2.14.25 Lecture Recording

Unidroit and Governing Law in International Contracts

• Unidroit Overview

  • Unidroit: An international restatement, not a statute, serves as persuasive authority similar to US restatements.

  • Provides guidance on European rules of law for international contracts.

• Governing Law Clause

  • Sophisticated international contracts typically include a choice of law clause, designating the law from a particular jurisdiction to govern the contract.

  • Common choices:

    • New York Law: Often selected in major transactions involving US companies.

    • Delaware Law: Often selected for corporate governance or stock transactions due to its preferred status for public companies and startups in the US.

Good Faith in Contracts

• Good Faith Negotiations

  • In American law, there's generally no duty of good faith in negotiations unless explicitly stated.

  • Exceptions exist where parties may agree to negotiate in good faith (e.g., in a letter of intent).

  • European law imposes a duty of good faith during negotiations.

• Post-Contract Changes

  • American law: Once a contract is formed, parties are not obligated to renegotiate terms, even if circumstances change, unless explicitly agreed upon.

  • European law requires parties to negotiate modifications in good faith if the contract becomes unfair due to changing conditions.

Key Cases Related to Good Faith

• Omni Case

  • Involves a sale of real property where the buyer's duty to purchase was contingent on satisfaction with an inspection report.

  • Court implied a duty of good faith, requiring the buyer to make reasonable efforts to obtain the inspection and determine satisfaction.

  • The obligation to act in good faith was not explicitly stated in the contract but was recognized by the court as implicit.

• Bilman v. Hensel Case

  • Centers on a young man attempting to purchase a house under a financing clause.

  • The duty to make a good faith effort to obtain financing was implied by the court, even if not explicitly stated in the contract.

  • The distinction between effort to obtain financing and the actual obligation to obtain financing was critical, highlighting the importance of good faith efforts.

Implications and Understanding of Good Faith

• Good Faith Duties

  • Good faith duties must be connected to concrete obligations or covenants within a contract, rather than being vague or general.

  • Essential for students to articulate specific good faith duties arising from cases clearly for examinations and practical applications.

Zapata v. Derrymark Overview

• Case Summary

  • Zapata, a foreman, is terminated from his franchise at Dairy Mart after refusing to extend business hours as demanded.

  • Dairy Mart issued a termination notice with a 90-day period and argued their actions were within rights under the agreement.

  • Issue raised: Zapata argued termination was in bad faith due to timing and strategy to force a modification of the contract.

• Court's Ruling

  • The court ruled that Dairy Mart acted within its rights under the contract, emphasizing that the termination clause allowed for termination without cause.

  • The court found no evidence of bad faith since the agreement allowed termination with notice.

Hillisland Case in Employment Context

• Employment Agreements

  • Hillisland, a bank executive, terminated for actions considered unseemly despite having followed internal procedures.

  • Court upheld the bank's right to terminate under the at-will employment doctrine, stating a bank can fire for good reason, bad reason, or no reason at all, provided it isn’t illegal.

Warranties in Contracts

• Express vs. Implied Warranties

  • Express Warranties: Clearly stated assurances about goods; typically found in sales documents and contracts (e.g., a car dealer stating a vehicle’s condition).

  • Implied Warranties: Automatic warranties imposed by law, even when not stated; includes:

    • Warranty of Title: Seller must own goods and have the right to sell them.

    • Warranty of Merchantability: Goods sold must be fit for ordinary purposes.

    • Warranty of Fitness for a Particular Purpose: Seller must ensure goods are suitable for a specific purpose if the buyer relies on the seller's expertise.

• UCC References

  • Uniform Commercial Code (UCC) provides the legal framework for implied warranties, ensuring buyers receive goods that meet certain standards and conditions.

Unidroit and Governing Law in International Contracts

Unidroit Overview

• Unidroit: An international organization aimed at harmonizing commercial laws. Its instrument serves not as binding legislation but rather as a restatement, similar to US restatements, and provides persuasive authority.

• It offers a comprehensive set of principles and rules governing international contracts, addressing gaps in domestic legal systems and enhancing predictability in cross-border transactions.

