Contracts allocate responsibilities, rewards and property rights among parties to the contract.
Transaction costs are the costs involved in managing any economic activity. In the case of contracts it includes costs involved in gaining information about the subject of the transaction, searches relating to potential contractual parties, negotiating with and monitoring other parties to the contract, and the costs of enforcing the contract.
For standard contracts that are frequently repeated – such as the purchase of a car or a house – these costs are relatively low as templates have been developed through many previous transactions. These can be tweaked to fit specific transactions.
Small, frequently repeated transactions, such as buying a loaf of bread, also involve contracts. However, they do not usually require written contracts – in the case of poor performance, the buyer will probably just choose to make their next transaction with another party.
For large one-off contracts – for example building an offshore gas extraction platform – transaction costs can be very high. In circumstances such as this it is important for the parties to be able to enforce the contract.
Duration of contracts
Typically contracts cover a period of time and so are usually designed to be able to cope with variations in hard-to-predict factors. Some contracts may be for very long periods of time, for example a contract to supply gas from the Kapuni gas field covered 30 years. Others may be perpetually renewable and so at the time they are entered into they need to specify how to manage future situations. For example leases with a perpetual right of renewal specify how the rent is to be determined at dates in the future, and other long-term contracts include procedures defining how prices should be set.
Only a few key factors can be anticipated in a contract document, and contract disputes often arise over changed circumstances, as well in cases of deliberate breach.
Disputes are settled in various ways, including negotiation, arbitration and court determination. In the settlement process the courts interpret the contracts, and may add terms into the contract to reduce ambiguity. New Zealand courts widely apply the common law approach to contract disputes, but many acts of Parliament have had the effect of reducing the influence of common law.
Contracts and statute law
Parliament has passed a substantial amount of legislation aimed directly at influencing contracts, including:
- the Frustrated Contracts Act 1944, which made provision for compensation where a party to a contract suffered loss through no fault of their own, for example if the contract was cancelled by the other party
- the Contracts Enforcement Act 1956, which stipulated that no contract was enforceable unless it was in writing
- the Public Bodies Contracts Act 1959, which standardised the terms under which officers of local councils or other public entities could enter into contracts
- the Illegal Contracts Act 1970, which stipulated that contracts were not void even if at some point they led to an illegal action
- the Contractual Mistakes Act 1977, which standardised the law that applied when mistakes in contracts occurred that were accepted as such by both parties
- the Contractual Remedies Act 1979, which allowed a party to a contract to go to court in respect of disagreement over statements made in the course of negotiating a contract.
For particular economic activities, such as employment, legislation is especially prescriptive.