Appunti di Contract Law

Contract law

Contract law is a body of law that governs, enforces and interprets agreements related to an exchange of goods, services, properties, or money. According to contract law, an agreement made between two or more people or business entities in which there is the promise to do something in return for a gain or advantage is legally binding. We can define contract law as the branch of civil law that deals with interpretation and enforcement of contracts between two or more parties.

A contract is usually associated with a piece of paper through which one buys a house, takes a job, buys online, buys a coffee in a bar, or buys shares of a corporation. Contracts are the primary tools by which we exchange products and services. Contracts don't have to be signed, but there must be consent. If you go to the bar and buy a coffee, you give your consent. There are some cases where you are not able to consent, for example, a 5-year-old boy who wants to buy a Ferrari. Marriage is not a contract because it is not directly intended to regulate economic aspects.

Classification of contract law

In a contract, parties must be treated equally, no matter what they contract about or who they are. Although this general character of contract law usually leads lawyers to distinguish between different types of contracts. There are many ways in which we can classify contracts, for example, depending on which parties are involved, the main characteristic of the contract, or the reason why parties want to be bound.

• Based on the parties: Commercial contracts or B2B contracts are contracts between two or more commercial parties, also called business to business. Then we have consumer contracts, or B2C contracts, that are contracts between a business and a consumer. Then we have contracts between two individuals, C2C contracts that are contracts consumer to consumer.
• Main characteristics: They are classified depending on the kind of the object that is in that contract, for example, transportation contracts, service contracts (when you buy something online), sales contracts, or employment contracts. For example, while in sales contracts the seller needs to deliver a good and the buyer undertakes to pay the price, an employment contract requires the employer to pay the required remuneration and the employee to perform the contractually agreed work. These are called specific contracts and are governed by their own specific rules laid down in national civil codes (sale of goods, employment contract, lease contract, etc.).
• Reason of why parties want to be bound: The distinction made here is between bilateral contracts, in which each party assumes an obligation in order to obtain the performance to which the other party in exchange obliges itself toward the first party, and unilateral contracts, in which a party is not promised anything in return for its performance. In a bilateral contract, party A wants to be bound to party B because party B is also willing to oblige itself towards party A; contracts of sales, lease, employment, franchise, and insurance, but not in contracts of donation.

Why do we need to have specific rules, franchising agreements, or regulate renting contracts? The answer is that the legal system is trying to help the citizens. The legislator is trying to make the citizens' life easier and he is trying to do that through giving us a set of rules that we can apply. For example, when we buy on Amazon, we don’t negotiate any point of the contract, we don't need to study law to buy a product. If the legal system doesn't provide us with that set of rules, we would have to negotiate a specific and detailed agreement with Amazon every time we want to buy a product, this would make the process more expensive and slower.

Contract law as a part of private law

Contract law is seen as only one part of a more comprehensive system of private law. Private law consists of the rules and principles that deal with the relationships between private actors such as individuals and companies. Next to contract law, also the fields of tort law, property law, family law, and company law are part of the overall system of private law.

Fundamental principles of contract law

The fundamental principle of contract law all around the world is that we have no obligation to enter into a contract. I buy a book because I want to buy the book. So, the fundamental principle of all contract law systems is the freedom of contract. There are some cases in which you are obligated to enter into a contract, for example, if you are entering a taxi, the driver is obligated to transport you. So, the freedom of contract has some limitations.

Another fundamental element of contract law is whenever we enter into a contract, the contract has a binding force for the parties, meaning that the two parties are now obligated towards each other to do what they have promised the other to do. For example, if I work at the University of Pisa, I am obligated to work a certain amount of time and the university has to pay me a certain amount of money. If I breach the contract, I will face legal actions. So, we are free to enter into a contract but when we do, the parties are no longer free to do whatever they want and their relationship is now regulated by the contract.

Another fundamental element is the informality. The contracts don't require any particular form, so they don't have to be written and signed. Most contracts are not put in writing and are not signed. Some contracts are indeed put in writing and these are the most relevant ones. There might be two reasons why a contract must be put in writing: the first is that the law obligates it (when we buy a property), if we don't do that the contract is not valid. The second one is that the contract must be written because it provides evidence that can be used in court, for example, insurance contracts. So, you can enter into an insurance contract on the phone because the law says that is not so much economically relevant, but you can't buy a house on the phone because this is economically relevant.

