the effect of contract lesson 5 contract reduced

general effects of a contract

• a contract creates a regulation between the parties, giving rise to mutual rights and obligations

• the general effect of a contract is the creation of binidng obligations between the parties

• however this rule is not absolute:

  • there are exceptions where contracts can affect third parties

  • there are cases where obligations are not fully enfcorable

the principle of relativity of contract: contracts and third parties

• article 1257: contracts only produce effects between the parties and their heris

  • except when rights or boligations are non trasnferable by nature agreement or law

• classical expression: “res inter alios acta, aliis nec nocet nec prodest”=acts between some do not harm or beenfit others

relatiivty: direct or binding effect

• relativity= contracts only bidn parties and heirs

• direct effect=the contract only creates rights and boligations for the parties who entered it 

• third parties cannot be bound by the contract

  • a legal representative or someone with authroity is not a third party as they are acting on behalf of one of the contracting parties, not someone outside of the contract

  • the legally represented person is bound not the representative themselves

• no one can contract on behalf of another without authority or legal representation (agent/lawyer/guardian) (art 1259)

  • if someone contracts without that authroity the contract has no legal effect unless the person who was supposedly represented later approves it (ratification)

  • ratificiation gives the contract retroactive validity from that moment =when the person approves it the conract becomes valid as if it had been valid from the start

  • before approval/ratification its incomplete (not completely vpid just waiting for confirmation )

  • sts case 22 april 2010 n.225/2010: a contract made without authroity isnt absolutely null- its just incomplete until represented person confirms it

contracts on behalf of another: direct or binding effect

1. contract on behalf of another without authroity= void until ratified

   1. a sells b property as if he were b’s representative (without authority)= contract incomplete

2. contract at the expense of a third party= valid but one party promises that a third person will perform; if not they must compensate damages

   1. a promises that b will sell a property= a must compensate if b refuses

3. contract in own name over another property= valid but non owner must compensate/indemify if unable to perform

   1. a sells bs property as if it were his own= valid but a must indeminfy if he cannot deliver ownership

relativity indirect effect: third parties

• indirect effect= even though only the people in the contract are bound by it, third parties still have to respect it

• reflected effect: rights can affect or be trasferred to third parties (eg assignment of rights)

  • buyer of a house sues the developer even though the contract was between developer and seller

  • buyer of a car sues the manufacturer for defects

• provoked effect: third parties have a duty not to interfere with someone elses contract ; if they knwingly help breach the contract the injured party can act directly against them

  • third party aquires/buys property knwing it viiates anothers contractual right (breaks anothers contract)= they can be held liable

  • contractual rights extend against a bad faith party aquirer

• if a third party damages a contractual right without being bound the affected party may sue under tort liability (art 1902)

  • sts 23 mrch 1921= third party helped breach an exclusivity clause- liable for damages

contracts in favour of a third party 

• contracts in favour of a third party= creates rights for a non party benficiary

• article 1257 : if the contract gives a beenfit to a third party the third party can claim it- but only if they accept it and tell the person who must perform before the offer is revocated

  • created a beenfit for a third person who was not a contracting party

  • the benfeciary gains a direct right once he accepts it (befre reocation)

  • examles: life insurance policies, transport contract with third party delivery, annuity

third party contracts: triangular relationship 

1. stipulator= contracts in favour of the third party

2. promisor= undertakes the obligation to the third prty

3. beneficiary= recieves the benefit 

• only the stipulator and promisor are parties to the contract

• the third party becomes creditor of the benefit once the right is accepted

third party contracts: acceptance

• the acceptence by a third party:

  • the third party becomes entitiled to the benefit once they accept it

  • after acceptance the benefit cant be cancelled/revocated

  • acceptance can be express (spoken/written) or implied (shown by actions like using the benefit)

  • the benficiary can also reject the benefit if they dont want it

  • the contract and the third partys right exist as soon as the contract is made; acceptance isnt needed to create contract validity or the right

  • acceptance only shows that the third party wants to receive the benefit and activates their entitlement

third party contracts: revocation

• normally by the stipulator since the interest is his

• if the benficiary has not yet accepted the stipulator can revoke or desginate another beneficiary

relations between the three parties

• stipulator to promisor= arranges the deal

  • contractual relation (direct contract between them)

  • the stipulator can demand performance or sue for damages

  • but they cannot interfere with the benficiarys rights once the benficary accepts the benefits (cannot revoke eg)

• promisor to beenficiary = delivers the benefit; can enforce their rights directly

  • the beneficiary can enfroce the benefit directly against the promisor

  • the promisor cannot use defences/refuse to give the benefit based on their contract with the stipulator (any issues the promisor has with the stipulator dont affect the benficiary)

• stipualtor to beneficiary= gets their right indirectly through the stipulator so special lega iddues can sometimes appear

  • indirect link (through the stipulators contract with the promsior); no contract directly between them

  • sometimes issues may arise for restitution (returning the benefit if something was unfair or mistaken) or inheritance (if the benfit is really a gift hidden in a contract it might affect who gets it after someone dies)

principle of binding force in unilateral withdrawal

• contracts must be fulfilled

• binding force= contracts create a legal bond between parties so unilateral withdrawal is not allowed

  • article 1256: the validity and performance of contracts cannot be left to the will of one parties

• mutual dissolution= the contract can be terminated by mutual consent

  • based on the freedom of contract= as parties bind themselves they can also unbind themselves

  • not expressly regulated in the cc but recognised in dcotrine

unilateral withdrawal exceptions

• contract is of indefinite duration: doesnt have a clear end date, one party could be stuck forever

  • to avoid perpetual obligations

• contracts granted by law: partnership, agency agreements or loan for use contracts include legal rules that let a party withdraw

  • confirmed by cases sts 16 nov 2016 n672/2016 + sts 9june 2020 n.269/2020

• expressly agreed in contract: can agree in contract itself that one party may withdraw

  • article 1256 doesnt forbid this

  • confirmed in sts 15 june 2016 n. 406/2016

• consumer contracts: concluded at a distance/off premises (online/phone/doortodoor sales)

  • article 102 of the consuer protection act grants consumers a right of withdrawal within a certain period even if the contract doesnt say so

principle of irrevocability an supervening change of circumstances

• irrevocability= contracts cannot be changed unilaterally 

• pacta sunt servanda= contracts must be performed as agreed

  • parties assume risks such as cost increases reduced profits or loss of motive

  • yet severe and unforseen changes (wars crises epidemics) can make strict performance unfair

• doctrine of rebus sic stantibus= contracts are presumed to bind as long as the circumstances remain the same

  • allows adaptation or termination if circumstances change drastically and unforseeably

  • today the law doesnt automatically include a ‘implied clause’ in every contract allowing it to change if circumstances change

  • instead in extreme or unfroseen situations, courts rely on the principle of good faith article 1258 to decide fairly whether the contract should be adapted or terminated

supreme courts position

• very restricitve application sts 18 july 2019 6 march 2020

• applies only if 

1. contract is of a continous or deferred performance

2. there is a serious alteration of the contractual equilibrium (one party seriously disadvantaged another seriously advanatged)

3. the event is supervening (after begun), unforseeable (not predictable), and not atributable to either party (no fault of own)

two types of cases

1. excessive onerosity (hardship): performance becomes too burdensome on one party eg extreme inflation price surges increased costs

2. frustration of purpose: performance remains possible but useless to the other party eg coronation cases UK- balancoies rented to watch a cancelled coronation

procedure

• the affected party must first propose

1. renegotiation of the contract or

2. termination by mutual agreement

• if refused the judge may readjust or terminate the contract

• renogitation and adjustments are preffered to protect contract