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International Contract Laws: A Comparison September 24, 2012

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International Contract Laws:

A Comparison Research Thesis

Nithin S 2011E11

Anurag Raychaudhury 2011E14


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Contents Acknowledgement .......................................................................................................................... 6

Certificate ....................................................................................................................................... 7

Executive Summary ......................................................................................................................... 8

Chapter 1 ...................................................................................................................................... 10

International Contracting Forms .................................................................................................... 10

1.0 Introduction ..................................................................................................................... 10

1.1 UK, EUROPEAN AND INTERNATIONAL CONTRACT FORMS ................................................ 10

1.2 Institution of Civil Engineers (ICE) ..................................................................................... 12

1.3 Institution of Electrical Engineers (IEE) ............................................................................ 16

1.4 Institute of Chemical Engineers ....................................................................................... 17

1.5 The Joint Contracts Tribunal (JCT) ................................................................................... 17

1.6 The Association of Consultant Architects (ACA) ................................................................ 20

1.7 BE Collaborative Contract ................................................................................................ 21

1.8 International Chamber of Commerce (ICC) ...................................................................... 22

1.9 Liaison Group of the European Mechanical, Electrical, Electronic and Metalworking

Industries (ORGALIME) .......................................................................................................... 23

Chapter 2 ...................................................................................................................................... 24

Comparison of English Law and German Law ................................................................................. 24

2.0 Introduction ..................................................................................................................... 24

2.1 English law versus German law ........................................................................................ 26

2.1.1 Common law versus Systemdenken? ............................................................................. 26

2.2 Internal and External perspectives ................................................................................... 27

2.3 Conclusion ....................................................................................................................... 31

2.4 Indigenous and Received Influences in England ................................................................ 32

Chapter 3 ...................................................................................................................................... 42

CONTRACT LAWS OF TURKEY AND AUSTRALIA .............................................................................. 42

3.1 Introduction ..................................................................................................................... 42

3.2 Agreement ....................................................................................................................... 43

3.3 Intention .......................................................................................................................... 45

3.4 Legal cause (consideration) .............................................................................................. 45

3.5 Genuine Assent ................................................................................................................ 46

3.6 Mistake ............................................................................................................................ 46


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3.7 Fraud (Misrepresentation) ............................................................................................... 47

3.8 Termination of the Contract: ............................................................................................ 48

Chapter 4 ...................................................................................................................................... 50

Contract Law in the United States: An Overview ............................................................................ 50

4.0 Introduction .................................................................................................................... 50

4.1 Sources of Contract Law ................................................................................................... 51

4.2 What Kinds of Promises Should Be Enforced? .................................................................. 53

4.3 COMPARING CONTRACT LAWS- America vs Europe ......................................................... 93

4.4 MANDATORY RULES AND DEFAULT RULES ....................................................................... 93

Chapter 5 ...................................................................................................................................... 96

Case Analysis with respect to Evaluating Reasonableness of a Contract ......................................... 96

5.0 Introduction ..................................................................................................................... 96

5.1 Norway ............................................................................................................................ 96

5.2 Germany .......................................................................................................................... 97

5.3 Italy ................................................................................................................................. 98

5.4 England .......................................................................................................................... 100

5.5CISG ................................................................................................................................ 101

5.6 Conclusion ..................................................................................................................... 102

Chapter 6 .................................................................................................................................... 106

Cases comparing American and European Laws .......................................................................... 106

6.1 GRATUITOUS PROMISES ................................................................................................ 106

6.1.1 MILLS v. WYMAN ........................................................................................................ 106

6.2 OFFER AND ACCEPTANCE ............................................................................................... 108

6.2.1 LEFKOWITZ v. GREAT MINNEAPOLIS ............................................................................ 108

6.3 TERMS OF CONTRACTS.................................................................................................. 111

6.3.1WEISS v. LA SUISSE ....................................................................................................... 111

6.4 INCORRECT INFORMATION OR MISTAKEN ASSUMPTIONS ............................................. 113

6.4.1 SWINTON v. WHITINSVILLE SAVINGS BANK ................................................................. 113

6.5 REMEDIES ...................................................................................................................... 115

