chapter 4 Comprehensive Study Notes: The Law of Contract

Introduction to the Law of Contract

• Modern Significance: Modern society is fundamentally reliant on the ability to conclude binding contracts. This applies to both citizens pursuing personal needs and businesses trading goods or services.

• Examples of Everyday Contracts:

  • Purchasing products in a supermarket.

  • Renting an apartment.

  • Taking out insurance or opening a bank account.

  • Downloading software or accepting a new job.

  • Medical treatment, hairdressing services, or ordering tickets online (e.g., for a Lady Gaga concert).

• Scope of Contract Law: It governs so-called consumer contracts (between professionals and consumers) as well as commercial contracts (business-to-business). Examples of commercial transactions include:

  • Sale of goods, franchising, and distribution contracts.

  • Agreements for joint ventures and company takeovers.

  • Large-scale infrastructure projects (e.g., building an airport) or foreign investments.

• Conceptual Societies without Contracts:

  • Societies where the State or community provides all necessities (food, housing, health care), such as theoretical Communism.

  • Pre-historic nomadic groups before the division of labor, who shared resources through hunting, fishing, and gathering without internal or external exchange agreements.

• The Core of a Contract: The essence is exchange. One party provides something and receives something in return. This is driven by economic rationale where both parties believe they benefit (\text{Buyer values good} > \text{Money}; \text{Seller values money} > \text{Good}).

• Gratuitous Contracts: While exchange is the norm, gratuitous contracts (e.g., a promise to make a gift) can be legally enforceable even if only one party benefits.

• Core Structure of Contract Law Inquiry:

  1. Formation: When exactly is there a binding contract (enforceable promise)?

  2. Contents: What are the exact mutual obligations of the parties?

  3. Remedies: What rights exist if a party does not perform (performance, damages, or termination)?

Sources of Contract Law

• Freedom of Contract: This is a central principle where the law (enforceable rights/obligations) is largely decided by the parties. Parties are free to decide whether to contract, with whom, and what the contents shall be.

• Binding Nature: Once a contract is lawfully entered into, it is as binding as a rule made by the legislature.

  • Legal Maxim: French Civil Code of 1804, Art. 1103: \u00abAgreements lawfully entered into take the place of the law for those who have made them\u00bb.

• General Conditions: Standardized sets of rules used by professional parties (supermarkets, retailers) to save time and increase efficiency. They avoid the need to draft individual conditions for every contract.

Official National, European, and Supranational Rules

• Default (Facilitative) Rules: These apply automatically if parties have not made specific arrangements for matters such as place of delivery or remedies for nonperformance.

• Mandatory Rules: Rules that intervene to declare contracts void or avoidable if they are contrary to law or morality (e.g., hiring a thief or certain surrogacy agreements).

• National Level Sources:

  • Civil Law Jurisdictions: Found in Civil Codes.

    • France: Code Civil (contract law in the Third Book on acquiring ownership; major reform in 2016).

    • Germany: B\u00fcrgerliches Gesetzbuch (general provisions in Book 1, specific contract rules in Book 2; major revision of the law of obligations in 2002).

    • Case Law: Increasingly important for interpreting older codes.

  • Common Law Jurisdictions: Contract law is primarily found in court-decided cases (precedent). Statutes have gained importance (e.g., the English Sale of Goods Act 1979).

• European Sources: The EU legislature has promulgated nearly $20$ directives related to contract law (e.g., package travel, doorstep sales, consumer sales).

  • Legal Basis: Art. 114 of the Treaty on the Functioning of the European Union (TFEU), aimed at the internal market.

  • Fragmented Nature: Directives focus on specific contracts and specific aspects (information duties, withdrawal rights).

• Supranational Rules: The most significant is the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG).

  • Adoption: Ratified by $85$ countries.

  • Application: Applies to commercial cross-border transactions (e.g., between a German and a Dutch business) unless explicitly excluded.

Informal Rules (Soft Law)

• Nature: Rules that are not officially binding but influence norm-setting, court decisions, and legal education.

• Key Examples:

  • Unidroit Principles of International Commercial Contracts (UP) ($1994$).

  • Principles of European Contract Law (PECL) ($1995$).

  • Draft Common Frame of Reference of European Private Law (DCFR) ($2009$).

