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I The Formation Of Business Contracts


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I The Formation Of Business Contracts

  1. 1. International Business Law The formation of business contracts Avv. A. Saccomandi European School of Economics Rome, 18 Jan 2010 1
  2. 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. 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. 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. 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. 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. 6
  7. 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. 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. 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. 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. 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. 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. 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. 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. 14
  15. 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 15
  16. 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. 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. 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 18
  19. 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. 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 20
  21. 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) 21
  22. 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. 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. 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. 24
  25. 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. 25
  26. 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. 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