Sources of Contract Law: Common Law & Uniform Commercial Code

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  • 0:07 Contract Law in General
  • 2:22 Common Law and Acceptance
  • 3:40 Uniform Commercial Code (UCC)
  • 4:39 UCC in Practice
  • 7:02 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

There are two sources of contract law: common law, which is based on case rulings, and statutory law, which is based on federal and state statutes. Contract law uses both common law and a set of statutory rules known as the Uniform Commercial Code.

Contract Law in General

Contract law controls most agreements between parties, whether oral or written, that involve goods, services, money, employment contracts and real estate deals. Let's use an example to put contract law into motion.

Maurice wanted to sell his vintage car, so he placed a classified ad on a popular website offering the car for a whopping $35,000. Kendall noticed the ad and quickly emailed Maurice requesting a test drive. After zipping around town, Kendall accepted Maurice's offer of $35,000 without a single negotiation. The parties have offer and acceptance.

Once this is done, they drafted a contract for the sale of the car. When Kendall coughed up the $35,000 cash, and Maurice handed over the keys, there was an exchange of something of value to both parties and the element of consideration was met. As long as the remaining elements are satisfied, the deal is as good as done!

The law recognizes this as a contract, meaning a legal document containing signatures of two or more parties that is binding and enforceable. Of course, there are certain other elements that must be present, like:

  • Mutuality or meeting of the minds, meaning both parties understand and agree with the terms of the contract
  • Capacity, meaning both parties are free of mental illness or intoxication and neither is a minor
  • Legally accepted terms

However, even when all elements are met, this does not always mean that both parties will commit to the promises made in the contract. For this, the set of laws or rules were developed that govern how contracts are written and executed. In short, they ensure that both parties to a contract adhere to their promises. The law sets some ground rules everyone has to follow, so that neither party loses out on a promise made to him.

The umbrella of contract law is divided into two areas:

  • Common law
  • Uniform Commercial Code (UCC)

Both areas of contract law work in similar ways, but the difference lies in the type of contract. And, both require that certain elements of a contract be present. The most significant difference is in acceptance, an important element to any contract.

Common Law and Acceptance

Common law contracts require strict adherence to the mirror image rule, while the UCC allows for minor changes to a contract that do not significantly impact its terms. We will focus on the element of acceptance. Common law is like a precedent set by prior court rulings. In other words, no set-in-stone law applies to common law decisions. And, decisions may vary by court or state.

Next, common law contracts also use the mirror image rule, meaning acceptance must be for the exact same terms and conditions presented in the offer. Nothing is permitted to change or the offer is no longer valid. To make this a bit clearer, let's revisit Maurice and Kendall. We know that Maurice and Kendall were in the midst of working out a deal for the sale of his sports car.

Suppose when Maurice presented Kendall with the contract for $35,000, Kendall slashed through the $35,000 and returned the signed contract with a price reduction of $2,500 written in pen. Mirror image rule would say that there is no longer a valid contract. Acceptance of the original offer of $35,000 stands. Even though Kendall signed the contract, the price was changed. The element of acceptance has no longer been met and no contract exists. The Uniform Commercial Code is a bit less restrictive.

Uniform Commercial Code

Unlike common law, the Uniform Commercial Code deals specifically with commercial contracts. It is actually a set of laws that governs transactions between states and in business transactions. It was designed to create a uniform set of standards that regulate fairness in commercial transactions. The Uniform Commercial Code is a comprehensive set of nine articles or laws and rules. For our purposes, we will focus on Article 2 - Sales.

Article 2 was written so that transactions between businesses would be more elastic than, say, the mirror image rule, to allow flexibility making contract formation easier to facilitate. This is because acceptance and consideration work a bit differently. In common law, for a contract to be binding, one party offers, the other party accepts and something of value is exchanged.

The terms of offer, acceptance and consideration - amongst other elements - are written or expressed orally in a very specific way. The Uniform Commercial Code does require that whatever promises each party makes must be fulfilled but not in such strict terms.

Let's say you were a jalapeño farmer. Pico's Tacos buys most of its peppers from your farm. They do this by emailing your sales department with their order on a weekly basis. Since you have been selling jalapeños to Pico's for years at the price of $50 a case, there is an assumption that the peppers will remain $50 a case.

When the peppers arrive, Pico notices that you raised the price to $60 a case. Pico can either accept the peppers at the higher price, or he can refuse the shipment and send the pepper truck driver packing. Pico accepted the peppers at the higher price. The important nuance: Acceptance came after the delivery and the price change.

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