• Restatements: These identify commonalities across jurisdictions and propose \u00abbest rules\u00bb where differences exist. They serve as blueprints for potential future legislation (e.g., a European Code of Contracts).

Formation of a Binding Contract

From a Promise to a Binding Contract

• The Criterion for Enforceability: The primary modern criterion is the intention to be legally bound.

  • PECL Art. 2:101 s.1: A contract is concluded if parties intend to be legally bound and reach a sufficient agreement.

• Historical Development:

  • Roman Law: Only specific types of contracts were enforceable based on form or the handing over of goods. Purely consensual contracts were limited (e.g., sale, mandate).

  • Natural Law (17th Century): Development of the general principle pacta sunt servanda (contracts must be honored) based on consent.

• English Law and Consideration: English law historically used the doctrine of consideration, requiring a quid pro quo (something for something). While the requirement of intention to be legally bound is now standard, consideration remains relevant, particularly in making gratuitous promises unenforceable.

• Gratuitous and Suspect Promises:

  • Gratuitous Promises (Gifts): Civil law usually requires a notarial deed for gifts to ensure reflection and legal advice. English law requires a deed (written, signed, attested by witnesses) due to the lack of consideration.

  • Unequal Obligations: Promises of very low value (e.g., selling a $20,000\,\u20ac$ car for $10\,\u20ac$) are scrutinized. Courts look for the \u00abreasonable expectations\u00bb of the promisee based on words, conduct, and reliance (e.g., selling one's own car in reliance on the promise).

  • Domestic/Social Sphere: Promises among family/friends (e.g., a father paying for driving lessons if a daughter doesn't smoke) are generally not seen as legally binding. Carpooling arrangements may fall into the economic sphere depending on circumstances.

Offer and Acceptance

• Definition of an Offer (PECL Art. 2:201 s.1):

  1. Intended to result in a contract if accepted.

  2. Contains sufficiently definite terms (e.g., price and characteristics).

• Offer vs. Invitation to Treat:

  • English/Polish Law: Newspaper advertisements or shop displays are mere invitations to treat.

  • French Law: Advertisements and displays are generally binding offers.

  • PECL Art. 2:201 s.3 (Middle Way): Public advertisements/displays by professional suppliers are presumed to be offers until stock is exhausted.

• Revocation:

  • Civil Law (Germany Art. 145 BGB, France Art. 1116 CC, Dutch Art. 6:219 BW): An offer is generally irrevocable for a fixed or reasonable period unless stated otherwise.

  • English Law: An offer can be revoked at any time before acceptance (consistent with the consideration doctrine).

• Moment of Binding Contract:

  • General Rule (PECL Art. 2:205 s.1): A contract is concluded when the acceptance reaches the offeror (applies to electronic mail when it enters the mailbox).

  • The English Mailbox Rule: For regular post, the contract is concluded when the acceptance is dispatched. This does not apply to instantaneous communication like email or telephone (see Entores v. Miles Far East Corp, $1955$).

Formalities and Protection of the Weaker Party

• General Rule: Contracts can come about in any form (oral is valid, though hard to prove).

• Exceptions for Protection:

  • Consumer Protection: Includes information duties and withdrawal rights (the right to cancel without reason within a \u00abcooling-off period,\u00bb typically $14$ days). Found in Directives such as 2011/83 (Consumer Rights), 2008/122 (Timeshare), and 2008/48 (Consumer Credit).

  • Incapacity: Minors (< 18 years old) and the mentally ill are protected. Contracts can be invalidated by legal representatives.

    • Exceptions: Contracts for necessities, or transactions considered \u00abnormal\u00bb for the minor's age (e.g., a $10$-year-old buying candy).

Pre-contractual Liability

• Civil Law Position: Negotiations can create liability based on fairness and reasonableness, culpa in contrahendo (Germany \u00a7 311 II BGB), or delict (France Art. 1112 CC). Parties must take into account each other's interests (Demogue's \u00abmicrocosm\u00bb theory).

• Common Law Position: No duty to negotiate in good faith. As established in Walford v. Miles ($1992$), the concept is seen as inherently repugnant to the adversarial nature of negotiations.

The Contents of the Contract

Interpretation

• The Conflict: Subjective intention (what the promisor meant) vs. Objective declaration (what the external expression appeared to mean).