The fourth and last principle is that of contractual fairness, this principle is the least precise because views of what is fair fundamentally differ. There are two types of fairness: on one side we apply the idea that a fair contract consists of simply following what the contracting parties agreed upon. In this type of fairness, it is required that an unequal position among the parties is remedied, mostly by obliging a party to put the weaker one in the same position in order to allow it to make an informed decision. For example, one party might mislead another by lying about the quantities of the sold product, preventing the latter from forming his intention in the right way, or for example, one party is presumed to lack judgment because of mental illness or age. At the other extreme, we find the view that a contract should also be an instrument to distribute wealth in society, helping the poor and weak at the expense of the rich and strong. If a contract clearly favors one party over the other, the law should intervene adapting the contract to meet the requirement of social justice. It's difficult for judges to assess whether it contributes to social justice or not.

Sources of contract law

Contract law is the set of rules and principles that govern transactions among parties, establishing those parties' enforceable rights and obligations. We will investigate where to find these rules and principles because if one is not able to distinguish between the relevant contract law and other types of norms, either every norm could be enforced in courts. The relative weight of the sources of law changes from one jurisdiction to another.

The various rules of contract law are widely diverse in nature. Such a categorization on the basis of sources allows us to distinguish between three types of rules relevant to contract law:

• The party agreement: rules that are made by the contracting parties themselves.
• Official sources: rules that emerge from the official national, European, and supranational sources.
• Informal rules: rules that are made by entities other than official institutions, including non-state organizations.

Together, these rules of contract law originating at different geographical (national, European, supranational) levels form the multi-level legal system. Any lawyer should be able to find their way through this system in order to identify the precise rules needed to solve a case.

The party agreement

Freedom of contract entails that parties not only are free to enter into the contract or not, but also that they can determine the contents of their contract. The party agreement, consisting of what the parties expressly agreed upon when entering into a contract, typically includes the price of the good or service and the qualities it must possess. Usually, commercial parties often make use of standardized sets of rules that are suited to their own interests. These so-called general conditions or standard forms are used by almost all professional parties (retailers, supermarkets) for the contracts they conclude with consumers or professional parties.

The advantage of this is that it saves the party from having to negotiate contract conditions for every new contract they want to conclude. When used in a B2C contract, the law has always been suspicious of these standard contracts because the consumer hardly has the position to renegotiate them. This is why legislators have developed mechanisms to avoid that the consumer is confronted with general conditions that are too one-sided.

Official sources

In most cases, the party agreement alone cannot set all rights and obligations under the contract. Often parties discuss the parts of the contract that they consider essential such as the price and the time of delivery, not saying anything about the place of delivery. For this reason, default rules exist, that are applicable if the parties have not made any other arrangements. Default rules are those rules that parties can deviate from, they are applicable subject to agreement otherwise and fill the gaps left open by the parties.

It may also happen that parties want to contract in a way that is contrary to law, in such cases the law might have to intervene with mandatory rules, that declare such a contract void by one of the parties. Both default and mandatory rules flow from the official national, European, and supranational sources.

National law

Official contract law at the national level is primarily produced by the legislature and the courts. In civil law countries, general rules on contract law are typically found in the civil code. The German and Dutch code are much more systematized, they are drafted as a coherent whole with a high level of abstraction. They both have a layered structure, which means that the more general provisions precede the more specific ones. The French, German and Dutch civil codes have undergone significant changes in the last two decades. Next to civil code, many civil law countries have more specific statutes in which contract law can be found.

The dominant source of contract law in the common law family is not legislation but the case of law developed by the courts. The primary reaction of a lawyer when confronted with a contract case is to consult the decisions of a supreme court of the UK. This does not mean that specific statutes on contract law are absent in England, but they just don’t aim to systematize the existing law. The most important statutes on contract law are the sales of goods act, unfair contract terms act, and contracts act.

European law

Contract law also flows from European sources. In the last 25 years, the European legislature promulgated 15 directives with relevance for contract law, a directive is a European legislative instrument that shall be binding as to the result to be achieved, upon each member state to which it is addressed, but shall leave to the national authorities the choice of forms and methods. This means that a directive obliges all 28 states to implement the rules in the national law. After the implementation, the directives rule are in force as if they had been created by the national legislator.

The reason why the EU is active in the field of contract law is because the aim of the EU is the development of a single European market in which the free movement of goods, services, and persons is ensured. The European Commission has always said that differences among the contract law of the member states hinder the internal market. The EU hopes that harmonizing at least some of these rules will lead to more businesses and consumers being willing to contract across borders.

