U.S. Contract Law

• Author: Kevin J. Fandl
• Profession: Director of the Global Legal Education Institute
• Pages: 39-76

U.S. Contract Law

Chapter 3

39

Introduction

Most of you reading this book understand that the basis of most

business transactions is the contract. Whether this is in the form of

an oral agreement followed by a handshake or an elaborate written

document with enough clauses to fill the North Pole, the contract

forms the foundation of business transactions. In addition, most of

you probably already understand the basics of forming a valid con-

tract in your country, and, not surprisingly, you will find that many

of those basics have equivalents in U.S. law. Unfortunately for those

of you hoping that this gave you a free pass to skip the contracts

section, the basics are where the similarities end.

Contract law in the United States is state-specific and very de-

pendent upon decisions from state courts in the jurisdiction in which

your case is being filed. This means that your ability to understand

the implications of a certain clause, or the likely outcome in a par-

ticular contract dispute, will depend largely on the case law of that

state. To further complicate (or simplify?) matters, most states have

adopted a set of common rules in the interpretation of contract provi-

sions that are meant to facilitate business. This Uniform Commercial

Code, or UCC, applies only to certain types of transactions. This means

that you need to determine the state in which your claim will be heard,

the type of claim it is, and the relevant state case law before you can

begin to understand the contours of the issue in the case.

40 CHAPTER 3

This chapter is divided into two sections: the common-law re-

quirements for forming and enforcing a valid contract, and the Uni-

form Commercial Code. I consider it essential for any foreign legal

professional to acquire a solid understanding of the common-law rules

of contracts before proceeding to the UCC. The common-law rules

serve as the default rules for non-business transactions and also fill in

the gaps where the UCC does not speak to the issue. Accordingly,

even in the event that the UCC clearly applies to the case, common-

law rules may be used to interpret or “gap-fill” as necessary. Failure

to understand these rules will leave any practitioner at a significant

loss when he or she is out of the realm of the UCC.

We begin this chapter with a look at the entire process of forming

a valid contract, understanding when performance of that contract is

excused or when liability results from failure to perform, and how

damages are calculated. We then move on to the Uniform Commer-

cial Code, looking specifically at the distinctions between common

law and the UCC as they relate to business transactions. We conclude

with a look at warranties. We’ll get started with an examination of the

basics of contract formation under the common law.

The Law of Contracts

Contract law in the United States is founded upon common-law

concepts. This means that in order to understand contract rules and

principles, it is necessary to review case law. Contract law is also

largely state-based law in the United States, which means that, de-

pending on where the contract was formed or which jurisdiction

has been identified for the choice of law, the particular cases that

apply to a given situation may differ.

Because contract law is so important for economic develop-

ment and business transactions, inconsistency in contract rules

among states caused consternation for many attorneys and

businesspeople. Starting in the late 19th century, states began to

make efforts to unify frequently used contract law provisions and

to streamline contractual transactions. However, not until 1952 did

a uniform code emerge that was adopted by all 50 states.

The Uniform Commercial Code (UCC) was a significant effort

to codify common contract transactions. It applies only to a limited

U.S. Contract Law

41

number of contracts—namely, contracts for the sale or lease of

goods. Practitioners in the United States need to be aware of UCC

rules as well as common-law contract rules, as one or both may

apply to any given contract, depending on the terms.

In this section, we will first focus on common-law contract rules

to lay the foundation for contract law outside the UCC. We will

then examine the key articles of the UCC and explore how they

differ from common-law principles.

Forming a Valid Contract

As a preliminary matter, bear in mind that a contract can generally

be defined as:

• A promise or set of promises, the breach of which the courts

will provide a remedy for.

When two parties agree to a valid contract, it creates a legally

recognized duty to perform. But not all agreements are recognized

as legally binding and enforceable, as we will see below.

Contracts come in two different “flavors” in the United States—

unilateral and bilateral. These are usually easy to distinguish by

looking at the requirement for acceptance (see below). The impor-

tant thing to remember about these two types of contracts is that

each, while perfectly enforceable once formed, requires a different

type of consideration.

Unilateral contracts include a promise to perform by one per-

son and actual performance by another. An example of a unilateral

contract would be a reward poster in which the offeror will pay

only when an offeree performs the action described in the poster. A

promise to perform is insufficient to form a valid contract here.

Bilateral contracts include two promises to perform at a given

point in time. The exchange may take place immediately, but it is

not required to do so.

To form a valid contract, you must have all of the following

elements:

• A valid offer

• Legal consideration