wash. Ditto again, if I purchase airplane tickets from a travel agent, or have my house painted, or have my teeth cleaned at the dentist’s office.

Fortunately, most exchanges are performed on the spot to everyone’s satisfaction. Were this otherwise, our society and general commerce would soon become choked by controversy and disputes. Thus it may be said that our system depends above all on the good faith and honesty of our people. Indeed, the principle of “good faith” is central to contract law.

Every contract made or performed in California is said to include an implied-in-law covenant of good faith and fair dealing, by which each party to the contract agrees to act in good faith and deal fairly with the other. This has been construed to mean that one party to a contract should not try in bad faith to cheat the other party of the benefit of the bargain made by the contract.

Inevitable Complications and Controversies:
While most exchanges are performed without incident, not all of them are, as we all know. This is true even in the simplest of matters (e.g., the sale of a cup of coffee) and is even more likely in a complicated transaction (e.g., the financing, delivery, and insurance of commercial aircraft for an overseas company over a thirty-year term).

Let us take a simple example first. I will list only a few of the problems that might arise from a simple contract for a one-time sale of a single box of tomatoes. If you offer to give me $10 for a carton of tomatoes that I have sitting on a table behind me, and if I agree to accept it as payment in full for the tomatoes, we have made an oral contract that we can perform on the spot: You hand me the $10 bill, and I give you the carton. Nothing more simple or straightforward, right? But what if you discover that my tomatoes were too ripe when you bought them, and that they all go rotten within two hours of the purchase? What if I take your $10 bill, but then refuse to give the box of tomatoes, telling you to “beat it, scram, or else you’ll get hurt!” What happens if your $10 bill turns out to be counterfeit, or if you take the tomatoes but refuse to pay, or pay with a check that you later cancel or that is returned unpaid by the bank? What if the carton breaks while you are carrying it, and all the tomatoes fall to the ground and are ruined? What if you needed these tomatoes for the dinner you meant to make for your boss, who, in disappointment, decides not to give you the promotion he had earlier discussed with you? My point is only that problems can and often do arise in even the simplest, easiest exchanges.

In more complicated transactions, the possible difficulties are varied and sometimes difficult for the parties even to envision at the outset, much less address in an intelligent, orderly manner. Let’s consider one such example. Suppose a large American company makes a contract with a large foreign company by which it becomes obliged to design, deliver, and insure an entire generation of commercial aircraft over a thirty-year period. The possible complications might take me literally years to ponder, list, analyze, and explain. It could take a decade or longer for feuding teams of lawyers in several countries to sort out the possible complications that might arise.

To avoid such controversy, which results in burdensome attorney’s fees and an equally burdensome devotion of attention and effort that could be better employed in more constructive endeavors, it is necessary to have a proper contract in place at the outset: If the exchange is to be done on the spot and simultaneously, a written contract need not be used, but the parties should either reasonably trust one another’s good faith or have an exact understanding of the exchange before they undertake it. If the exchange cannot be performed in full on the spot, there should be a written contract to state the parties’ obligations and the essential terms of the exchange. A good written contract will also address at least the most likely complications that might arise, assigning responsibility for any such complication to a specific party in a specified manner.

A good written contract is one that clearly describes the exchange to be done and also addresses the possible complications that might arise during the performance of the exchange.

Different Kinds of Contracts:
I earlier provided a simple definition of a contract. Here is a more technical definition: A contract is a private compact, voluntarily made, by which the parties agree to exchange valuable things with one another. A contract comes into existence when (1) one party makes an offer that the other party accepts, and (2) the parties thereby agree to exchange valuable benefits on specified terms and conditions, with reasonably specific agreement on the price, place, time, the goods or services to be delivered, and the other essential terms of the exchange.