Understanding the Restatement (Second) of Contracts: A Comprehensive Guide
What is the Restatement (Second) of Contracts?
The Restatement (Second) of Contracts is among the most prominent and influential legal treatises of the modern era. It has helped define the landscape of contract law for the present generation, with its influence felt throughout the United States and even beyond. Its predecessors and successors only add to its significance.
The Restatement (Second) of Contracts is a comprehensive, 1,332-page overview of and guide to contract law in the United States. It is published by the American Law Institute — a non-profit organization that drafts model laws and principles to assist courts in the formation of the common law. The Restatement (Second) of Contracts was written over a period of 20 years, with its drafting commencing in 1954. The Restatement (Second) of Contracts was published in seven volumes from 1973 to 1981. The Restatement (Third) of Contracts was published in 1981 by the American Law Institute, which focused on a more principled approach than the previous Restatement.
In order to be included in the Restatement (Second) of Contracts , a principle must have been recognized by a substantial majority of states. Principles are then refined by the American Law Institute with input from other Restatement drafters and leading practitioners until they are ready to be proposed for adoption at an American Law Institute annual meeting. The members of the American Law Institute then vote on whether to adopt the principle, with a majority required for adoption. After approval by the members, the text is finalized to reflect the result of the vote and any subsequent editorial changes. The final text is then published.
The Restatement (Second) of Contracts, along with its predecessor the Restatement (First), has been cited more than 7,000 times in federal court opinions and more than 12,000 times in state court opinions. While some rules constitute the majority view, others were once the minority view but are now followed by a majority of states. Others are simply not dispositive because they have never been addressed by a court. The quotations above reflect the Restatement (Third).
History and Development of Contract Restatements
In 1906, the American Law Institute published the first Restatement of Contracts, a groundbreaking legal work whose conception and execution have been credited to the restatements’ primary drafter Karl Llewellyn. Within a year, the chief reporter of the project, Professor Joseph Beale, resigned from the project over disagreements with Llewellyn. In May of 1917, the ALI discontinued the first restatement. Although the Restatement of Contracts was well-received in some quarters, it had not come close to achieving comprehensive coverage. In 1923, "The Restatement" of the Law of Agency was published as a separate project. While grades of "excellent" and "good" were common for the agency restatement, its reviewers nonetheless called it an "unambitious lame duck." The American Law Institute thus concluded that its restatement projects would be conducted world-wide – in future projects, as well as in existing projects – in the "restatement" manner but under the auspices of underlying groups like the American Law Institute’s Restatement of the Law of Agency, "which may in such a case continue or take over the initiative by the ALI." The age of adjudication reigned supreme in contract law in the years after the first restatement’s demise, with individual states promulgating their own contract principles-cum-codes. By the time of the Second Restatement’s emergence, states had created myriad vastly differing contract principles, spawning a system that was characterized by "an unwieldy and largely incoherent body of case law." By 1962, the Restatement of Agency had been incorporated into the Second Restatement, as had the Restatement of Judgments, the Restatement of Torts, and the Restatement of Conflict of Laws. Professor Llewellyn – the architect of the modern model rules of sales with Professor Arthur Corbin – tipped his hat to the work of Sir Frederick Pollack, who elements of the modern contract law we know today. Psychologically, the drafting of the Second Restatement proved much more successful than the first, which was undertaken without guidance of any kind. The chief reporter, Professor Arthur Corbin, was assisted by a stellar selection of legal authorities on contemporary contract issues. Corbin not only undertook the Second Restatement ably, but he also produced key contributions to the Second and Third Restatement of Torts. Llewellyn’s role in the Second Restatement is irrefutable, with his fingerprints all over the document. Without Professor Llewellyn’s monumental efforts, the Second Restatement would never have even begun in the first place. Meanwhile, given Llewellyn’s later disagreements with Professor Beale and then chief reporter Corbin, it is notable that Llewellyn cooperated and collaborated with them during the drafting of the Second Restatement.
Key Principles of the Restatement (Second) of Contracts
The Restatement (Second) of Contracts provides a comprehensive, albeit general, set of principles that govern contract formation, performance, and breach. It acts as a guide, summarizing the law as it has evolved with respect to contracts to date. In this section, we will review the key principles and rules issued by the Restatement (Second) of Contracts.
One of the most important of these principles is that for a contract to be formed there must be an offer, acceptance and consideration. An offer is a manifestation of willingness to enter into a bargain. A valid offer need not be made in any particular form or need not be communicated to the other party before a valid contract may be formed. There are certain objective criteria that must be met, however, for something to qualify as an offer. These include an indication of desire, intent or readiness to conclude a bargain; and a sufficient essential detail. A valid offer would include a price term, the subject matter of the contract and the parties to the transaction.
