1. International Business
Law
The formation of
business contracts
Avv. A. Saccomandi
European School of Economics
Rome, 18 Jan 2010
1

2. What is a contract ?
 It is a voluntary agreement entered into
by the parties
 It allows parties to regulate their
relationship in a certain way
 It provides certainty / security
NOTE:
All contracts are agreements, but not all agreements are
contracts !
There has to be a distinction between:
 agreements recognised by law as legally binding
 not binding agreements
A contract is an agreement with specific characteristics 2

3. Requirements of a contract :
1. Compliance with any required formality
2. Offer and acceptance
3. Capacity of the parties
4. In common law jurisdiction, the presence of
“consideration”
5. Contractual intention
6. Absence of any potential invalidating factors,
such as mistake, illegality, duress, and so on
3

4. 1. Compliance with any required
formality
Also an oral contract can be valid, but how
may the parties prove its conclusion ?
Common sense suggests that – if the contract is
complicated / involves significant sums of money –
written evidence is essential
4

5. 1. Compliance with any required
formality
Formal requirement
For some contracts writing formality is mandatory:
contract VOID
absence of writing
(no effect)
Example of formal requirement is the notarial act
(document drawn up and signed by a notary):
sale/mortgage contracts often require formal
requirement 5

6. 1. Compliance with any required
formality
 Evidential requirement
To prove the transaction, written evidence must be
produced
Example of evidential req. may be found in:
French civil code: if the sum involved is above € 762,
a signed written document must be produced.
Under English law, the only contract which must be
evidenced by writing is the contract of guarantee,
where a person promises to answer for the debt of
another.
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7. 2. Offer and Acceptance
OFFER represents an intention by one of
the parties to be legally bound to
some stated conditions in case of
to be acceptance by the other
distinguished
from preliminary Intention behind
negotiations / words/conduct
“invitation to as crucial factor
treat”
The test is what a reasonable person – considering
the surrounding circumstances – would assume to
be intention of the party concerned. 7

8. Example: ADVERTISMENTS
May an advert placed on a newspaper
be regarded as on offer ?
 English Law : the mere placing of an advert is regarded as an invitation
to treat and not as an offer. The advertiser has the last word
 German Law shares the English view
 French Law: the advert constitutes an offer to the public which binds the
offeror to the first person who accepted (ex. Cour de Cassation p.54)
EXCEPTION to the English rule : if – from the facts of a particular case – it
appears that the advertiser had a SERIOUS INTENTION to be legally bound
to potential respondants, then the advert will be regarded as an offer (ex.
Carlill v Carbolic Smoke Ball Co p.55)
If risks of business promotion can be identified in advance, they may be
more effectively dealt with (ex. putting a time limit on the promotion etc)
8

9. Example: GOODS ON DISPLAY IN A SHOP
If an item is displayed in a shop, can the
customer demand to be sold it
at the advertised price ?
THE CRITICAL ISSUE IS TO DETERMINE WHEN A SALE TOOK PLACE
 The English Court of Appeal stated that there is no sale until the offer
is accepted (“Pharmaceutical Society of GB v Boots Cash Chemist” p.57).
 French Law : a sale in a self-service shop is complete when the
customer, having chosen from the shelf an article offered for sale at a
posted price, places it in the basket which is provided and which he is
bound to use until the goods are checked out at the cash desk.
Accordingly, by selling a product which was unsafe, the supermarket was
in breach of contract and would have to compensate the customer for the
injuries suffered (Paris Court of Appeal p.57) 9

10. Termination of the Offer:
LAPSE
An offer is not valid for the rest of eternity. Most law systems recognise
that unaccepted offer will eventually lapse through the passage of time:
AT WHAT POINT DOES IT HAPPEN ?
• English, French and German Law: an offer lapses after a REASONABLE
time. What is reasonable depends on all the circumstances of the case,
including, for example, the subject matter of the offer (ex “Ramsgate
Victoria Hotel Co v Montefiore” p.59).
• If a deadline for acceptance is set, the offer will lapse on the expiration
of that deadline
10

