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The common law is the body of legal rules created over time by judges as they issue written opinions resolving individual lawsuits. The opinions serve as precedents to guide the resolution of future similar cases. The common law is to be contrasted with positive law, which consists of statutes passed by legislatures.

The principal subject areas of the common law are contracts, property, and torts. Common law originated as customary rules of social conduct that came to be enforced in the English courts. It also applied in the British colonies and was adopted by the fledgling United States, whose courts adapted it as necessary to suit the American experience.

The common law has three distinctive features that define it and set it apart from positive law. First, it is not a written code. There is no single source, such as a statute book, that codifies the principles that apply to a given case.

Second, common law develops through the resolution of actual legal controversies, primarily at the appellate level. The judge's opinion typically sets forth the facts and the applicable legal principles and resolves the case by applying the principles to the facts.

Third, the common law develops through the accumulation of these opinions, or precedents, as they are applied to similar cases in the future. The doctrine of precedent is based on the principle of stare decisis (to stand by a decision), which binds courts to follow prior judicial decisions unless circumstances (e.g., a change in societal norms) compel a reexamination or overturning of a prior case. The doctrine is intended to ensure that the same legal principles apply to all similarly situated parties. It also establishes the rule of law: Basing decisions on precedent ensures that society is governed by established rules rather than the personal views of each judge.

Contracts

A contract is an agreement between two or more parties. Contracts usually consist of an exchange of promises of future performance; for example, one party promises to paint the other party's house, while the other party promises to pay a certain sum on completion.

The essence of contract is free exchange—each party freely decides what to promise and what to demand in return. Freedom of contract promotes mutually beneficial exchanges by willing parties. In interpreting ambiguous contract terms, courts attempt to determine the intent of the parties to carry out their will.

The question at the heart of contract law is, “Why does society enforce promises?” According to libertarians, the key is free choice: The purpose of the state is to secure individual liberty, and contracts embody the free choice of the parties. Others answer that contract is a form of economic exchange in a free market. Because contracts are free exchanges, each party to a contract believes it has benefited by the exchange—has gotten more than it has given—and, therefore, contracts increase the sum of society's wealth. Indeed, because the enforcement of contracts makes free exchange and, hence, business transactions possible, it is one of the law's most important functions.

Still others believe that society enforces contracts not to promote exchanges but to compensate the injured party in the event of breach. Because a promise induces reliance, a party must be made whole when he or she relies on a promise to his or her detriment. This rationale shifts the focus of contract law from the will of the parties to a notion more like that of tort: The focus is on fairness to the injured party rather than enforcement of a free exchange.

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