6.5.1 ROCKINGHAM COUNTY v. LUTEN BRIDGE CO. ............................................................. 115

Chapter 7 .................................................................................................................................... 117

Annexures ................................................................................................................................... 117

Chapter 8 .................................................................................................................................... 140


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BIBLIOGRAPHY ............................................................................................................................ 140


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Acknowledgement

We, Nithin Santhosh and Anurag Raychaudhury, students of MBA-Infrastructure

Management, SCMHRD, Pune, Thank Dr. Ajit Patwardhan and Professor Vivek Date,

faculty, CoE Infrastructure Management, SCMHRD, Pune, for their support and guidance

provided throughout this thesis work.

With such help, this project would not have been completed on time. We also thank our

colleagues who provided us with various inputs from their end which helped us in

collection of data and analyzing the problems and possible solutions to them.

Last but not the least, thanks to our Director K.S Subramanian, for giving us the

opportunity to do this project as part of our semester three research project.


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Certificate

This is to certify that Nithin Santhosh, roll number 2011E11 and Anurag Raychaudhury, roll

number 2011E14, of MBA-Infrastructure Management, Symbiosis Centre for Management

and Human Resource Development, have completed their thesis work on ‘International

Contract Laws: A Comparison’ satisfactorily.

Dr Ajit Patwardhan

Faculty- CoE Infrastructure Management

SCMHRD, Pune


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Executive Summary

Research Objective: Comparing & identifying the trends in various International Contract

Laws and examining the critical issues for multinational contracting parties.

Contract laws and their applications are wide and varied in the modern world of

Contracting. The innumerable models available across different geographies have made

the entire process of contracting complex and varied.

Starting with the understanding of the standard forms of contracting existing in the

system, we obtain an overview of the entire Standards that are adapted across the world

for Construction projects. We also examine the varying distinctions between Civil and

Common law with respect to Contract laws across geographies. This is done with the

objective of enabling a better understanding of the distinctions between the Contract

practices and laws across the world.

The case study on the Reasonableness of Contract in various European countries has also

been examined. Countries such as Norway, Italy and Germany have been examined in

detail owing to their wide contrasts in Contract practices.

With the aim of examining the Contract law distinctions across continents, we undertook

the study of the Turkish Contract law and compared it with a more neo liberal system of

Contracting undertaken by the country of Australia.

To wind up the study, the Contract law of the capitalist behemoth USA was done with a

focus on the Construction pertinent laws.


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Chapter 1

International Contracting Forms

1.0 Introduction

Subcommittee TI of the International Bar Association has undertaken to compile a library of standard conditions of contract for construction in various jurisdictions across the globe that would serve as a useful resource for all IBA members. The aim of the project is to facilitate the drafting and negotiation of international construction contracts and to advise members of the existence of standard forms of contract in a particular jurisdiction with which they may not be familiar. This document lists prominent national and international contractor or engineering associations and the standardized documents they offer. As there is a fee required to obtain most documents we have not obtained them, but instead have referenced the websites from which members may access documents. Please note that we make no representation as to the content of any of the documents though we have tried to make some general comments which may be of assistance.

1.1 UK, EUROPEAN AND INTERNATIONAL CONTRACT FORMS

1.1.1 FédérationInternationale des Ingénieurs-Conseils (FIDIC)

FIDIC, also referred to as the International Federation of Consulting Engineers, produces standard forms of contract for civil engineering construction which are used throughout the world. FIDIC contracts are often referred to as the international standard. The present suite of FIDIC contracts often best known by their colours, detailed below, replace the set issued originally in 1987. There are important changes between those issued in 1987 and the current. In the period between 1987 and 1999 FIDIC accepted that there was a need for a design and construct contract, and so produced in 1995 what became known as the Orange Book, which in some respects was a slightly uncomfortable compromise between total Turnkey and orthodox design and build. With the publication of the 1999 suite the need for the Orange Book became redundant as the need for a design and build contract was accommodated by either the Yellow or the Silver Book. However, the Orange Book still is occasionally used but has to be used with care as not being either a member of either the 1987 or 1999 suites.


