formation and perfection of contract

preliminary dealings

this part describes the intial stage of contract formation- the period before a binding contract exists when the parties are still negoitating 

it explains how agreement is reached and what counts as a valid offer and acceptence

contract formation-preliminary dealings

a contract is legally formed when both parties agree (there is offer+ acceptance) on the essential elements:

1. the object- what the contract is about- eg sale of a car, lease of an apartment)

2. the cause- the purpose or reason for entering the contract - eg to trasnfer ownership for payement

3. accessory items- additional or secondary terms (eg payement method, delivery date)

once there is agreement on these elements a binding contract is formed

offer

offer= a proposal made by one party the offerror that:

• contains all essential elements of the contract

• so that the contract can be completed by simple acceptance

• no further negotiation needed

so if the other party simply says yes to the offer, the contract is perfected/completed

disiitnction between offer (binding prorposal) and an invitation to offer )preliminary communication)

a true offer is a definite proprosal made by one party to another showing a clear intention to be bound once accepted. the offer is binding on the offeror once communicated unless withdrawn before acceptance

an invitation to offer/treat is simply an expression of willingness to negoitate- an invitation for others to make offers with no intent to be immediately bound . tusually does not include all essential elements so this does not creat lega obligations and the oerson making it is not committed to accept any offers recieved

• i will sell u my lapto for 500 euros vs advertisement in shop window: laptop for sale contact for details

acceptance

acceptance means agreeing to the offer exactly as it was made

accordng to spanish supreme court case sts 14 feb 2008 78/2008, once acceptance occurs the contract is perfected-meaning it becomes legally binding

counter offer

if the person recieiving the offer (the offeree):

• does not accept purely and simply and 

• modifies any elements of the offer eg change price or delivery terms 

then there respnce is not acceptance but a counter offer

counter offer 2

• cancels the original offer

• can itself be accepted rejected or modified

• may lead to a series of offers and counter offers

negotiated contracts

this back and forth exchange of offers and counter offers is known as the neogitation phase.

contracts that arise from such negotations are called negotiated cntracts

what is a cntracts of dhesion

• these contracts are the opposit to neogtiated contracts as they occur when one party the offerror sets all terms in advance and the other arty the offeree has no real opportunity ti neogitate

• the offeree can only accept or reject the contract as a whole- a take it or leave it situation 

• rejects ay counteroffers or negotiations from other party

• the consent of the adhering party is therefre limited to simple acceptance of the standard terms 

• although they eclude negotiation they do not have a special legal nature by themselves, their regulation follows general contract law with special additions from consumer protection law

common contexts of contracts of adhesion (business and consumers)

very common in modern commerce espeically in

1. mass contracts- used for mnay customers under dienticial terms

2. standard form or pre printed contracts such as:

   1. online terms and condiitions for a website or streaming service

   2. insurance contracts

   3. bank account agreements

   4. molbile phone or internet providers

legal implications of adhesion

they stremline transactions for busineses but also raise fairness concerns so legal safeguards exist

because these arent negotiated the law often provides protections for the weaker party- the adherent such as:

1. requiring clarity and transparency of terms 

2. interpreting ambigous clauses in favour of the adhering party 

3. prohibitin unfair or abuisve clauses (espeicaly un consumer contracts)

precotractual liability general pricniple

the prelim phase before a contract is concluded does not create contractual obligations

however parties must act in good faith and avoid causing harm to the other party

pre contracual liability offers

offers are revocabe until accepted

statements made during negotiation do not become contractual terms unless explicitly agreed upon

origins of precontractual liability

concept proposed by jhering 19th century

• reognised precontract laibility when one party acting in bad faith (behavng negligently or deceitfully)during negotiations and causes harm to the other they can be held liable for damages even if no contract results

precontractual liability- invalid contract caused by fault

• intially applied when te contract was not validly coblcuded and the invalidity resukted from the fault f one party