11. Termination of the Offer :
REVOCATION
Can an offer be revoked ?
Not all legal systems allow the offering party to change
their mind.
German Law recognises the binding nature of an offer 
once it has been received by the other party, it can’t be
revoked. A revocation that arrives before or simultaneously
with the offer will be effective.
The offeror can avoid the binding effect of an offer by
expressely providing for this; e.g. by using words as
“revocable offer”. 11

12. Termination of the Offer :
REVOCATION
• English Law : an offer is freely revocable before
acceptance.
Exception: when an option contract is created, the
promise to keep an offer open for a stated period is
binding.
• American Law : an offer can be revoked before
acceptance.
Exception: the UCC provides that if an offer states that it
is to be binding or “firm”, it may not be revoked during
any period speicified or – if none – for a reasonable
period not exceeding 3 months 12

13. The Acceptance
An offer becomes a contract when it is accepted.
OFFER acceptance CONTRACT
There should be some external evidence of the
offeree’s intention to accept.
As a general rule, silence is not sufficient.
13

14. The Acceptance
In German Law a party can be legally bound as a result of failing
to respond to a communication from the other. For example, for
commercial letters of confirmation, when a business contract is
concluded orally, one party often sends to the other a written
confirmation of what has been agreed. If the content of the letter
differs from the oral agreement but are accepted by the other
party without objection, the agreement will be treated as modified
/ amplified in accordance with the letter of confirmation.
In this kind of situation, the recipient of a letter of confirmation
must OBJECT PROMPTLY, otherwise he risks being legally bound
to its content.
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15. The Acceptance
The acceptance has to be ABSOLUTE and UNQUALIFIED
A response which introduces variations does not amount
to an acceptance but constitutes a counter offer, that
destroys the original offer
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16. The Acceptance: “standard terms”
The parties of a contract will often have their own standard terms of
business.
In negotiating a contract, the parties will probably focus on the main
issues and may not expressely refer to each other’s standard terms.
If a dispute later arises over the contract, the standard terms become
an issue: each party will be insisting that their standard terms should
prevail over those of the other  “battle of the forms”
 English Court of Appeal : where documentation is exchanged
between the parties containing different terms of business, the terms
which are last presented will prevail, if accepted by the other party.
 Other systems adopt a different approach, by ascertain the parties’
“true intention” of by applying the requirement of “good faith” 16

17. The Acceptance:
COMMUNICATION
The acceptance has to be communicated to the
offeror, before a contract will come to existence.
Issue 1
In WHAT WAY should the offeree
communicate his/her acceptance ?
a) The offeror may use any reasonable means to
communicate the acceptance, unless the offeror
specifies a particular method of replying
17

18. The Acceptance
COMMUNICATION
Issue 2
At WHAT POINT in time does it take effect ?
instantaneous communication (e.g.
telephone conversation): the
communication is not deemed to be
effective until it’s actually received by
b) English Law the offeror
distinguishes
between
non-instantaneous communication
(e.g. post office): the rule favours the
offeree: by approving use of the post,
the offeror is agreeing to take risk of
things going wrong
Italian civil code: presumption of knowledge when the letter
ARRIVES at the offeror’s residential address
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19. 3. Capacity of the parties
To conclude a binding contract, the parties must have the legal
capacity to incur contractual obligations
Individuals who have not reached the age of majority will generally
have restricted contractual capacity
Contracts entered into with minors may be unenforceable against
them:
• contracts advantageous / beneficial to the minor may be
enforceable
• contracts which are manifestly disadvantegeous to the minor are,
under most systems, likely to be void.
Italian Law: there is distinction between “capacità giuridica” (legal
capacity) that is the suitability to be entitled to duties and rights and
that a person acquires by birth and the “capacità di agire” (action
capacity) that is the ability to perform legal acts, and that a person
reaches when he/she’s 18 years old. 19

