2 - General Principles of Contract Law

Summary

INTRODUCTION

Contracts are quintessentially about relationships. In the usual case, two (or more) parties enter into an agreement in which they commit themselves to certain obligations to each other. The relationship between the parties is of relatively little importance in over-the-counter sales or even in the high-value world of financial trading, where transactions are concluded instantaneously. However, commercial parties often enter into contracts that last for many years and the provisions of the contract are the backdrop against which they do business with each other. At the beginning of the life of a contract both parties optimistically hope that the courts need never be involved and in most cases the content of the contract remains a private matter which regulates their business relationship without contention. It perhaps seems strange that the law should intervene at all in private commercial agreements and in the common law world there has traditionally been reluctance for either governments or courts to interfere with the operation of commerce. That reluctance stems from the belief that individual and commercial freedom creates the best environment for business to flourish and for the economy to grow. However, when things go wrong it is important for business confidence and commercial certainty that the agreement the parties have made with each other is enforceable and that the remedies it provides can be relied on. Commercial contracts, therefore, have two principal functions: to provide certainty by setting out clearly and concisely in advance the parties’ respective rights and obligations; and to provide a solution when things go wrong through application of the default rules of contract law.

Much of what we refer to as commercial law is founded on the application of the law of contract in a corporate and business context. Contract is at the core of the law of agency (Chapter Four); it provides the basis of the relationship between partners to a partnership (Chapter Five); it regulates the seller's obligations towards the buyer, and vice versa, in the sale of goods (Chapter Six); the institution of insurance depends on a contractual relationship between the insurer and the insured (Chapter Seven); contract is the primary means through which a commercial debt may be created and enforced (Chapter Eight); and it provides a mechanism by which one party undertakes to guarantee the performance of another's obligation (Chapter Ten).