• eg misrepresentation or deceit/fraud causing nullity

• a seller lies about owning a proprty leading to a void contract

• the duty to compensate arises (article 1902 cc general tort based duty not to cause harm negligently)

pre contractual liability- unfair rupture of negotatins

• one party unjustifiabley breaks off negotiations after creating a legitimate expectation in the other that the contract would be concluded

• this abrupt withdrawal causes loss to the other party eg waisted expenses or missed opportunties 

• the duty to compensate arises

pre contractual liability extent of damages

since there is no ocntract cmpensation covers the negative interest (reliance interest):

1. loss suffered due to the failure of anticipated contract

2. does not include the expected profit (positive contractual interest)

pre contractual liability modern case in recent case law

a valid contract is cocluded but one party is disadvantaged due to breach of pre contractual duties

• incidental fraud- art 1270(2)cc-deception not serious enough to invalidate contract but still harmful

• failure to discolsre essential information eg financial insitutions not infomring clients properly of risks of morgages

here the contract remains valid

however there isa contractualisisation of those precontractual duties so they become part of the contractual obligations

therefore actual contractual damages may be claimed based on positive contractual interest ( damages putting them in the position they woud have been n if the cintract had been proerly perfored eg possible profits) instead of just pre contractual neg interest (loss suffered in prep )

eg bank persuades client to sign a comlex fiancial products but in negotiations the bank fails to discolse key risks- the contract is valid the client did sign it but the bank brached it preconstractual duty of info. since contract exists the banks duty to inform becomes obligation so if the clit suffers losses they cab sue the bank fr breach of contract not just precntracrual fault

judicial approach to precontractual liability

spanish ciurt accept pre contractual liability very restricivly especially regarding

• unjustified breaking off of negotiaions

to avoid undue limitations on freedom of contract- parties must be free to enter or withdraw from negotiaions without excessive legal risks

so liabilty is only impsed when there is clear bad faith/abuse of trust and the injured partys legitimate expectations were seriousky harmed

preparatory contracts

increasingly common during preliminary negoatiations to organise and regulate the negotiation process

typically include: agreement to negotiate, rules for conducting negotiations and duties of info conduct and confidentiality

if these duties are breached remedies apply (usually contractual damages for copensation of breach since prep contract is bidning)

HOWEVER these do not create oblgation to reach a final agreement- so if the parties decide not to sign the final contract that alone is not a breach

pre contract

a pre contract is a specific type of preparatoy contract but with a more defintivie objective. in a pre both parties formlly commit to entering into a future defintive contract (the main contract)

it is essentially an agreement to conclude another contract in the future so there is an obligation to reach a final agreement

if breached may be enforced to execute the final contract or claim damages

eg- an agreement where both parties promise to sign a property sale contract within 3 months once certain conditions are met

requiremnts for a valid precontract

to be valid and enforcable must already contain the essentia elements of the future contract.

if these elements are not ncldued or determinable the pre contract is invalid- it is just a non binding declaration of intent to contract- this is based on cc art 1273,1447 and 1448 which require the object of a contract to be certain or determinable

eg parties sign a promise to sell but fail to specify the property or rice the agreement lacks essential elents so is inffective

• conversly if the pre contract includes everything necessary for. avalid contract it becoes almost indisignushibanle from the def contract which raises doubts abouts its indpeednant purpose

early supreme court interp

obligations under a pre contract were not specficially enforcable

breach only give rise to dmaages not to compelled perform

eg a seller under a sales contract can be forced to deliver the goods vs a seller under a precontract of sale could only be required ti pay dmages forrefusing to conclude the contract

modern supreme court doctrine

since the mid 20th century sc recogises the full enforceability of pr contracts

current view:

the precontract contains the seed of the future regulation

can nowbe specifically performed- party may be legally required to execute teh contract not just pay damages

but if it is already enforcable and only lacks minor dispositive terms theres little difference from the final contract

practcial utitlity of the pre contract

useful where parties wish to bind thesleves before all details are settled:

