Contract Law For most of us living in Western societies contracts pervade most of our waking hours, yet how often do we really think about the countless transactions that we engage in every day? Buying a cappuccino at the corner Starbucks, streaming a video on Netflix, or coming home to a mortgaged house can involve countless contracts, both unstated and written. In fact, our ability to stream videos over the internet in our own home probably involves layers upon layers of contracts. Given the importance of contracts in our everyday lives, it should come as no surprise that volumes of statutes have been crafted at both the state and federal levels which attempt to define the legal parameters of exchange relationships. Contrary to expectations, however, some controversy remains due to opaque or contradictory judicial rulings (Chirelstein, 2010, p. 1). This report will examine the basic elements of contracts, the laws governing their use, and the impact of contracts on society.

The Elements of a Contract

A contract is a legally enforceable if it contains the following four elements: (1) mutual assent, (2) consideration, (3) capacity, and (4) legality (Legal Information Institute, 2010). When one party makes an offer of exchange and the other party accepts, this generally represents an enforceable contract under the law (Chirelstein, 2010, p. 36-38). This 'mutual assent' can take the form of a written or verbal agreement, or exist simply by virtue of engaging in the exchange. Ordering a pizza over the phone involves mutual assent between the customer and the restaurant. Consideration is what is exchanged, which may take the form of an act, a promise to perform a future act, or the promise to not perform (Epstein, Markell, & Ponoroff, 2012, p. 31). The promise of paying $20 over the phone to a pizzeria is consideration to the pizzeria, while the promise to bake and deliver the pizza is the customer's consideration. Capacity refers to a person's ability to legally engage in a contract (Chirelstein, 2010, p. 81). For example, minors, drunks and the mentally ill are generally considered to lack legal capacity. The element of legality simply implies that the exchange must be recognized as legal, which means that ordering marijuana from a dealer over the phone would not be enforceable under contract law (in most states).

Required Information for a Contract

Contracts represent a legal framework for enforcement of promises (Chirelstein, 2010, p. 12). The Restatement of the Law, Second, of Contracts defines an enforceable contract as containing "a bargain" (as cited in Chirelstein, 2010, p. 12). In addition, the parties to the contract must give mutual assent and agree to give consideration. An agreement written on a paper napkin was contested before the Virginia Supreme Court by two farmers (Lucy v. Zehmer, 1954). Both men were drinking and Farmer Lucy offered $50,000 for Farmer Zehmer's property, but according to Zehmer the offer was made in jest to embarrass the financially-strapped Lucy. Zehmer even had his wife co-sign the contract to make the charade more elaborate. In court Zehmer claimed that the offer was made in jest, while Lucy argued that Zehmer never openly revealed that he was engaging in a charade. A lower court decided in favor of Zehmer, but the Virginia Supreme Court found that both parties had voluntarily assented to the exchange and reversed the lower court's decision. The contract contained a promise to sell Lucy Zehmer's farm if he came up with $50,000 within 48 hours. This was the bargain, the signatures represented mutual assent, and consideration was in the form of a promise to pay $50,000 to Zehmer in exchange for a deed to the property.

Contract Law

An English judge in the 14th century held that any person who stands bail for a prisoner will suffer the sentence imposed should the prisoner fails to return, including being hanged until dead (Holmes, 2000, Lecture VI). Although bail bondsmen today pay a fine instead, this common law principle remains largely intact today. A more recent decision by the U.S. Supreme Court described the how state judges have traditional viewed arbitration contracts with hostility (AT&T Mobility v. Concepcion, 2011). For example, California courts had viewed arbitration provisions that preclude class-actions as unconscionable and therefore unenforceable. The majority opinion in Concepcion, however, held that Section 2 of the Federal Arbitration Act preempted California common law, thereby upholding the legality of arbitration contracts more generally and class action waivers specifically. This case also reveals how statutory governance of contract law has been displacing or redefining common law principles.

