Contract Law

Contract law: a comparative introduction

Jan M. Smits

Contents

Part 1 - Contracts

• 1. Introduction ……………………………………………………………………………………… 2
• 2. Sources of law ……………………………………………………………………………………. 5

Part 2 - The formation of a contract

• 3. Offer and acceptance ……………………………………………………………………..…… 8
• 5. Legal capacity of the parties ………………………………………………………..………….. 14
• 6. Formalities ………………………………………………………………………...…………….. 18

Part 3 - The contents of the contract

• 7. The party agreement: interpretation and gap filling ………………………………………… 22
• 8. The principle of good faith and policing unfair contract terms ……………………………... 26

Part 4 - Vitiating factors

• 9. Defects of consent and misrepresentation ………………………………………………….…. 29

Part 5 - Contractual remedies

• 11. Performance …………………………………………………………………………………… 34
• 12. Damages for non-performance ……………………………………………………………….. 37
• 13. Termination of contract ………………………………………………………………………. 43

Part 1 - Contracts

1. Introduction

In a given jurisdiction, contracts are defined as legally binding agreements, irrespective of whether they are written down or not. This means that, in law, people conclude contracts when they buy products, take out insurance, download software, are treated by the doctor or go to the hairdresser. Contracts can even come about in cases where no word is spoken at all, as in case of putting money into a machine to buy a cup of coffee and of computerized derivatives trading.

Why contract law?

A market economy is based on the premise that people and companies should make their own bargains on the basis of a voluntary exchange of goods and services. It is not the government that decides how many goods are produced or how much money a person is to pay for the product they desire. Instead, within certain limits, it is left to the needs of the people and therefore to the market’s price mechanism to ensure that supply and demand correspond to each other. Such a market economy cannot do without contracts.

Contract law in turn ensures that these contracts are binding, and can therefore be enforced in the courts in case that other party does not perform. This turns contract law into the cement of modern society: it enables market actors to participate in economic and social life.

Types of contracts

Most rules and principles of contract law are designed to apply to any contract, regardless of the type of party and of obligations the parties take. The implicit assumption it is that the law must treat all contracts and parties equally, no matter what they contract about, or who they are.

Despite this general character of contract law, lawyers usually distinguish between different types of contracts:

• 1. On the basis of who concludes them. Commercial contracts (between two or more commercial parties, B2B) thus stand next to consumer contracts (between a business and a consumer, B2C). Contracts concluded between two individuals (not a business) are sometimes referred to as C2C.
• 2. On the basis of their main characteristics: what parties need to do under the contract depends on the type of contract they concluded. The seller and buyer in a contract for sale of goods need to do something different than the employer and employee in employment contract. These specific contracts are all governed by their own specific rules, laid down in national civil codes or developed by the courts. Typical specific contracts are sale of goods, barter, lease, mandate, donation and employment.
• 3. On the reason why parties want to be bound. Contracts in which each party assumes an obligation in order to obtain the performance to which the other party, in exchange, obliges itself towards the first party are bilateral contracts, while contracts in which a party is not promised anything in return for its performance are unilateral contracts.

Contract law as a part of private law

In the civil law tradition, to which most countries on the European continent belong, 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, restitution, property, trust, inheritance, family and company law are part of the overall system of private law.

The law of contract, tort and restitution are often lumped together under the heading of “law of obligations”. This is because they can all give rise to so called “obligations”, a legal term indicating that an enforceable duty exists of one person vis-à-vis another person or several other persons.

In a bilateral contract, like sale, typically two obligations come into being: the obligation of the buyer to pay the price and the obligation of the seller to deliver the good.

While in case of a contract, this obligation arises voluntarily because a party intends to be legally bound, in case of a tort the obligation is imposed upon a person independent of its intention. Typical tort cases concern victims claiming damages for personal injury or for defamation.

This classification of different areas of law into one system of private law is typical for the civil law tradition, which is different in the English common law, in which such scientific rationalization has long been absent. The first comprehensive book on the English law of obligations was only published in 2010.

Main principles of contract law

When lawyers say that a field of law is governed by certain principles, they intend to refer to the main values or goals that underlie this fields. It may be that these principles are laid down in legislation or court cases, but this need not be the case. Some principles are seen as so self-evident that the official institutions do not bother to put them into writing. Thus, both French and Dutch constitution lack an explicit provision on the rule of law, while the German Civil Code does not codify the binding force of contract. As principles all refer to fundamental standards, it is difficult to prioritize one principle over another: they can contradict each other. In addition, principles are so broad that they are never without exceptions.

Given the meaning, we can say that contract law is governed by four principles:

• 1. Freedom of contract is an essential part of the liberal politics of the laissez-faire: it gives legal application to the idea that each individual should be allowed the autonomy to make the choices they desire. If parties are best able to decide what is in their own interest, they are also in the best position to make the contract they prefer: the law presumes that a party will not choose contract terms that are unfavorable to it.

But the principle of freedom of contract not only entails that a person is allowed to conclude a contract on whatever terms it deems fit (choice of contents), but also whenever it desires (freedom to contract at all) and with whomever it wants (freedom to choose the other party).

This principle can never be applied across the board. In the reality of daily life, many parties do not have the bargaining power needed to choose the terms they like best. The reality is that consumers, buyers, insurees, tenants, employees and smaller businesses often simply have to accept the terms dictated to them by their economically stronger and more experienced counterparts. Often, these terms are general conditions that the other party is indifferent about and simply accepts without bothering to read them. This is why legislators and courts tend to intervene to protect the interests of the weaker party. Sometimes so little is left of the freedom to contract that one speaks of regulated contracts.