• to secure negotiations while final terms like formlaities or timing are being arranged

• to guarantee commitment in transactions that require prelimanry steps eg financing permits due dillgince

types of pre contract

1.fixed term precontracts- obligation to coclude the contract only exists within a set period (after expiry, freedom restored); if not excercised by the deadline the obligation expires and parties regain freedom 

2. unilateral precontracts- only one party may enforce the future contrat; the other is bound to accept

the unilateral promise/option contract (article 1451 cc)

• the grantor pormises to enter into a future defintiive contract (usually a sale) if the option holder decides to go ahead

• the option holder has the right to choose whether to accept the offer and make the contract final

• this choice must be made within a set time period agreed by both parties 

• onerous option- the option holder pays the grntor something for this right (a fee or deposit)- paying 5000 to reserve the right to buy later

• gratuituos option- the option is given for free with no payement in return

  • eg option to purchase- gives one person the exclusve right to buy something (like property) under pre agreed terms within a fixed period-

  • porperty owner gives someone the option to buy their apartment within 6 months for 200 grand, f the buyer decides to excercise withinthat time the seller is legally bund to sell

legal effects and nature of option contracts

• an option contrract creates an obligation on the grantor to conclude the difinitve contract if the option is excercised

• however it does not create a real rght of aquisition in favour of the option holder (not a right over the thing)- it remains a personal obligational right (a right against the person)

  • the option holder cannot enforce the option against a third party in good faith who acuires the property without knwoledge of the option

  • the option hoder can enforce it against a third party in bad faith ie one who knew about existing contract

registration in the land registry articles 14 mortgage regulation

option cintracts can be registered which gives public notice of their ecistence

this protects the option holder agans third parties who claim ignorance

registration does not transform the option onto a real right-it remains obligational 

egistration acts as a shield not a sword-it informs others of the option but does not change its legal nature

consumer protection aspects of contracts of adhesion

certain speical rules apply to adhesion contractd because of consumer protection (because one party is a weeker party) , not because of the non negotiated nature of the contract

consumer protection law adds extra duties for businesses and extra rights for consumers to ensure fairness

these rules affect how the contract i sinterpreted enforced or even formed

ensures advertising information and promises made to consumers are bidning parts of the contract protecting from misleading and unfair commercial practices

commcercial advertising

eg- this phone has a 48 hour battery life and comes with a 2 year warranty

• when u buy the phone those statements in the advertising can become part of the binding contract- even if theyre not wirtten in the final agreement

• this means businesses must deliver what is promised in its ads

• the consumee can hold the seller responsible if the product doesnt match what was adveertised

narrower (techncial) meaning of contrats of adhesion

in a stricter sense these are contracts where:

• one party businessc drafts and pre sets the contractual terms possibly diverging from supplementary law

• the other party consumer can ony accept or reject; negootiations are excluded

general contract conditions

• when these predisposed terms are intended for repeated se in many contracts they are called general contract conditions

• often refferred to as the small print (long detailed terms most peope dont read) in :

  • insurance polciies

  • banking contracts (cresit card loan agreements)

  • and transport contracts (train tickets)

• they are not legal norms but contractual clauses meaning their binding force comes only from the other partys consent

  • their validity comes solely on being accepted as part of the contract they have no higher authoity than negotiated clauses

2 legal regulations of general contract terms

1. law 7/1998 on GCT- regulated how stanrds clauses can be used when they appear in multiple contracts

   1. ensuring these terms are fair clear and accessible

2. roya; legislative decree 1/2007 rdl 1/2007- consolidates the general law for the deference of consumers and users