Governing Law Clause

• Importance: Sophisticated international contracts typically include a choice of law clause to designate which jurisdiction's laws will govern the contract. This choice ensures clarity and reliability in the event of disputes.

• Common Choices:

  • New York Law: Frequently selected in significant transactions involving US companies due to its well-established legal precedents and business-friendly environment.

  • Delaware Law: Preferred for corporate governance or stock transactions as it provides an extensive body of corporate law favored by public companies and startups, ensuring a favorable regulatory framework.

Good Faith in Contracts

• Good Faith Negotiations: In American contract law, there is typically no inherent duty of good faith in negotiations unless explicitly stated in the contract. However, exceptions exist where parties voluntarily agree to negotiate in good faith, often indicated through letters of intent or preliminary agreements.

• European Law Perspective: In contrast, many European countries impose an explicit duty of good faith during negotiations, mandating that parties act honestly and fairly to foster cooperation and trust.

Post-Contract Changes

• American Law: Once a contract is executed, parties are usually not bound to renegotiate terms, regardless of changing circumstances, unless such an obligation is expressly included in the agreement.

• European Law Standards: Conversely, European laws may require parties to negotiate modifications in good faith when external changes render the contract unfair or commercially impractical due to unforeseen circumstances.

Key Cases Related to Good Faith

Omni Case

• Case Summary: This case involves the sale of real property, where the buyer's obligation to complete the purchase was contingent upon satisfaction with an inspection report.

• Court Ruling: The court recognized an implicit duty of good faith, requiring the buyer to exert reasonable efforts to obtain the inspection report and to act upon determining his satisfaction. The court emphasized that while not explicitly stated, good faith rests within the realm of the buyer's responsibilities.

Bilman v. Hensel Case

• Case Overview: This case focused on a young purchaser attempting to buy a house under a financing clause.

• Judicial Interpretation: The court implied a duty for the buyer to make a good faith effort in obtaining financing, distinguishing between the effort required to secure financing and the ultimate obligation to procure it. This distinction underscored the significance of good faith actions throughout the transaction process.

Implications and Understanding of Good Faith

Good Faith Duties

• Definition: Good faith duties should be specific and related to concrete obligations defined within the contract, avoiding ambiguous or generalized interpretations.

• Importance in Legal Studies: It is crucial for students and practitioners to articulate specific good faith obligations arising from relevant cases for successful application in both examinations and practical situations.

Zapata v. Derrymark Overview

Case Summary

• Background: Zapata, employed as a foreman at Dairy Mart, was terminated after refusing to comply with demands to alter business hours significantly.

• Legal Argument: Following his termination, Zapata contested the legality of the action, citing it as an act of bad faith driven by timing and strategic maneuvers to force contract modifications.

Court Ruling

• Decision: The court upheld Dairy Mart’s right to terminate under the existing contract provisions, emphasizing that the termination clause allowed for such action without cause. Additionally, it found no substantiated evidence pointing towards bad faith in the termination action, noting the standard contractual terms permitted termination with advance notice.

Hillisland Case in Employment Context

Employment Agreements

• Context: Hillisland, a bank executive, was terminated for conduct deemed inappropriate, despite adhering to internal protocols.

• Court's Position: The court affirmed the bank's right to terminate employment based on the at-will employment doctrine, highlighting that an employer can dismiss employees for just cause, unjust cause, or without reason, provided that such actions do not breach statutory legal protections.

Warranties in Contracts

Express vs. Implied Warranties

• Express Warranties: These are clearly articulated promises regarding the nature or quality of goods, typically found in transaction documents or explicit sales agreements (e.g., a car dealership guaranteeing a vehicle's condition).

• Implied Warranties: These are automatic protections established through law, regardless of whether they are explicitly stated. Key categories include:

  • Warranty of Title: The seller guarantees ownership of the goods and the right to sell them.

  • Warranty of Merchantability: The goods must be suitable for the ordinary purposes for which they are used.

  • Warranty of Fitness for a Particular Purpose: The seller must ensure that goods are appropriate for a specific use, especially where the buyer relies on the seller's expertise.

UCC References

• The Uniform Commercial Code (UCC) serves as the foundational legal text that outlines the framework for implied warranties, thus ensuring that buyers receive goods that align with specific quality and performance standards in commercial transactions.