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1.1.1.1 Available Documents

Latest Contracts (1999) 1. Conditions of Contract for Construction (First Edition, 1999) The Red Book 2. Conditions of Contract for Plant and Design-Build (First Edition, 1999) The Yellow Book 3. Conditions of Contract for EPC/Turnkey Projects (First Edition, 1999) The Silver Book 4. Short Form of Contract (First Edition, 1999) The Green Book Other Forms of FIDIC Contracts: 5. Form of Contract for Dredging and Reclamation Works “Dredgers Contract” The Blue Book In addition FIDIC publish:- 6. A form of agreement for engagement of Consultants (The White Book) 7. A form of agreement for Sub-consultants 8. A joint venture agreement form It should be noted that documents 7 and 8 above are of some antiquity, being published in 1992 and have not been updated since the 1999 suite came into force. Further FIDIC did publish in 1994 a form of Subcontract to be used, principally with the Red Book. No such document has been published since the 1999 suite came into effect.

1.1.1.2 Brief Summary

1. Conditions of Contract for Construction (First Edition, 1999) Red Book Conditions of Contract for Construction are recommended for building or engineering works designed by the employer or by its representative, the engineer. Under the usual arrangements for this type of contract, the contractor constructs the works in accordance with a design provided by the employer. However, the works may include some elements of contractor-designed civil, mechanical, electrical and/or construction works. 2. Conditions of Contract for Plant and Design-Build (First Edition, 1999) Yellow Book Conditions of Contract for Plant and Design-Build are recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract, the contractor designs and provides, in accordance with the employer’s requirements, plant and/or other works, which may include any combination of civil, mechanical, electrical and/or construction works.


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3. Conditions of Contract for EPC/Turnkey Projects (First Edition, 1999) Silver Book Conditions of Contract for EPC Turnkey Projects are recommended where one entity takes total responsibility for the design and execution of an engineering project. Under the usual arrangements for this type of contract, the entity carries out all the engineering, procurement and construction: providing a fully-equipped facility, ready for operation (at the “turn of the key”). 4. Short Form of Contract (First Edition, 1999) Green Book These Conditions of Contract are recommended for engineering and building work of relatively small capital value. However, depending on the type of work and the circumstances, the Conditions may be suitable for contracts of considerably greater value. They are considered most likely to be suitable for fairly simple or repetitive work or work of short duration without the need for specialist sub-contracts. This form may also be suitable for contracts which include, or wholly comprise, contractor-designed civil engineering, building, mechanical and/or electrical works. 5. Form of Contract for Dredging and Reclamation Works “Dredgers Contract” These Conditions of Contract have been prepared by FIDIC in close collaboration with the International Association of Dredging Companies (IADC), and are recommended for dredging and reclamation work. The aim has been to produce a straightforward document which includes all essential commercial provisions, and which may be used for all types of dredging and reclamation work and ancillary construction with a variety of administrative arrangements. Under the usual arrangements for this type of contract, the contractor constructs the works in accordance with design provided by the employer or by its engineer. However, this form may also be suitable for contracts that include, or wholly comprise, contractor-designed works.

1.2 Institution of Civil Engineers (ICE)

ICE is an independent engineering institution and represents approximately 80,000 civil engineers worldwide. Principal membership is in the United Kingdom, but it has memberships in China, Hong Kong, Russia, India and roughly 140 other countries. The ICE documents are traditionally for Engineering Contractors. Pre 1987 versions of FIDIC were very much based on ICE forms but there is far less similarity now. Traditionally they were Engineer based contracts where the Employer appointed the Engineer.