   1. articles 80 and following provide extra protection when general contract terms are used between businesses and consumers (not business to business)

influence of eu law

the rules in this area are heavily shaped by european union law

the eu has strong powers in concsumer protection and it has issued many directives and regulations to protect consumer from unfair or abusive contract terms 

as a result spansh laws like law 7/1998 (general protection) and rdl 1/2007 (b2c) are based on eu consumer directives to ensure fairness and trasnparencuy across all eu countries 

disiitnction contracts vs conditions

contracts of adhesion= prewritten nonnegotiable contracts

general contract conditions= standards clauses used repeated in multiple contracts

rationale for legal control of gct

• in negotiated contracts - law assumes freedom on contract

  • both sides doscuss and agree on the terms so the law assumes fairness because both parties have equal bargaining power

• in contracts pf adhesion - law recognises imbalance of power since only one party set the terms

  • one side has all the power so runs a risk that the stronger party could include unfair and abusive clauses

• to protect fairness the law introduced controls- allowing judicial review of these terms to examine whether they respect

1. good faith (stronger party must act honestly and fiarly)

2. fairness (no abuse of power or one sided clauses)

3 types of control

control of inclusion= ensures the adhering party knows and freely accepts the contract terms (valid consent)

trasnparency controls= prevents hidden or misleading clauses from distorting essential terms ensuring the consumer can freely form their will   (understanding)

content/abusiveness control= nvalidates clauses that create serious dsiadvantages or inbalances the contract even if the consumer formally accepted them (fairness)

control of inclusion or incoprtation (validity)

• articles 5 and 7 of law 7/1998 general contract terms are only vali when:

  • the consumer could really access, knows and accepts the terms

  • ensures the terms are clearly written and understandable

• any term that fails either tests is excluded from the contract

• protects the weaker party from being bound by hidden or unexepcted clauses

• ensures that consent is real and informed; consitent with goo faith in contracting

inclusion control method a: requirement of knowledge and acceptance (stated/known)

• terms must be known and accepted by the adhering party

• terms are not binding if the consumer had no real chance to read or understand them when signing

• this requires

  • signature of the adherent (sometimes required)

  • delivery of a copy of the contract with all the terms

  • public display of terms at the place of contracting if not in writing

• eg a consumer signs a gym contract if the hidden fees were never shown or explined they cannot be enforced because the consumer didnt really know about them

inclusion method b : requirement of clarity (understanding)

• terms must be clear legible and understandable 

• clauses are excluded if they are:

  • illegible

  • ambigious

  • unclear/incomprehensible

• consent only covers what the consumer actually udnerstands. hidden or confusing terms cannot bind the consumer

• a bank contract contains a clause written in tiny legalistic text that is impossible t undertsamd-this cannot be enforced

interpreation rule (art 6.2 law on general contract terms)

• ambiguities in gernal terms are interpreted against the party who drafted them

• disocurages businesses fromdrafting confusing or misleading clauses

• ensures that any doubt or ambiguity does not benefit the stronger party who actually wrote the contract (usually the business)

• any contract with predetermined standard clauses can be subject to this rule, not just consumer contracts

• eg a bank says interest may be charged at a variable rate: if the variable rate is unclear or ambigious the clause is intepreted against the bank not the customer

protection beyond inclusion control for business to business

• no trasnparency or abusiveness controls apply

• protection relies on general civil law article 1258 civil code- parties be bound by good faith

• bad faith occurs if the predisponent imposes severely unbalanced terms exploiting their dominant position

  • big company a dfrats a standard supply contract that forces smaller compnay b to accept extreme penalties for minor delays

  • company b could argue company a acted in bad faith becuase terms are serverly unilateral unbalncing the contract and exploiting as dominant position

additional controls for consumer contracts

for contracts between businesses and consumers two extra orotections exists:

1. trasnarency control

2. content/abusiveness control

purpose:

1. rebalnce the power between parties

2. to neutralise unfar advanages that arise from preset non neogtiable contract terms

why the difference in control of b2b and b2c

1. businesses are assumed to have the skills and negotiating power to protect themselves during negotiations (reject absuive clauses)  so these require less protection and these controls are not generally applied to b2b contracts

