contract law -introduction

   
Sources of contract law
     In the United States, law derives from five sources: constitutions, international treaties, statutes, regulations promulgated by administrative agencies, and appellate opinions of courts (appellate opinions of courts are collectively referred to as "common law"). The United States is composed of multiple sovereigns - - federal, state, and local governments (counties, cities, and assorted special districts). Accordingly, some law is federal, deriving from the United States Constitution, treaties entered by the President with the concurrence of two-thirds of the Senate, statutes enacted by Congress, regulations of federal administrative agencies (such as the Federal Trade Commission or the Securities and Exchange Commission), and decisions of federal courts. Some law is state law, deriving from the constitution of an individual state, statutes enacted by a state's legislature, regulations of a state's administrative agencies, and decisions of the state's courts. Some law is local law, deriving from municipal charters, city council ordinances, local administrative agencies, or special districts.
     Because law derives from several sources in a government with multiple sovereignties, part of your task as a first year law student is to learn where to look for the law that will govern resolution of a client's problem. This is a brief introduction of where to look for the law of contract. Full understanding will come in stages.
     1. State common law, state statutory law, and state administrative regulation
     General.
     Most of the contract law that we study in the first year contracts course is state law, either state statutory law or state common law. Among the 50 states, statutes and common law are sometimes identical, sometimes similar, and sometimes dissimilar. Moreover, law in some states addresses some issues as to which the law of other states is silent. Accordingly, assuming for the moment that state law rather than federal law governs the resolution of a client's problem, the first question to resolve is which state's law to apply. This question is referred to as "choice of law." In many written contracts, the parties will have included a clause expressing a choice of law. See, for example, the clause entitled "Governing Law" in a written agreement between a girls soccer club and a soccer trainer. In case of a dispute between the parties, such an expressed choice of law will typically be respected if the parties have chosen a state to which their transaction with each other bears a reasonable relationship. See, e.g., UCC 1-105(1). For example, if the contract is to be performed in California, a choice of California law to govern a dispute between the parties would be respected. In contrast, for example, the court in LaGuardia Associates and Field Hotel Associates v. Holiday Hospitality Franchising, Inc., refused to honor a clause in the contract calling for application of Tennessee law to a dispute between two New York limited partnerships, on the one hand, and a Georgia based corporation incorporated in Delaware, on the other. Beyond this introduction to choice of law, the typical first year contracts course does not cover choice of law issues.
     By applying choice of law rules, lawyers can identify the state whose law will resolve a dispute or guide the planning of a transaction. But this still leaves the question of how we teach contract law more generally if the contract law of one state may differ from the contract law of another. The answer is that we cannot teach the contract law of all states, nor is it necessary or desirable to do so. We teach, instead, a generally applicable vocabulary and classical conceptual structure, provoke critical examination of the classical conceptual structure, and help you develop skills of analysis, evaluation, and argument. Together with legal research skills, this will equip you to find, interpret, and apply the relevant state law when the occasion arises.
     These materials include some classic cases that you will find in almost any casebook on contract law. While you needn't generally memorize case names and the content with which they are associated, you should memorize the names and basic content of the classic sources as part of your initiation into the profession and as a way to become a part of and carry on its rich tradition and culture. I have identified the classic sources by displaying their names in red font. Toward the same end, these materials provide brief biographical sketches and additional information about several famous judges and legal scholars.