Acceptance is a manifestation of assent to the terms of an offer made by the offeree in a manner invited or required by the offer. Similar to an offer, an acceptance need not be communicated to the other party, although where a contract is conditioned on communication of acceptance, that condition must be fulfilled. If the method of acceptance is provided in the offer, the offeree must accept using only that method to form a contract.
Both offer and acceptance must show that assent to the contract terms is exhibited by the parties involved. In other words, meeting of minds must occur. Once an agreement is complete there can be no misunderstanding about the parties’ obligations because there is a reasonable level of detail in the agreement. Any ambiguity may be rectified by the parol evidence rule which prohibits evidence of prior or contemporaneous oral or written agreements. The purpose of the parol evidence rule is to protect parties to a contract so that after a contract has been entered into, an attempt cannot be made to change the terms of the agreement.
The final element of a valid contract is consideration. Consideration is some benefit or value given by both parties to a contract. If either party does not meet this requirement the contract will not be enforceable. Consideration does not have to be monetary, but it has to be a legal detriment to one of the parties or a legal benefit to the other.
There are many ways a contract may be terminated. In some cases, the offer may be terminated if it was rejected, has expired or is revoked. If a contract has been broken, the innocent party may bring about a remedy in respect of the breach. This remedy may or may not be damages, but in any case the innocent party’s primary right is to be placed, so far as money can do it, in the position he or she would have been in had the contract been performed.
Influence on Modern Contract Law
The Restatement (Second) of Contracts has had a profound influence on modern U.S. contract law. From its inception, it has served as a beacon of guidance for the resolution of complex legal issues concerning the enforcement and interpretation of contracts.
The Restatement (Second) of Contracts has been an integral part of landmark decisions. For example, in Hadley v. Baxendale, 156 Eng. Rep. 145 (1854), a seminal case often cited in Restatement (Second) commentary, the court borrowed the concept of foreseeability from the Restatement to determine what damages are recoverable in breach of contract cases. The Restatement defines the principle as the "damages that arise naturally from the breach of contract, or those that the parties contemplated at the time the contract was formed."
Courts have also used the Restatement (Second) of Contracts to determine whether to enforce specific performance of a contract. The Restatement (Second) lays out the circumstances in which specific performance may be granted, such as where the sale of an unique item is at issue or if the breach would cause irreparable harm.
Evidence of the Restatement (Second) of Contracts also appears in the determination of whether an implied contractual obligation exists. Courts follow what the Restatement (Second) of Contracts sets forth as the consideration of a contracting party’s actions as acceptance of a binding commitment. In such cases, statements and acts can supercede the written language of the contract.
The Restatement (Second) of Contracts remains a seminal instrument in understanding how the individual states laws apply to contracts. Although the Restatement is not legally binding, it has been adopted, in whole or in part, by a majority of the states. It is often the basis for existing legislation, court decisions and legal commentaries.
Comparison of the First Restatement and the Second Restatement of Contracts
While the first Restatement of Contracts remains a relevant and useful source for contract law analysis, the Restatement (Second) is generally viewed as the most authoritative statement of the common law of contracts today. Nevertheless, there are some differences between the two Restatements worth recognizing.
Many provisions in the Restatement (Second) were imported from the first Restatement, but there were additions and revisions made to vocabulary that substantially modified certain doctrines. For example, in the first Restatement the doctrine of consideration was limited to those benefits or detriments that were "bargained for" by the parties to a contract. The Restatement (Second), however, broadened the consideration rule to focus on the concept of "exchange," and has its own definition of "bargained for."
Similarly, the first Restatement defined "reciprocal promises" as "one made in exchange for at least one other in any sequence." The Restatement (Second) established what has become known as the "bargained for exchange" rule, which defines it as: "(a) a performance or a return promise which must be bargained for is induced by the promise or performance of the other; (b) performance may consist of an act other than a return promise, of a forbearance; or of the creation, modification, or destruction of a legal relation; (c) a return promise may be implied from the circumstances . In other words, a promise is induced by a return promise if the promised performance is sought as part of the bargain to secure the return promise."
Additionally, The Restatement (Second) expanded the "legal detriment" requirement to allow courts to find a "detriment" in a promise to make a gift, due to the fact that the Restatement (Second) supports the concept that a legal detriment is "any reduction in the legal rights of the promisee" in is sufficient consideration to support a bargain.
The Restatement (Second) also added definitions and rules to the doctrine of Mistake, Frustration of Purpose, Impossibility and Interpretation. In fact, the Restatement (Second) expanded upon the Restatement (First)"futility of performance" doctrine to include the "Commercial Impracticability" rule, which arguably was invented by the drafters of the Restatement (Second). The new Restatement also added pages of commentary to Section 1, which is devoted to discussing good faith and fair dealing.