2. consumers often choose based on key terms (price interest service) and cannot analyse small print or legal jargon to require more protection

• criticism:

  • small businesses may lack real bargaining power

  • transparency control is about free formation of consent, which arguabley should also aoply between businesses too

control of inclusion v control of consumer specific

control of inclusion= all adhesion contracts= ensures the contract is validly formed+the adhering party knows and freely accepts the terms- if known and accepted deemed fair becuase voluntarily agreed

consumer specific controls= only b2c= does not aim to ensure knowledge/consent but rather fairness and justice in predisposed terms - may be deemed unfair even if the consumer technically accepted them ( consumers cant reasonabley analyse contract clauses with small print and legal jargon)

transapraency control art 82 consumer law art 4.2 dirwctive 93/13/cee (knowledge and understanding)

• ensures consumers can understand and freely agree to key contract terms

  • if essential termsare hideen or obscured the consumers consent is not truely free

• nullfies suprise clauses-protects consumers from hidden or misleading clauses tat alter the economic impact of essential contractual olbigations and disadvantage the consumer

  • nulifiles clauses that are masked or hard to see and unexpectdly shift costs,risks or burdens onto the customer 

• eg floor clauses in variable rate loans set a minimum interest rate (can be higher than market) favouring thelender often without clear notice or explaantion to the consumer

  • =invalidated under transparency control even if the consumer signed the contract because it distors the essential terms of the loan

  • ensures conumer was not unfairly suprised and coud have freelly decided whether to accept the loan on thse terms

• judges cannot usually question the fairness or economic balance of essential obligations outside cases of suprise/non transparency

transparency v inclusion

inclusion= all clauses= ensures customer knows and undertsands the terms (formal consent)

trasnparency= essential obligations= prevents hidden clauses from suprising the cosumer by shifting the economic effect of main obligations

• key different= trasnparency focuses on main contractual terms such as price interest and core duties because consumers primarily decide based on these

  • so a non transparent clause prevents the consumer making an informed choice so the clause can be nullified even if its a main obligation

content/abusiveness control art 83 consumer law (fairness)

• cosumer protection mechanism that examines the substance of contract terms not jsut whether the consumer sogned/knew them

  • focuses on accesory or secondary clauses (the small print ) that may seem formally accepted but could subtly disadvantage the cosnsumer ; not main obligations that consumers are expected to pay attention to 

• even if a consumer foramlly agreed to a term it can be invalidated if:

1. it creates a sigiifcnt disadvnatge for the consumer or

2. conlficts with statutary rights/ default legal provisions ( favouring the predispoent)

• method: compare the clause to the default povision ;if it creates significant harm or inbalance it can be declared abusiveand be nullified

  • default rules are designed to maintain fainess between parties- businesses cannot override them to unduly benefit themselves

• example: a bank includes a clause charging a penalty fee for early repayement that is far higher than the banks actual costs; even if consumer signed this clause can be voided under abusiveness control

• articles 85-90 consumer law provides a list of clauses that are commonly abusive to serve as guidance for judges/businesses and consumers (excessive penalties, exclusion of liability)

  • this list is not exhaustive and other clauses arent explicitly listed can be declared absuive 

consequences of non compliance with controls

• if a clause fails any control it is null and acluded from the contract + the rest of the contract remains valid and binding 

• if a contract cnnot function without the clause the law provides a default stat provision to fill the gap (supplementry rule)

  • this ensures the contract can still operate fairly even without the abusive or hidden term

• example: a bank loan cintract has an absuvie early repayement penaty clause- that clause is removed- if the loan cant function without repayement rule the default stat repayement rules apply

nature of controls (reactive)

• all controld are ex post meaning they are invoked by the consumer in court aftee the contract has been signed and a problem arises

• there is no adminstrative or pre approval process to check predisposed general terms before use 

• although some general terms can be registered this only helps to make them public, it does not guarantee fairness or valdity- courts still have to decide that