The EU directives left the decision of the method of implementation to the member states, this leads to significant differences in implementation. For example, in Germany, we give effect to directives by implementing them into the civil code, whereas in France we collect it into the consumer code, and in the UK the directives are transposed into the consumer rights act.

Supranational law

A third source of official contract law consists of supranational rules. Before the EU had such a huge influence on national contract law, there had been efforts to unify parts of the law on a regional or even global scale. The most important achievement is the convention on contracts for the international sale of goods (CISG). The CISG has been ratified in 85 states and contains rules that apply to commercial cross-border sales contracts. For example, if two states like Israel and the Netherlands want to make a contract, the rules of the contract are set by the CISG. The CISG is inspired by the idea that the adoption of uniform rules promotes the development of international trade.

Informal rules

As in many other areas of law, contract law is influenced by rules that are not binding, but have the status of soft law. Soft law can be guidelines, code of conduct, principles, and model rules. Even if they are not binding, they are still important because they represent the first step in adopting binding instruments.

The best-known soft law rules in the field of contracts are called principles. These principles aim to identify rather detailed commonalities among different jurisdictions and put these down in the form of a rule. The principles make a choice for what their drafters consider to be the best rule. The three most important principles are the PICC, PECL, and DCFR.

The PICC are drafted by the UNIDROIT, an intergovernmental organization based in Rome. The UNIDROIT principles are intended to provide a system of rules especially designed to the needs of international commercial transactions.

The PECL are a private initiative drafted with the financial help of the European Commission. They have a wider scope of application than PICC as they are intended to reflect the common core of contract law in general.

The third set of principles is the DCFR, which covers other fields of private law, like torts and property law, and also deals with a range of specific contracts that are not dealt with in the PECL like sale, lease of goods, contracts of services, franchise, loan contracts, and donation.

The formation of a contract

Three main requirements need to be met before a contract is validly concluded: agreement of the parties, an intention to create legal relations, and the legal capacity of the parties.

Offer and acceptance

The formation of a valid contract requires the agreement of the parties. This agreement normally consists of an offer by one party (the offeror) and a corresponding acceptance by the other party (the offeree). Civil codes, legal doctrine, and case law of any jurisdiction in the world define a contract as a legally binding agreement.

A contract only exists if one party has made an offer and the other party has accepted the offer. Before the acceptance, no one is bound to do anything under the contract, while after the acceptance, both parties are bound. There are five important issues that need to be discussed concerning offer and acceptance:

• What is an offer and how to distinguish it from a mere invitation to enter into negotiations?
• Can an offer be revoked before it is accepted by the offeree?
• How long does the offer last?
• What are the requirements that the acceptance must meet?
• What is the time of conclusion of a contract?

What is an offer?

General

The offer must be such that it creates a contract if accepted by the other party. This requires that the offer indicates both the intention of the offeror to be bound and the terms by which the offeror is willing to be bound. If these requirements are not met, there is no offer at all, but at best an invitation to enter into negotiations.

It is not difficult to tell an offer from an invitation if the proposal itself indicates that it is to be seen as a binding offer. Often, however, the statements made by the offeror are vaguer and may incite the other party to think that the offer was made. In such cases, it is decisive how the proposal is understood by a reasonable person in the position of the offeree.

For example, Mr. Gibson was interested in buying a house, and the city council responded that it may be prepared to sell the house to him for £1180. On March 18, Mr. Gibson said to carry on with the purchase, but shortly after, the city council changed, and the council decided to no longer sell the house. Gibson then claimed that the letter of the council was an offer, however, the court didn’t find an offer in the letter. A reasonable person in the position of Gibson could not have believed that the letter was an offer because it contained only the price of the house.

The offer must contain sufficiently definite terms; this is the logical consequence of the very nature of an offer. An offer must contain all the essential elements by which the parties will be bound. Any agreement that is too vague or incomplete will therefore not be regarded as a binding contract. In the case of a sale contract, we must define the good to be sold and the price of the good, but they are free to decide to leave the place and the time of delivery to be decided upon by a third party.

Offers to the public: advertisement

An offer does not have to be directed towards a specific person; it can also be addressed to the general audience. Many products are put up for sale in advertisements, for example, clothing and food advertised in magazines, televisions, or on websites. In such cases of proposal to the public, some jurisdictions regard an advertisement as an offer, others only as an invitation to treat.

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