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A contract is an agreement between two parties that creates an obligation to do or refrain from doing a particular thing. The purpose of a contract is to establish the terms of the agreement by which the parties have fixed their rights and duties. Courts must enforce valid contracts, unless one party has legal grounds to bar enforcement.

Consumers and commercial entities both depend on the enforceability of contracts when conducting business relations. When consumers or commercial entities enter a contract to buy goods or services at a particular price, in a particular amount, or of a particular quality, they expect the seller to deliver goods and services that conform to the contract. Manufacturers, wholesalers, and retailers similarly expect that their goods and services will be bought in accordance with the terms of the contract.

A legal action for breach of contract arises when at least one party’s performance does not live up to the terms of the contract and causes the other party to suffer economic damage or other types of measurable injury. The injury may include any loss suffered by the plaintiff in having to buy replacement goods or services at a higher price or of a lower quality from someone else in the market. It may also include the costs and expenses incurred by the plaintiff in having to locate replacement goods or services in the first place.

Contract disputes may be governed by the common law, statutory law, or both. Each state has developed its own common law of contracts, which consists of a body of jurisprudence developed over time by trial and appellate courts on a case-by-case basis. Many states have been influenced by the Restatement (Second) of Contracts, which was approved by the American Law Institute (ALI) in 1979.

For contracts involving commercial transactions, all fifty states have enacted, at least partially, a body of statutory law called the Uniform Commercial Code (UCC), which governs a variety of commercial relations involving consumers and merchants, among others. Article 2 of the U.C.C. governs the sale of goods, which are defined by the code as items that are “movable” at the time of the contract. The National Conference of Commissioners on Uniform States Laws, along with the ALI and the American Bar Association, approved a revised version of Article 2 in 2003. However, as of February 2006, no state had adopted the revised version.

State legislatures have also enacted a host of other statutes governing contracts that affect the public interest. For example, most states have passed legislation governing the terms of insurance contracts to guarantee that sufficient financial resources will be available for residents who are injured by accident. Congress has passed a number of laws governing contracts as well, ranging from laws that regulate the terms of collective bargaining agreements between labor and management to laws that regulate false advertising and promote fair trade.

Inside Contracts