• 2. The second main principle is that the contract is binding upon the parties (binding force). Each party has to perform the obligations it took upon itself and if it fails to do so, the court can intervene at the request of the other party. The law can react in different ways to ensure the binding force of the contract. No one is forced to enter into a contract, but if one does, one is bound by it in the same way as if the rules therein had been made by the legislator.

However, as no principle is without exceptions, here too it is possible that the binding force might be set aside, for example if the contract contains a clause that the law considers to be unfair or prohibited.

• 3. The third principle is that contracts do not require any particular form (principle of informality). This is the necessary corollary of the rule we encountered before: if parties are legally bound to the contract because they intend to be bound, their intention is apparently sufficient and there is, as a matter of principle at least, no need to put the contract into writing, visit a notary, or have a witness present, in order to make it binding.
• 4. The fourth main principle is that of contractual fairness. This is the least precise principle, because of the different views of what is fair.

One extreme is to apply the idea that a fair contract consists of simply following what the contracting parties agreed upon when they exercised their autonomy. If an individual is in a better position than anyone else to decide what is in their own interest and they conclude a contract conscious of its consequences, it is fair to hold this individual to what he or she agreed upon. In this view the law is not concerned with the fairness of the outcome or with the extent to which a contract is in line with the public interest. This view largely forms the basis for contract law, and the law needs to intervene to protect one party against the other.

It could be that a party misleads another by lying about the qualities of the sold product preventing the latter from forming his intention in the right way. It could also be that a party is presumed to lack the necessary judgment because of age or mental illness. In consumer contract, the law often requires the professional party to give all kinds of information to the consumer so that the latter can take an informed decision before entering into the contract.

This type of fairness is called procedural fairness and requires 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. But once this has happened, it no longer matters that a party agrees to sell something far below its value. That contract law must in any event be concerned with this procedural fairness, as opposed to substantive fairness, is accepted everywhere.

At the other extreme, we find the view that a contract should also be an instrument to redistribute wealth in the society. It should help the poor and the weak at the expense of the rich and the strong. If a contract clearly favors one party over the other, the law should intervene and either declare the contract void or adapt it to meet requirements of social justice. This would require a political choice that best reflects the collective goals of society, but once this choice is made the courts should apply it when being confronted with unfair contracts.

2. 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. While each jurisdiction recognizes the same sources of law, the relative weight of these sources differs from one jurisdiction to another.

The various rules of contract law are widely diverse in nature. A categorization on the basis of sources allows us to distinguish between three types of rules relevant to contract law: rules that are made by the contracting parties themselves (the party agreement), rules that emerge from the official national, European and supranational sources (official sources), and informal rules that are made by others than the official institutions, including non-state organizations and academics (informal rules). Together, these rules of contract law originating at different geographical and actor-specific levels, form what is called a multi-level legal system.

The party agreement

Compared to many other fields of law, contract law is special in at least one important respect: the question of what is the law can be decided by the parties themselves. Freedom of contract entails that parties are not only free to decide whether they want to contract at all, and with whom, 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 the contract, typically includes the price of the good or service and the qualities it must possess. For the rest, it depends on the type of contract and the relationship between the parties what it is that they add to these essentials.

Contractual rules need not to be made for one contract only. In practice commercial parties often make use of standardized sets of rules that are suited to their own interests. These general conditions, or standard forms, are used by almost all professional parties. The advantages are that it saves a party from having to negotiate and draft contract conditions for every new contract it wants to conclude. When used in a B2C contract the law has always been suspicious of standard terms, in fact consumer has to accept the conditions or not contracting. This is why legislators and courts 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 only discuss those elements of the contract that they consider essential. For other matters, not covered by general conditions, the law should provide default rules that are automatically applicable if the parties have not made any other arrangements.

Default rules are thus 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 would like to contract in a way that is considered contrary to law, public policy or good morals, in such cases, the law may have to intervene with mandatory rules that declare such a contract void, or at least avoidable by one of the parties.

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. Thus, the French Code Civil (CC) of 1804, places contract law in Book II, while the German BGB of 1900 has general provisions on juridical acts in Book 1 and specific rules on contracts in Book 2. The Dutch BW of 1992 places the provisions on juridical acts in Book 3, on contracts in general in Book 6 and on specific contracts in Book 7.

Those are the three major European civil codes and reveal a number of differences in their treatment of contract law. The French code is sometimes referred to as “the code of the owner”: the fact that it places contract law in the book on ways to acquire property is clear evidence of the post-revolutionary focus on property as most important right of the citizen. Until the Grand reform of 2006, the French Code lacked a general part on the law obligations.

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, thus avoiding repetition. The reverse of this internal economy of the Code is that only trained lawyers are able to find their way through the scattered provisions.

The French, German and Dutch codes have undergone significant changes in the last two decades. The German Act on the Modernization of the Law of Obligations of 2002 incorporated doctrines developed by the courts and made important changes to the law of contractual remedies and consumer protection. In the Netherlands, the state adopted a whole new Civil Code, that replaced the old one of 1838, which was based on the French one. The French Ministry of Justice introduced a major reform of French contract law in 2016.

Next to the civil code, many civil law countries have more specific statutes in which contract law can be found. France has adopted a separate Consumer Code that collects and consolidates laws on consumer protection, as well as a Commercial Code that provides additional rules on B2B contracts. Germany has the Product Liability Act of 1989 and statutory implementations of recent European directives.

The dominant source of contr