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1.2.1 Available Documents

1. ICE Conditions of Contract Measurement Version 7th Edition: July 2004 2. ICE Conditions of Contract Design and Construct 2nd Edition: July 2004 3. ICE Conditions of Contract Minor Works 3rd Edition: July 2004 4. ICE Conditions of Contract Term Version: July 2004 5. ICE Conditions of Contract Ground Investigation 2nd Edition: July 2004 6. Agreement for Consultancy Work in respect of Domestic or Small Works: amendments Dec 1999


1. ICE Conditions of Contract, 7th Edition: July 2004 This Contract is based on the traditional pattern of engineer designed contractor built works with valuation by ad-measurement. The traditional role of the engineer in advising the client, designing the works, supervising construction, certifying payment and adjudicating in cases of dispute is fully maintained. 2. ICE Conditions of Contract Design and Construct 2nd Edition: July 2004 This contract radically departs from the normal ICE Conditions of Contract concept with the contractor responsible for all aspects of design and construction, including any design originally provided by or on behalf of the employer. The Form of Tender provides for payment on a lump sum basis but other forms of payment may be used. 3. ICE Conditions of Contract Minor Works 3rd Edition: July 2004 Intended for use in contracts where: a) The potential risks involved for both the employer and the contractor are adjudged to be small; b) The works are of a simple and straightforward nature; c) The design of the works, save for any design work for which the contractor is made responsible is complete in all essentials before tenders are invited; d) The contractor has no responsibility for the design of the permanent works other than possibly design of a specialist nature; e) Nominated sub-contractors are not employed; and f) The contract value does not exceed £500,000 and the period for completion of the contract does not exceed 6 months except where the method of payment is on either a day-work or a cost plus fee basis.


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4. ICE Conditions of Contract Term Version: July 2004 The concept of a term contract is to carry out routine maintenance and remedial work within a set geographical area. A contractor is appointed to carry out such work for an agreed period of time (the term) carrying out such packages of work as may be required by the employer under conditions set out in the Term Version. The contract should be suitable for planned and reactive maintenance or refurbishment work as well as for new work and emergency works where a contractor may be on call. Each package of work to be carried out is identified in a works order which defines the works required and their location sets any programming needs and also states any special requirements or payment terms. Payments will normally be valued by measurement using rates set down in the term contract but specially agreed prices or a cost plus arrangement may also be used. 5. ICE Conditions of Contract Ground Investigation, 2nd Edition: July 2004 The conditions are very closely based on the ICE General Conditions of Contract 5th Edition. The contract conditions specify that the work will be under the full direction and control of the engineer, and on site, under the supervision of the engineer's representative or other person appointed by the engineer. The company or firm undertaking the physical work is referred to as the contractor. With limited exceptions, the role of the contractor is to perform the physical works and testing included within the contract documents, the control, direction and interpretation of such work generally being in the hands of the engineer or his representatives. In following the ICE General Conditions of Contract 5th Edition, the contract price is indeterminate at tender stage and is only finally derived on final measurement of the work undertaken. 6. Agreement for Consultancy Work in respect of Domestic or Small Works: amendments Dec 1999 ICE has produced this contract for domestic or small works in the form of a checklist for discussion with the client. It is divided into five sections, four of which reflect the type of services most often provided and the fifth deals with payment.

1.2.2 The New Engineering Contract (the NEC)

The NEC was developed by ICE in the early 1990s with the aim of introducing a new form of non-adversarial form of contract strategy which would contribute towards the more effective and smoother management of projects. NEC is now in its Third Edition and will be projected as the preferred form of contract for works relating to the 2012 Olympics in London.


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It is radically different from other English style forms of Building and Civil Engineering Contracts, in that it has a core contract form, written in simple terms and substantial bolt ons to enable use in a variety of circumstances. The choice of options will have to be a subject for advice in each case. The NEC is a legal framework of project management procedures designed to handle all aspects of the management of engineering and construction projects. It is in use across the spectrum of engineering and construction activities by a wide range of clients, consultants and contractors. Its use encompasses projects both large and small, civil engineering and building, national and international. It comprises a suite of contract documents and range of support services consisting of training, consultancy, software and a users group. Since the original launch of the main engineering and construction contract and subcontract, the NEC has been extended to include a professional services contract, an adjudicator’s contract and a short contract. Further extensions of, for example, a term services contract, are under development. The NEC is being used for:

• engineering and construction work containing any or all of the traditional disciplines such as civil, electrical, mechanical and building work;

• projects where the Contractor has full design responsibility, partial design responsibility or no design responsibility;

