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The United States (US) continues to be the world’s largest economy and one of Australia’s leading trading partners. Although each state has its own legal system, there is a degree of uniformity in US contract law. There are many similarities between Australian and US contract law reflecting their shared origins in English common law. However, each system has developed its own characteristics. If the Australian Government was to reform contract law, US law may provide some useful lessons.

Features of US contract law: the Restatement and the Uniform Commercial Code

In common law legal systems like Australia and the US, legal rules are created in a large number of different court decisions and statutes.

In the US, there has been an attempt to state all the rules of contract law in a single source, the Restatement (Second) on Contracts. This was drawn up by the American Law Institute, a body made up of eminent judges, lawyers and legal academics. The Restatement brings together the rules made by case law. Where there is a lack of uniformity in the case law, the Restatement puts forward a preferred solution.

The Restatement is not a code, because it has not been passed by the legislature. This means that it is not binding on US courts. However, courts consider it highly persuasive. The Restatement also serves as a basic text for students learning contract law.

The Uniform Commercial Code (UCC) is also important for US contract law. The UCC was drawn up to harmonise the law on sales and commercial transactions between the states. Unlike the Restatement, the UCC does not contain general rules applying to all contracts—it only applies to specific types of transactions. However, the UCC binds courts in all states, and overrides the Restatement and the common law.

How does a restatement compare with a code?

One disadvantage of legal codes is that they may make the law too rigid. Since a code is binding law, the courts have to apply it. Amendments to a code require legislation, which makes it difficult to change the code in response to new circumstances. A restatement may avoid some of these difficulties. Because it is not strictly binding, courts do not have to apply rules which are considered to be flawed or out of date. However, a restatement that is treated with deference by the courts may become closely equivalent to a code. Alternatively, if parts of the restatement are not applied, it fails to increase the accessibility of the law. Drawing up a restatement may require a significant investment of time and expertise. Since it is not legally binding like a code, courts will only apply a restatement if they accept that the text reflects an expert consensus. Work on the current US Restatement began in 1962 and was not completed until 1979.

How does US law compare with Australian law? In several areas, Australian and US contract law have undergone similar developments away from English common law rules. The US rules have generally evolved further than Australian law, so there are some important differences.

INFOLET 11

United States contract law:Lessons for Australia?

INFOLET 8

Consideration Unless each party gives a promise or a benefit or offers a detriment to the other, no contract is formed. This is known as the doctrine of consideration, and applies both in Australia and the US. Arguably, the importance of the consideration requirement is declining in both systems. Both Australian and US law allow someone who has received a promise without giving anything in return to enforce it in some circumstances. For example, in both systems a person can seek to enforce a promise if they have reasonably acted in reliance on it and would be worse off if it is not kept. However, the US has gone further in modifying the consideration requirement. According to the Restatement, an agreement to change an existing contract may not need to be supported by consideration if it is made in response to unforeseen difficulties faced by one party. For sales contracts to which the UCC applies, consideration is not needed to vary an existing contract. The UCC also provides that written promises to keep an offer open for a specified time can be binding while in Australia such offers are usually revocable.

Interpretation of contracts Contract cases often require courts to decide exactly what the words of a written contract mean. Courts face the choice of confining themselves to the ‘plain and ordinary meaning’ of the written words, or using evidence of the surrounding circumstances to help determine the words’ meaning. There has been a shift to greater use of extrinsic evidence in many common law jurisdictions, but the position in the Restatement goes much further than in Australian law. The leading case in Australia suggests that evidence of the surrounding circumstances can only be used by the court where the written words are ambiguous. Evidence of the parties’ pre-contractual negotiations, and of their conduct after the contract has been formed, cannot generally be used by the court to aid interpretation. In contrast, the Restatement takes a broad approach to the use of this kind of evidence. Evidence of the surrounding circumstances, including the parties’ previous dealings and their subsequent conduct, is admissible. There is no prerequisite that the text be ambiguous. However, a number of US states do not follow this aspect of the Restatement, preferring a more text-based approach.

Fairness and good faith Traditionally, contract law has emphasised parties’ freedom to contract on whatever terms they agree. On this view, it is not the court’s role to interfere when a party has made an unbalanced bargain. Most legal systems now take a more protective approach to less powerful parties who make disadvantageous contracts. In both Australia and the US, ‘unconscionable’ (or excessively unfair) contracts are not enforceable. The Restatement goes further than this. It also imposes a duty of good faith and fair dealing in the performance and enforcement of the contract. This limits the extent to which parties can act in their self-interest even if they would be within the letter of the contract. Although some Australian courts have accepted the idea of good faith, its place in Australian law is still unclear. (For more details see Infolet 8 Long-term contracts and good faith).

Question for consideration Which aspects of United States contract law, if any, should be considered in Australia?

Lessons for Australia? CONTINUED

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United States contract law:

INFOLET 11

Haveyour sayDISCLAIMER: This infolet does not provide legal or other professional advice, but contains general information about issues related to Australian contract law. The Australian Government does not accept responsibility for the accuracy and completeness of the information provided. Nor do the contents of this infolet commit the Australian Government to any particular course of action.

As we consider the future direction of Australian contract law, we want to take account of everyone’s experience and perspective. If you want to respond to the infolets, please email us at contractlaw@ag.gov.au. You can also access our discussion paper on reforming Australian contract law on the Attorney-General’s Department’s website at www.ag.gov.au/Consultationsreformsandreviews/Pages/Review-of-Australian-Contract-Law.aspx.