     Restatement of the Law, Second, Contracts
     Teaching materials such as these offer samples of statutes and appellate opinions drawn from many states. Some samples are and some are not representative of the law in a majority of states. If you feel more comfortable knowing the majority or minority rule, consult an outline or treatise. Don't expect that information here. Most clients don't care about the majority or minority rule; they care about how their problem or dispute will be resolved. However, these materials, as most contract teaching materials, refer liberally to the Restatement of the Law, Second, Contracts (hereafter abbreviated as "R.2d Contracts"), a resource that articulates, explains, and illustrates "black letter rules" of contract law. R.2d Contracts, promulgated in 1981 by the American Law Institute ("ALI"), replaces the earlier Restatement, Contracts, promulgated by ALI in 1932. The American Law Institute, which has also promulgated restatements on several other legal subjects (e.g. Property, Torts, Agency, Restitution) is a private organization founded in 1923 with the objective of improving the law, in part by the study, synthesis, extrapolation, and restatement of the common law of all states. It is important that you remember that a restatement as a whole (of contracts or other subjects) is not the law of any particular state, even though it reads like a statute. Rather, you may consider it as a surrogate for, or representative of, state common law on the subject that it addresses. It reflects lengthy and intense analysis of common law precedent by distinguished legal scholars with the objective of influencing continued common law development. Because of its pedigree, judges facing decisions on discrete issues will often consider the relevant section of the appropriate restatement with considerable deference, and sometimes will explicitly adopt a section of the restatement as the common law of the state. There would, of course, be no occasion for a judge to adopt an entire restatement of a subject as the common law of a state because the judge may only decide the particular issues presented by the specific case under consideration.
     Uniform Commercial Code
     In addition to state common law, represented either by appellate opinions or by R.2d Contracts, you must become familiar with and learn how to use portions of the Uniform Commercial Code ("U.C.C."). A code is a jurisdiction's compilation of statutes. Some codes collect and organize statutes, adopted piecemeal in the jurisdiction over many years, that relate generally to a particular subject matter (e.g. the California Penal Code, the California Civil Code, or the California Code of Civil Procedure). Other codes, such as the U.C.C., the California Evidence Code, or the federal Bankruptcy Code, consist of a group of statutes drafted and adopted by a legislature as a unified whole. For such a code you must acquire the techniques of finding, interpreting, and applying the statutes in the context of the whole. Study of portions of the U.C.C. is a perfect vehicle for acquiring those techniques.
    The U.C.C. as well as uniform codes on other subjects, was drafted and is published jointly by the ALI and by the National Conference of Commissioners on Uniform States Laws ("NCCUSL"), an organization founded in 1892 for the purpose of promoting uniformity of state law through the promulgation of uniform statutes to be proposed for adoption in each of the 50 states. See, e.g., U.C.C. 1-102(2)(c). Drafting of the U.C.C. began in 1942. The U.C.C. was first promulgated in 1951 and was adopted by Pennsylvania in 1953. It was soon redrafted, in large measure because New York, a center of commercial activity, declined to adopt the original version. The 1962 version of the UCC was adopted by the legislatures of all 50 states, although Louisiana did not adopt Article 9 of the U.C.C. Of the UC.C., one prominent federal judge has written: "The U.C.C. is one of the most carefully assembled statutes in American history. It was written under the guidance of a few people, all careful drafters, debated for a decade by the American Law Institute and committees of commercial practitioners, and adopted en bloc by the states." Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir. 1986)(Easterbrook, dissenting).
    Virtually every state has adopted its own comparatively small number of "non-uniform amendments" that add to, vary, or delete particular sections of the UCC to reflect local approaches to particular issues. ALI and NCCUSL have substantially redrafted much of the U.C.C. in ensuing years to respond to changes in commerce and technology and to clarify, refine, elaborate, or add to the Code's resolution of legal issues. Most drafting changes have been adopted by most states, again with some non-uniform amendments. Of the many uniform laws drafted and proposed by ALI and NCCUSL, only the U.C.C. has been adopted by all states.