• all the normal current options such as competitive tender, target contracts, cost reimbursable contracts and management contracts; and

• contracts in the UK and around the world

1.2.2.1 Structure of the NEC

The main NEC contract, the Engineering and Construction Contract - omnibus edition, and its associated sub-contract, are based on the employer selecting a contract form from six options: Option A Priced contract with activity schedule Option B Priced contract with bill of quantities Option C Target contract with activity schedule Option D Target contract with bill of quantities Option E Cost reimbursable contract Option F Management contract The chosen contractual approach is then further refined by selecting from up to 15 secondary options depending on the main option selected. These are: Option G Performance bond Option H Parent company guarantee Option J Advance payment to the Contractor


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Option K Multiple currencies Option L Sectional completion Option M Limitation of the Contractor's liability for his design to reasonable skill and care Option N Price adjustment for inflation Option P Retention Option Q Bonus for early completion Option R Delay damages Option S Changes in the law Option U The Construction (Design and Management) Regulations 1994 Option V Trust Fund Option Z Additional conditions of contract The Engineering and Construction Short Contract follows the same principles as the main contract but with a reduced number of clauses and no secondary options. It can be used on projects which

• do not require sophisticated management techniques; • comprise straightforward work; and

• impose only low risks on both the employer and the contractor. The Professional Services Contract also follows the broad principles of other NEC documents but has been modified to cover the procurement of professional services. It is designed to be used in one of four main options: Option A Priced contract with activity schedule Option B Time based contract Option C Target contract Option D Term contract These may be supplemented by up to 14 secondary option clauses. Each contract document is supported by guidance notes and printed flow charts which set out the logic behind all contract decisions. In addition to the contract documents themselves, there are a range of support products and services covering training, consultancy, software, an active users group and a web site.

1.3 Institution of Electrical Engineers (IEE)

The IEE4, based in London, England, is an international organization for electronics, electrical, manufacturing and IT professionals, with specifically tailored products, services and qualifications to meet the needs of today's technology industry. The IEE, jointly with the Institution of Mechanical Engineers (IMechE), issues a range of model forms of general conditions of contract (including, inter alia, Forms of Tender, Agreements and Performance Bonds) and guides (known as "commentaries") to their use.


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These are Model Forms of Contract for electrical and mechanical work and consultancy. The contents of these publications are decided by a joint committee of IEE /IMechE members and others representing the various interests of the electrical and mechanical engineering industries. IEE has developed the Joint IMechE/IEE Model Forms of General Conditions of Contract. Apart from Model Form MF/4 and Model Form MF/3, the latter not involving the appointment of an engineer to manage the contract, the model forms have also been adopted and are recommended by the Association of Consulting Engineers (ACE).

1.4 Institute of Chemical Engineers

IChemE is a similar organization to IMechE/IEE, but specializes in production of contracts for the specialist process industry. The form of contract has been significantly updated in recent years to cover the spectrum of contract possibilities. Like FIDIC, IChemE contracts are often known by their colour and a list of available contracts is set out below: IChemE (Green) Form of Contract – Reimbursable Contracts IChemE (Brown) Form of Contract – Subcontract for Civil Engineering Works IChemE (Grey) Form of Contract – Adjudication Procedures IChemE (Orange) Minor Works 2nd ed 2003 IChemE (Pink) Form of Contract – Arbitration Procedures IChemE (Red) Form of Contract – Lump Sum Contracts IChemE (White) Rules for Expert Determination 3rd ed 2001 IChemE (Yellow) Sub Contracts 3rd ed 2003 IChemE (Green) Reimbursable

1.5 The Joint Contracts Tribunal (JCT)

Since 1931, the JCT, based in London, England, has been producing standard forms of contract, guidance notes and other standard documents used in the construction industry. The JCT range of contracts are fundamentally building rather than civil engineering contracts but are used for projects where both building and civil engineering works are involved. They cover orthodox contracting and design and build and management contracts. Some forms deal with less complicated or expensive forms of contract. The major types of form are listed below, traditionally English building contracts have been divided into With and Without Quantities forms to cover both methods of measurement. The JCT helpfully publish a document entitled – Practice Note – Deciding on the appropriate JCT Contract, which provides guidance on what they would consider to be the appropriate JCT Contract for different situations – e.g. design and build, traditional contracting, cost plus or management. The note also contains a detailed list of JCT style contracts available. The current note sets out the position as at February 2007.