• National Compromises:

  • France: Art. 1188 seeks the \u00abcommon intention\u00bb or what a reasonable person would think.

  • Germany: \u00a7 133 seeks real intention, but \u00a7 157 uses fairness/reasonableness in commercial practice.

• PECL Standard (Art. 5:101):

  1. Common intention takes priority over literal meaning.

  2. If one party's intention was known to the other, that intention prevails.

  3. Otherwise, the meaning given by reasonable persons in the same circumstances prevails.

Unfairness of Contract Terms

• Procedural Unfairness: Deficiencies in the formation of the will.

  • Threat/Duress: (PECL Art. 4:108) Holding a party at gunpoint.

  • Incapacity: Transaction by a minor.

  • Fraud and Mistake: Contracting under incorrect assumptions. Law balances the buyer's duty to investigate against the seller's duty to inform.

• Substantive Unfairness: Focuses on the content of the terms.

  • General Conditions: Often containing \u00abconcealed pitfalls or traps\u00bb (Director General of Fair Trading v. First National Bank, $2001$).

  • European Directive 93/13: Standard terms are invalid if, contrary to good faith, they cause a significant imbalance in rights and obligations.

• Good Faith: Often called the \u00abqueen of rules\u00bb in civil law. Defined by Lord Bingham as \u00abplaying fair,\u00bb \u00abcoming clean,\u00bb or \u00abputting one's cards face upwards on the table.\u00bb

Prohibited Contracts

• Void Contracts: Contracts contrary to law, public order, or morality (e.g., selling nuclear arms to terrorists, hired assassins, or market-dividing cartels).

• Ambiguous Categories:

  • Contracts for illegal activity unknown to one party (e.g., buying a knife to kill a neighbor).

  • Shared European values vs. cultural differences (e.g., brothels or \u00abdwarf-tossing\u00bb cases). PECL Art. 15:101 references principles recognized as fundamental in EU Member States.

Remedies of the Parties

Performance

• Civil Law (The Rule): Claims for performance are the natural, primary remedy. Enforcement can involve official bailiffs.

  • Exceptions:

    1. Objective impossibility (stolen good, fixed-date wedding dress).

    2. Unreasonable effort/expense (dropping a ring in a deep river).

    3. Personal character (Art. 9:102 PECL): Cannot force artists (Coldplay) or athletes to perform to their best ability, as this would be akin to slavery.

• Common Law (The Exception): The primary remedy is damages. Specific performance is an exceptional equitable remedy used when damages are \u00abinadequate\u00bb (e.g., unique land or works of art).

  • Generic Goods: English law denies specific performance for bulk goods (oil, steel, potatoes); Civil law allows it.

  • EU Harmonization: Directive 1999/44 allows consumers to require repair or replacement for non-conforming goods.

Damages for Nonperformance

• Common Law: Liability based on the mere fact of nonperformance (regardless of fault; strictly contractual).

• Civil Law: Liability generally requires fault or responsibility (Art. 1231-1 French CC: no damages for force majeure).

• Convergent Fictions:

  • Common law courts may use \u00abimplied conditions\u00bb to excuse impossible performance (Taylor v. Caldwell, $1863$).

  • Civil law may use fictions (implied guarantees) to hold debtors liable even without fault.

Termination for Nonperformance

• Standard: Only allowed for sufficiently serious breaches.

  • English Law: Breach of an \u00abessential\u00bb term.

  • German Law: Breach of a Hauptpflicht (main obligation) or failure within a grace period.

  • CISG/PECL: Fundamental non-performance (Art. 8:103 PECL).

• Definition of Fundamental Breach:

  1. Strict compliance is of the essence.

  2. Non-performance substantially deprives the party of expectations (unless unforeseen).

  3. Non-performance is intentional and destroys trust in future performance.

Outlook and Interdisciplinary Links

• Connections to Other Fields:

  • Tort Law: Along with contracts, it creates obligations. Contracts are voluntary; torts are imposed by law (Gaius, $160\,AD$).

  • Property Law: Performance of a contract often leads to transfer of property. Contracts generate the obligation; property law governs the actual transfer (e.g., passing with the contract in France vs. passing upon delivery in the Netherlands).

• Future of Contract Law: Parties in the EU can often choose which national law governs their commercial contract. There is an ongoing proposal for a 29th European system of contract law as an optional instrument available in all official languages.