     It is important for you to remember that the law of any particular state is not the U.C.C., but rather the version of the U.C.C. (identical to the U.C.C. except for non-uniform amendments) that the state has adopted. For example, the version of the UCC adopted in California is known as the California Uniform Commercial Code. However, for convenience, these materials refer to the uniform version. Judicial decisions in each state that interpret and apply a section or sections of the state's version of the commercial code establish a common law of the commercial code that supplements the language of the code. As with common law generally, the reasoning and holdings of these judicial decisions in one state are not binding on the courts of other states, but such decisions often influence or persuade courts of other states to reach identical or comparable decisions on the same issues because the statutory language being applied in each state is typically identical. Moreover, for contract disputes that are not covered by any provisions of the commercial code (e.g. a contract of employment), a court may nonetheless apply a section of the commercial code "by analogy" if it believes that the rule expressed by the commercial code section is appropriate to adopt as a more general common law rule.
     The U.C.C. consists of thirteen "Articles" (known in California as "Divisions") addressing a wide variety of transactions. In the first year contracts course we study in depth only Article 1 ("General Provisions") and Article 2 ("Sales"). We do not study articles dealing with leasing, negotiable instruments (e.g. checks and promissory notes), bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title (e.g. warehouse receipts and bills of lading), investment securities, and personal property collateral. Upper division courses in most law schools cover some of those topics.
     Each Article consists of several Parts, each of which gathers individual sections into a general subtopic. Each section bears a caption, and the captions are considered part of the text of the statute. U.C.C. 1-109. Each section is followed by an Official Comment. The Official Comments, prepared by ALI and NCCUSL, are not part of the text of the statute and thus do not have the force of law, but a court may find the history, explanations, and examples in the Official Comments persuasive in resolving an issue of interpretation or application. General cross references and definitional cross references follow the Official Comments of most sections, but the cross references are not exhaustive. If you don't find a definitional cross reference, look in the general definitions that appear at the beginning of each Article and also at the general definitions in U.C.C. 1-201.
     U.C.C. Article 2 is entitled "Sales." That label is convenient shorthand for the slightly broader and more opaque language "transactions in goods." U.C.C. Article 2 applies to "transactions in goods." U.C.C. 2-102. "Goods" are defined in U.C.C. 2-105. We explore the meaning of "transactions in goods" in greater detail in Problem.Dispute.Digital photographs and Nim Plastics Corp. v. Standex International Corp (involving the etching of matte finishes on rolls of film). For the moment a few examples will suffice. Your purchase of a refrigerator from Sears or your purchase of an automobile from the local car dealer or from a resident in the next county is governed by Article 2. So is the purchase of computers used by Sears for its internal accounting and inventory control and the purchase by the car dealer of parts for its service and parts department. These are all transactions in goods. But the employment contract between Sears and its employees, or the car dealer's purchase of advertising, or its purchase or lease of real property on which to conduct business, or your purchase of a home, are not governed by Article 2 because employment, advertising, and real property are not goods.
     While U.C.C. Article 2 governs transactions in goods, it does not address all issues of contract law that may arise in such transactions. In large measure Article 2 supplies default terms. For example, Article 2 provides a remedy for breach of a sales contract where the parties have not agreed to a remedy and displaces for that sales contract any different rule established by common law. However, Article 2 does not tell you, for example, that one party to a contract may escape the obligations of the contract if she can demonstrate that her agreement to the contract was induced by duress (the proverbial "gun to the head"). Avoidance of a contract for duress is a general common law principle of contract law not addressed by Article 2. In such cases the U.C.C.. tells us to continue to apply the common law. See U.C.C. 1-103.
     U.C.C. Article 1 ("General Provisions") contains important provisions (e.g. U.C.C..1-103, above) that apply to all articles of the U.C.C .and contains a large number of definitions (U.C.C. 1-201) that are applicable to all articles of the U.C.C. unless displaced by another definition in a particular article. Clearly, therefore, we must study Article 1 in order to properly apply Article 2.