20. 4. Consideration
In the common law tradition, contract law is not concerned with
gifts or merely gratuitous promises : the benefit of one party must
correspond to the detriment / benefit of the other (transaction
element in a contract).
involves the exchange of promises, that
a) Executory have yet to be carried out : the
consideration consideration is the promise itself, not
the performance of the act
one party’s promise is made in return for
the perfomance of act by the other : the
b) Executed
promise will only be enforceable when
consideration the required act has been completed.
E.g. rewards
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21. 4. Consideration
 Must not be past : a subsequent promise to pay for services previously
requested will only be enforceable if, at the time the original request was
made, there was an understanding that the services would be paid for (the
request was made “in a business sense”). In this situation, the subsequent
promise can be viewed as a confirmation of something which was implicit.
 Must be real : it has to have some economic value (it has not to be illusory)
 Must be sufficient : the substance of a promise has to be capable of
forming consideration in the eyes of the law. E.g. a party of a contract can
prove consideration by suffering a detriment in response to the other’s
promise. The level of “sufficiency” depends on the particular situation and also
on the fact that one party is under the duty to perform an action (p.76).
Consideration is a peculiarity of common law systems: it has no direct counterpart
in civil law:
- German law: a promise made with serious intent is binding without the need for
any counter-promise from the recipient;
- French code: a contractual obligation is only valid if it has cause (the goal
pursued by a party who enters into an obligation)
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22. 5. Contractual Intention
During negotiation, the parties may reach some “staging
posts” :
- Are they legally bound to each other at any of these
points in time ?
- What happens if one of the parties breaks off
negotiation before an agreement is reached ?
The answer depends on their INTENTION as ascertained
from the facts of the particular case.
As a general rule, the parties are entitled to act in their
own interest and this may involve them walking away
from the negotiation. 22

23. 5. Contractual Intention
 English law : no general duty to negotiate in good faith
 a party breaking off negotiation will not incur liability to
the other
 American courts : doctrine of “promissory estoppel”. If
one party raises in the other a reasonable expectation
that a deal will be reached, then if it fails to happen the
disappointed party may recover expenditure incurred for
this expectation (sometimes he/she may be entitled to
damages for losses)
 Civil Law systems : duty to conduct negotiation
according to the requirement of “good faith”
23

24. 6. Factors which may undermine the
contract’s validity:
MISTAKE and MISREPRESENTATION
- When both parties are mistaken, this can prevent them
reaching a consensus in the first place.
- If only one of the parties is mistaken, on discovering
the true situation, such party may escape the contract.
The point is whether the party’s mistake was induced by
something said / done by the other.
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25. 6. Factors which may undermine the contract’s
validity: MISTAKE and MISREPRESENTATION
Although a party is not generally obliged to volunteer
information, sometimes a duty of disclosure exists and,
by remaining silent, that party will be regarded as
misrepresenting the truth (French law case p. 83).
English law imposes duties of disclosure in the case of
insurance contracts, where there is an obligation on the
assured to disclose to the insurer all the material facts
which would influence the insurer in deciding whether to
accept the risk. Failure to disclose such facts will entitle
the insurance company to avoid payment on the policy.
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26. 6. Factors which may undermine the contract’s
validity: MISTAKE and MISREPRESENTATION
What happens if the mistake has not been induced by the
actions / words of the other party ?
-Civil law : mistake may invalidate the contract, if it is
related to an essential quality of the thing contracted for.
The damaged party is entitled to act for rescission of the
contract.
-English law : if the mistaken party wishes to avoid the
contract, he/she must prove that the other party is guilty of
misrepresentation. A misrepresentation occurs when a
party is induced to enter a contract having relied on
statements made by the other that turn out to be false
Example : Picasso painting p. 85
• Mistake on the identity of the other contracting party 26

27. DURESS and ILLEGALITY
A contract represents a voluntary meeting of minds 
the law helps the party who entered into one only as a
result of unlawful threats / duress (compulsion, threats
or violence to force a person to act against his will).
The threat must be unlawful
A contract made for an illegal purpose is VOID.
Examples:
- a contract involving the commission of a criminal
offence
- a contract which offends against public policy (immoral
contracts as prostitution)
- contract against public policy, but not immoral : 2
businesses conclude a contract to reduce /eliminate
competition between them 27