Finally, the Restatement (Second) was not restricted to only primary rules of contract law, and contained discussion of secondary rules, such as presumed terms, implied terms, conditions, assignments, delegations and third party beneficiary.
Practical Application in Legal Practice
Attorneys and judges make use of the Restatement (Second) of Contracts in a variety of ways. For instance, a trial court facing an issue of first impression may look to the restatement as a reliable source for guiding case law reasoning. On appeal, the parties may incorporate restatement contract principles into their briefs and courts will often cite to the restatement as a secondary source to help justify their interpretations of the law. In addition to these uses, the restatement also finds its way into judicial opinions in the form of expert witness testimony. Courts have relied on the testimony of experts as to whether a contract clause is consistent or consistent with the restatement. In one case, a court looked favorably upon a restatement standard for granting reformation where there was a mistake in the drafting process. Ultimately, the restatement bolsters the documents drafted by legal professionals and provides a greater consistency in language.
In the legal education environment, the Restatement has been a key element in the teaching of contract law. Law professors frequently assign the restatement (Second) of Contracts as part of their contract law curriculum. Many legal textbooks on contracts also rely on restatement contract principles to illustrate contract disputes. In addition, it is common for contract law textbooks to include excerpts from notable cases decided using restatement standards. Restatement Casebooks provide summaries of notable contract law cases.
Criticisms and Limitations
Although the Restatement (Second) of Contracts has been long celebrated, it is not without its naysayers. The criticisms generally focus on two components: alleged failures of coverage and alleged flaws in its construction.
Coverage Flaws. Critics have claimed that the Restatement (Second) fails to recognize a variety of important categories of enforceable contracts. They include some that were well recognized, such as:
- contracts whose terms are completely nonverbal;
- contracts made through the medium of a fictional writing created by only one party;
- contracts concluded in the absence of offer and acceptance in the formation process, such as through a "unilateral request or invitation" that results in one party’s performance; and
- judicially-created quasi-contracts based on "unjust enrichment."
These exclusions strike some critics as unreasonable and even indefensible. One analysis noted in particular that while the Restatement (Second) recognizes the enforceability of contracts implied-in-fact, it omitted any consideration of contracts implied-in-law, including those based on unjust enrichment.
Construction Flaws. The construction of the Restatement (Second) has also been called into question. One noted that, "It is no easy matter to tell whether a rule appearing in the Restatement is more than a simple restatement of existing law and whether it is meant to be vitiated by special detail or can be ignored if the reader of it prefers to start from scratch with an independent view." A particular concern is that the Restatement (Second) leaves so much unexplained that it does not serve as a reliable guide for either drafting contracts or enforcing them. It is as a result sometimes treated more as a form of a list that a comprehensive treatise on contract law.
Nevertheless, the Restatement (Second) has been consistently cited in hundreds of judicial opinions. Moreover, although the Restatement (Second) occasionally has been criticized for lack of comprehensiveness, it has also been held that similar arguments could be made about many if not most treatises on contract law.
To achieve a better understanding and appreciation of the topic, and to be able to effectively cite applicable authority, it is important to recognize what the Restatement (Second) does, and what it does not.
Future of the Restatement of Contracts
The future of Contract Restatements lies in their ability to reflect an increasingly complex world. As global commerce continues to grow and the law adapts to new industries and technologies, the body of law that guides contracts will need to evolve to remain relevant.
Indeed, the economic forces that drove the birth of the Restatement (First) of Contracts continue apace. Carried forward into the Restatement (Second), the justifications for continuing restatement are just as compelling today. Changing contract law—including problems that the early draftsmen could not have imagined and new industries that were not yet in existence—will drive a demand for a third restatement. As such, the ultimate question is not whether there will be a Third Restatement, but rather when.
Professors Corbin and Williston—whose work contributed so heavily toward guiding practitioners before the Restatement (Second)—both opined on why contract law should consist of "black letter" rules, well thought out, clear-cut, and easy to apply . Indeed, that was a primary goal behind the creation of the Restatement (Second). Whether one subscribes to that approach or not, it remains true that the "black letter" justification still applies to contract restatements today.
It should be noted that the Restatement (Third) of Contracts was published in 2003, but became outdated first by subsequent model laws like the Uniform Computer Information Transactions Act and then by technological advances. As mentioned above, a Third Restatement is needed more than ever today.
Because contracts affect nearly all commercial interactions and including elements like choice-of-law and choice-of-venue provisions that govern any potential litigation, contract restatements will always be necessary. Where they fit into the evolution of contract law in the future remains to be seen.