      We study U.C.C. Articles 1 and 2 in depth for several reasons, most obviously because transactions in goods constitute a significant portion of economic activity. The rules of Articles 1 and 2 therefore directly apply to many contracts. Moreover, as previously indicated, the concepts reflected in those rules influence the common law development of contract law even when the rules are not directly applicable. In addition, study of U.C.C. Articles 1 and 2 will help you develop skills in the use of statutes. An increasingly large percentage of legal issues are addressed by statutes and many important statutes enacted after the U.C.C., both state and federal, reflect the influence of either the content or the drafting style of the U.C.C.. Considering both the scope of its coverage and its enormous influence as a benchmark, the U.C.C. may be the most influential statute in the United States.
      In addition to the full text of U.C.C. Articles 1 and 2 (including Official Comments) that are reproduced in these materials, you will find a very useful online version of the Uniform Commercial Code at a web site maintained by the Legal Information Institute of Cornell Law School. Its copy of the uniform version includes hypertext links to definitions of all key terms in each section, but it does not include Official Comments. The site also contains a word search feature and links to the version of the code adopted in each of the 50 states.
      This general overview of the U.C.C. gives you a full plate. However, there is more on the subject to digest. In 2001, ALI and NCCUSL promulgated Revised U.C.C. Article 1. There are comparatively few significant differences between existing Article 1 and Revised Article 1. However, a couple of the differences may generate significant opposition in state legislatures, particularly by industry representatives, and this opposition may impede if not totally frustrate widespread adoption of Revised Article 1. As indicated earlier, as of August 2004, fewer than ten states have adopted Revised Article 1.
      In 1999, following many years of work, ALI approved a proposed Revised U.C.C. Article 2 but, in a very controversial session of its meeting in the summer of 1999, NCCUSL declined to do so, largely because of perceived industry opposition that might jeopardize uniform adoption. ALI and NCCUSL abandoned efforts to entirely revise U.C.C. Article 2 but, in 2003, approved a significant number of proposed amendments to U.C.C. Article 2 (as well as Revised Article 2A - Leases, which we do not study in these materials). Continuing controversy over some of the amendments, however, may jeopardize uniform or even widespread adoption of these amendments. Accordingly, as with Revised U.C.C. Article 1, it may be several years before we know how uniform U.C.C. Article 2 will remain. NCCUSL maintains and updates pages on its website identifying those states in which Revised Article 1 and amendments to Article 2 have been adopted and those states in which bills carrying Revised Article 1 and amendments to Article 2 have been introduced.
     Pending widespread adoption of Revised U.C.C. Article 1 and amendments to U.C.C. Article 2, these materials will focus on sections in existing Articles 1 and 2 but will refer to selected sections of Revised Article 1 or amendments to U.C.C. Article 2 when particularly significant, interesting, or educational (using the notation "R.U.C.C. [section number]", e.g. R.U.C.C. 1-201). Consider this example. Earlier in this commentary you read that parties to a contract may in their contract agree that the law of a particular state will govern any dispute between them concerning their contract as long as the transaction governed by the contract has a reasonable relationship to the state designated. U.C.C. 1-105(1). However, R.U.C.C.1-301(c)(1) provides instead that, with some exceptions, including those in which one party to the contract is a consumer, the parties to a contract may in their contract agree that the law of a particular state will govern any dispute between them concerning their contract whether or not the transaction governed by the contract has a reasonable relationship to the state designated. Some other parts of this new choice-of-law rule (both a new number for the section and new content in the section) may generate industry opposition that could derail widespread adoption of Revised Article 1.
      Other state statutory law
      In addition to the U.C.C., an enormous number and variety of other state statutes supply contract law. It would not be useful or practical to study all of them. Once again, therefore, these materials offer samples.
      Some statutes simply codify common law principles in general terms as of the time the statute was enacted. For example, Cal. Civ. Code 1550, enacted in 1872, reads:
"It is essential to the existence of a contract that there should be: 1. Parties capable of contracting; 2. Their consent; 3. A lawful object; and, 4. A sufficient cause or consideration."
