Contract law

A contract, in the simplest definition, is a promise enforceable by law. The promise may be to do something or to refrain from doing something. The making of a contract requires the mutual assent of two or more p­ersons, one of them ordinarily making an offer and another accepting. If one of the parties fails to keep the promise, the other is entitled to l­egal recourse against him. The law of contracts considers such questions as whether a contract exists, what the meaning of it is, whether a contr­act has been broken, and what compensation is due the injured party.

Contract law is the product of a business civilization. It will not be found, in any significant degree, in precommercial societies. Most primitive societies have other ways of enforcing the commitments of individuals; for example, through ties of kinship or by the authority of religion. In an economy based on barter, most transactions are self- enforcing because the transaction is complete on both sides at the same moment. Problems may arise if the goods exchanged are later found to be defective, but these problems will be handled through property law — with its penalties for taking or spoiling the property of another — rather than through contract law.

Even when transactions do not take the form of barter, primitive societies continue to work with notions of property rather than of promise. In early forms of credit transactions, kinship ties secured the debt, as when a tribe or a community gave hostages until the debt was paid. Other forms of security took the form of pledging land or pawning an individual into «debt slavery.» Some credit arrangements were essentially self-enforcing: livestock, for example, might be entrusted to a caretaker who received for his services a fixed percentage of the offspring. In other cases — constructing a hut, clearing a field, or building a boat — enforcement of the promise to pay was more difficult but still was based on concepts of property. In other words, the claim for payment was based not on the existence of a bargain or promise but on the unjust detention of another’s money or goods. When a worker sought to obtain his wages, the tendency was to argue in terms of his right to the product of his labour.

A true law of contracts — that is, of enforceable promises — imp­lies the development of a market economy. Where a commitment’s value does not vary with time, ideas of property and injury are adequate and there will be no enforcement of an agreement if neither party has performed, since in property terms no wrong has been done. In a mar­ket economy, on the other hand, a person may seek a commitment tod­ay to guard against a change in value tomorrow; the person obtaining such a commitment feels harmed by the fact that the market value dif­fers from the agreed price.

Traditional contract law developed rules and principles controlling the voluntary assumption of obligations, regulating the performance of obligations so assumed, and providing sanctions for failure to perform.

Modern commercial practice relies to a growing extent on arbit­ration to handle disputes, especially those that arise in international transactions. There are several reasons for the growing use of arbit­ration. The procedure is simple, it is more expeditious, and it may be less expensive than traditional litigation. The arbitrators are frequently selected by a trade association or business group for their expert understanding of the issues in the dispute. The proceedings are private, which is advantageous when the case involves trade or business secrets. In many legal systems, the parties can authorize arbitrators to base their decision on equitable considerations that the law excludes. Finally, when the parties are from different countries, an international panel of arbitrators may offer a greater guarantee of impartiality than would a national court. Despite these advantages of arbitration, the deve­lopment of contract law may suffer considerably by a withdrawal from the courts of litigation involving some of the most significant and difficult problems of the present day, all the more so because the reasoning in arbitral awards is usually not made public.