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In a radical departure from previous JCT forms, the JCT launched on 1 March 2007, a new set of contract documents entitled JCT – Constructing Excellence.


1. Major Project Form 2. PCC 2005 Standard Form of Prime Cost Contract 3. WCD 2005 Standard Form of Building Contract With Contractor's Design 4. 2005 Standard Form of Building Contract 5. MC 2005 Standard Form of Management Contract 6. IC 2005 Intermediate Form of Building Contract 7. MW 2005 Agreement for Minor Building Works 8. MTC 2005 Standard Form of Measured Term Contract In addition JCT publish subcontracts, trade contracts and forms of warranty to be used with the particular contract in question. In addition forms of framework agreement and facilities management agreements are available. Details of some of the major forms of contract available appear below.


1. Major Project Form (MPF) The Major Project Form has been developed to meet the needs of clients who regularly procure the construction of major buildings. It reflects those amendments frequently made to JCT developed standard form building contracts by developers and other large commercial organizations. This form is suitable for experienced users who require limited procedural provisions in the contract form and have their own in-house procedures, for experienced knowledgeable contractors who can put in place a proper system of risk management, and for significant projects in terms of size and complexity. MPF is the first JCT form specifically to provide for third party rights. It caters to various levels of design input on the part of the client and the contractor and incorporates a design submission procedure. The MPF also provides for projects carried out in phases, and therefore does not require a supplement, and it also requires the parties to establish their own insurance requirements, in contrast to other JCT forms. Other key provisions are those dealing with:

• acceleration of project, • bonus for early completion,

• cost savings and value improvements,

• the Client's pre-appointed consultants, • mediation.


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2. PCC 2005 Standard Form of Prime Cost Contract This form is appropriate for use where the employer wants the earliest possible start. There may be insufficient time to prepare detailed tender documents; or circumstances such as an inability to accurately define the work may make the use of the detailed tender documents inappropriate, necessitating the appointment of a contractor simply on the basis of an estimate of the total cost. 3. WCD 2005 Standard Form of Building Contract With Contractor's Design This form is appropriate for use where the employer wishes the contractor not only to carry out and complete works, but also to have a design responsibility for the works. 4. 2005 Standard Form of Building Contract Appropriate for use on building contracts where the Employer appoints an Architect or Supervising Officer to be the interface between Client and the Contractor. 5. MC 2005 Standard Form of Management Contract This form is appropriate for use with large scale projects where an early start and the earliest possible completion are required. In such situations it is not always possible to prepare full design information before work commences, and much of the detail design may be of a sophisticated or innovative nature requiring proprietary systems or components designed by specialists. 6. IC2005 Intermediate Forms of Building Contract. Suggested for prospects of between £250,000 and £5,000,000 or where more detailed condition than the Minor Works form (No. 7) are required. 7. MW 2005 Agreement for Minor Building Works This form is appropriate for new works, alterations and extensions to all types of building:

• where the proposed works are to be carried out for an agreed lump sum;

• where the work involved is simple in character; and

• where an architect or contract administrator has been appointed to advise on and to administer its terms.

It is not suitable for use where detailed control procedures are needed. 8. MTC 2005 Standard Form of Measured Term Contract


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This form is appropriate for use by employers who have a regular flow of maintenance and minor works, including improvements, to be carried out by a single contractor over a specified period of time and all under a single contract. The JCT Constructing Excellence Contract shares certain basic principles with the BE Collaborative Contract (see V1) below and has some common authors. It’s principles are stated to be collaboration and partnership within a rigorous legal framework, but a framework that has many options (like the NEC forms) to cover particular situations. It is too early to assess how successful it will be in practice.

1.6 The Association of Consultant Architects (ACA)

ACA is the national professional body representing architects in private practices throughout the UK. ACA has drawn up its own form of Building Contract with ancillary documents. In 2000 it published the first construction industry Project Partnership Contract PPC2000.


