Week 5 - Invalid contracts

what are the external reasons for invalidity of contracts?

• infringement of fundamental principles

• infringement of mandatory rules

which article outlines the grounds for invalidity of contracts?

art. II - 7:101

which art outlines fundamental principles?

art. II - 7:301

which art outlines mandatory rules?

art. II - 7:302

what are fundamental principles?

• abstract, basic values

• deep rooted principles

• good morals / public order

what is the reasoning to limiting party autonomy?

• freedom to conclude contracts stops where public interest begins

are there variations in what fundamental principles are?

• yes, variations across space + time

• what society considers fundamental principles changes based on where you are and in what time period you are in

who decides the scope of morality, public policy, fundamental principles?

• legislator makes law which sets boundaries

• judge has to decide which contracts are “unfair”

• conflict = leads to differing interpretations, a conservative judge against a liberal judge may disagree on what good morals mean

mercantile views vs non-mercantile views

2 competing schools of thought for why we interfere with contracts

mercantile views

correction of market failure

economic reasons to make the market work better

examples = monopoly, information asymmetry, efficiency

non-mercantile views

• elements of social justice

• ethical reaosn, nothing to do with profit

• examples: equality

usurious contracts

a contract where lender charges excessively high or exploitative interest rate

fundamental principles in the DCFR (pros and cons)

• not a definite / complete list of fundamental principles

• pros = include both mercantile and non-mercantile views

• cons = no hierarchy, what happens in conflict of fundamental principles?

what guides the fundamental principles of DCFR

• EC treaty, ECHR, EU charter on human rights

• look at these instruments to determine if contract violates fundamental principles of DCFR

Contracts infringing mandatory rules

• II - 7:302

• when the contract infringes mandatory rule of law (either national rule or european law)

where to look if contract violates mandatory law?

• art. II - 7:302

• para 2 = if the rule does not state the legal consequences for infrigement

what are the effects of nullity or avoidance?

• How does the DCFR handle the restitution of goods, money, and property ownership once a contract is wiped out?

• exchange of goods or money = governed by unjustified enrichment

• property ownership = governed by rules on transfer of ownership

• judicial discretion = the court retains the ultimate power to modify the contract or its cleanup effects to ensure a proportional and equitable outcome

illegality defence

• normally if contract is void, everyone gets their stuff back

• but if contract infringed on fundamental principles or mandatory rules (external ONLY)

• a court can refuse the return of money or property

What is the problem with the illegality defence?

• the illegality defence is not permittable incertain jurisdictions

• the DCFR is not clear on whether or not it permits the illegality defence (VII - 6:103)

when do harship and force majeoure apply?

valid contract but parties cannot perform due to an unforseen event

Hardship clause (art, when does it apply?)

• III - 1:110

• performance is still possible but it will financially ruin the debtor

Force majeure

• III - 3:104

• performance becomes impossible for the debtor

when does the contractual obligation still need to be performed?

• even if cost of performance has increased

• or if value in return deminished

• obligation still must be performed

• art. III - 1:110(1)

what is the exception to still having to perform contractual obligation in harship?

• if the change of circumstance is so unjust to hold the debtor to the obligation

• the court may either vary the obligation or terminate the obligation

events that make performance impossible (their features and examples)

• features = external, unforseeable, unavoidable

• examples = act of god, war, strikes (under certain conditions)