One typically learns more about the meaning of the concepts in these types of statutes from judicial opinions, some of which refer to the common law and not to the statute as a source of authority. In these materials we pay little attention to these types of statutes.
      Other statutes deliberately alter or repudiate common law rules (typically phrased "derogate from the common law"). For example, Cal. Civ. Code 1671 alters the common law rule on the enforceability of a liquidated damages term (a term by which the parties agree how much one party will pay the other in damages for breaching a contract) against a party to a consumer contract (e.g. a contract in which one party buys or rents property, such as a car, for her own personal use).
      Some statutes address discrete subjects, generally when the legislature has concluded that detailed rule making is preferable to common law resolution of issues. The U.C.C. is a notable example. But there are many others, such as Cal. Civ. Code 1694 - 1694.4 dealing with dating service contracts, Cal. Civ. Code 1694.5 - 1694.9 dealing with weight loss contracts, Cal. Civ. Code 1790 - 1795.7 dealing with warranties in connection with the sale of new consumer goods, and hundreds of comparable state statutes throughout the United States.
     Administrative regulation
     A legislature will sometimes delegate to an administrative body the responsibility for enacting and enforcing detailed regulations, because an administrative body can draw upon additional expertise, time, and resources, and sometimes because the legislature may wish to dodge a hot political topic. We do not study state administrative regulations for the same reason that we do not study the myriad of state statutes other than the U.C.C. However, you may be interested in an example. See Title 16, Division 33, Chapter 1, Article 7, section 3353 of the California Code of Federal Regulations, dealing with estimates for automobile repair, promulgated by the California Bureau of Automotive Repair, part of the State of California Department of Consumer Affairs.
     2. Federal common law, federal statutory law, federal administrative regulation, and treaties
     In 1938, the United States Supreme Court held in Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), that federal courts do not have the power to create general federal common law. Accordingly, if a contract dispute is properly brought to a federal court, that court must apply the common law of the state in which the lawsuit was initiated, known as the "forum state." You will study that case in your course in Civil Procedure and will also study in that course when a contract dispute may be properly brought to a federal court. For present purposes, you need only know that there is no general federal common law of contract.
     However, a considerable amount and variety of federal statutory law and administrative regulation govern contracts of particular types. You may study some of this law in your upper division law school courses (e.g. legislation governing collective bargaining agreements between labor and management, or truth in lending legislation, or Federal Trade Commission regulation governing consumer credit contracts). Except for a few samples, we do not consider this specialized contract law in the first year contracts course. You will also learn in an upper division course on constitutional law the constitutional limits on the power of Congress to pass legislation.
     Under the United States Constitution, international treaties entered by the President with the concurrence of two-thirds of the Senate become the supreme law of the land applicable to the states. States and local governments may not enter international treaties. One international treaty, the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), is a significant source of contract law. This Convention "provides a uniform text of law for international sale of goods. [It] was prepared by the United Nations Commission on International Trade Law (UNCITRAL) and adopted by a diplomatic conference on 11 April 1980." See Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Contracts for the International Sale of Goods. A nation, referred to in CISG as a "State," that ratifies CISG is thereafter referred to as a "Contracting State." As of October 2002, 62 nations, including the United States, accounting for approximately two-thirds of the world's trade, had ratified CISG. With some exceptions that are stated in CISG, the CISG rules of contract law apply "to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State." CISG, Article 2. For example, a contract of sale between an Italian manufacturer of shoes and a United States purchaser will be governed by CISG because both parties have places of business in Contracting States (the UCC will not govern the transaction because CISG, as supreme law of the United States, preempts state law). Because of the enormous volume of international trade in goods and the large number of Contracting States, CISG is a significant source of contract law, but we do not study CISG in these materials. You may have an opportunity to study CISG in an upper division course in international trade and may wish to refer to an excellent electronic library concerning CISG that is maintained by Pace University School of Law.
    Supplementary reading: Farnsworth 1.8, 1.9.