Private law also governs contracts, which are provisions in the contract that supersede state law (Legal Information Institute, 2002). Most contracts never enter a courtroom, so most are executed without any problems; however, private law can enforce contracts through a threat to a party's reputation (Schwartz, 2003, p. 557). The sanction incurred can include no future contracts between the parties and the spread of a poor reputation throughout an industry. As Schwartz (2003) mentions, however, news of poor performance can get lost in a large economy.

Handling Contract Disputes

When courts are faced with deciphering the original meaning of a contract the parole evidence rule comes into

590-591). A more liberal application of the parol evidence rule used in most courts, one supported by the Uniform Commercial Code, permits judicial review of both the original text of the contract and any extrinsic evidence that would not undermine the contract's wording. Some courts, however, use a stricter interpretation of the parol evidence rule, one that limits judicial consideration to the text alone.
Parties to a contract can sometimes assign their rights under an existing contract to a third party (Hillman, 2004, p. 333). For example, when a customer orders a pizza from a restaurant for home delivery, the restaurant can assign a portion of the rights to the consideration to a third party delivery service. When an assignment of rights occurs the promisor may also delegate contractual duties. For example, if the third party delivery service fails to collect payment from the customer the restaurant could demand payment from the delivery service. A recent U.S. Supreme Court case examined the assignment of rights that takes place between the Centers for Medicaid & Medicare, the state agencies that administer Medicaid benefits, and Medicaid recipients (Arkansas Department of Health & Human Services v. Alhborn, 2006). When an Arkansas resident receives Medicaid coverage for injuries sustained due to the actions of others, the recipient assigns her right to any settlement, judgment, or award to the Arkansas Department of Health & Human Services for the costs of benefits (ADHS). In addition, ADHS reserves the right to recover the cost of benefits from third parties on behalf of the recipient. The Court drew a distinction between settlements intended to cover medical expenses, lost wages, future medical expenses, or emotional trauma, thereby limiting the assignment of the right to reclaim the cost of medical benefits to the settlement amount allocated for medical expenses only.

Impact on Society

The efficiency of the market depends on the mutually beneficial exchange of goods, services, and labor; therefore society has a vested interest in promoting freely made contracts (Chirelstein, 2010, p. 2). An integral component of Western economies is the supply chain, but when Wu (2013) examined the predictive power of a traditional contract model he found it inadequate. The traditional model defines a contract as a single bargain between parties, but Wu (2013) discovered that supply chain practices today involve strategic and reciprocal interactions that extend well into the future. Of the three supply-chain contracts examined, wholesale price, buyback, and revenue-sharing, buyback contracts outperformed all others because of fewer disagreements and higher sales volumes. The freedom of contract therefore promotes commercial efficiency by lowering operating costs and consumer prices. A prime example is the success of Walmart as a discount retailer (Traub, 2012).

The search for greater supply chain efficiency at any cost, however, can have dramatic negative consequences. Cost-cutting measures that threaten the health and safety of workers seem to be in the news frequently. In 2010 the world learned of the high suicide rate of workers at Foxconn in Taiwan, a manufacturer supplying parts to Apple, Dell, HP, and Sony (Guo, Lee, & Swinney, 2013). Low wages, harsh living conditions, and forced overtime were some of the main contributing factors. While some consumers look the other way, others have reacted by boycotting businesses that have contracts with sweatshops. In 2000, the Worker's Rights Consortium threatened to boycott Gear for Sports, thereby threatening to strip away 20% of their revenue.

Summary

Contracts are a necessary and inescapable component of any society, but the rules that govern the legal enforcement of promises continue to evolve. Everyone benefits, from businesses to consumers, but a strong legal framework is required to keep everyone honest. This framework, however, fails to address the shortcomings inherent in international contracts. In such cases, consumers have stepped in to impose informal private law sanctions on businesses that violate international human rights standards using boycotts.

References

Arkansas Department of Health & Human Services v. Alhborn,…