1. PPC2000 - ACA Standard Form of Contract for Project Partnering (Amended 2003) 2. SPC2000 - ACA Standard Form of Specialist Contract for Project Partnering (Amended 2004) 3. ACA Form of Building Agreement 1982 Third Edition 1998 (2003 Revision) 4. ACA98 The Appointment of a Consultant Architect For Small Works, Works of Simple Content and Specialist Services (2000 Edition)


1. PPC2000 PPC2000 is a multi-party non-adversarial construction contract that provides the foundation for the partnering process. It allows the client, the constructor and all consultants and key specialists to sign a single Partnering Contract. It also provides for the early selection of a project partnering team and the collaborative finalization of designs, prices and members of the supply chain. It covers the full duration of the partnering relationships and provides for a partnering timetable to govern the contributions of all partnering team members to partnered activities. PPC2000 also provides for a clear system of reducing, managing and sharing risks and offers a non-adversarial problem resolution mechanism.


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2. SPC2000 SPC2000 is a specialist contract for project partnering and is a specialist subcontractor version of PPC2000, following a similar format. SPC2000 complements PPC2000 and focuses on the involvement of specialist sub-contractors in project design and risk management from the earliest stage of a project and encourages collaborative work throughout all stages of project process. 3. ACA Form of Building Agreement 1982, Third Edition 1998 (2003 Revision) This contract ensures that responsibilities are placed fairly upon those parties best able to shoulder them. It defines the various responsibilities of the parties in a readable and easily understood way, eliminating areas of uncertainty. The flexibility of this contract is achieved via the use of key optional clauses providing for a number of choices which allow it to be tailored to the needs of each individual building project. It can be used for design, development and construction. 4. ACA98 The Appointment of a Consultant Architect For Small Works, Works of Simple Content and Specialist Services (2000 Edition) This contract can be used between the architect and the client for small building projects and also for projects where the content of the work is of a simple nature.

1.7 BE Collaborative Contract

The BE Collaborative Contract is a new form of contract for construction projects that underpins collaborative behavior. The contract has been created by BE (Collaborating for the Built Environment). BE is the largest independent association for companies across the supply chain in the UK, committed to the research, design and delivery of sustainable built development. The Collaborative Contract is a new contract framework for the delivery of successful construction projects. This contract is intended for use by parties who genuinely want a contractual framework that assists a collaborative approach and who want to identify and manage risks, rather than simply passing them on under contract conditions. The BE Collaborative Contract aims to underpin collaborative behavior, provide flexibility in use and be clear and concise.

1.7.1 GC Form of Contract

GC forms of contract originated from the CCC/Works family which were extensively used for Government Contracts until the 1970s. The CCC form became increasingly antiquated


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and fell into disuse. In 1998 the forms were revamped and reissued as the GC set of forms and have been used for non government contracts since that time. The set covers almost every permutation and is an alternative to use of the JCT or NEC form. A summary of the forms available is: GC Works 1 – 1998 Without Quantities GC Works 1 – 1998 With Quantities GC Works 1 – 1998 Single State Design & Build GC Works 1 – 1998 Model Forms and Commentary GC Works 1 – 1998 Two Stage Design & Build GC Works 1 Construction Management Trade Contract 1999 with quantities GC Works 1 Construction Management Trade Contract 1999 without quantities GC Works 2 1998 Minor Works – General Conditions & Supporting Model Documents GC Works 3 1998 Contract for M&E Engineering Works – General Conditions & Supporting Model Documents GC Works 4 1998 Contract for Building, CE, M&E Small Works GC Works 5 Commentary 2000 GC/Works/5 1999 General Condition for the Appointment of Consultants: framework agreement GC Works 6 1999 Dayworks Term Contract GC Works 7 Measured Term Contract GC Works 8 Specialist Term Contract GC Works 9 1999 Lump Sum Term Contract for operation, maintenance & repair of M&E Plant Equipment & Installations GC Works 10 2000 – Facilities Management GC Works 11 2000 Minor Works Term Contract – general conditions, model forms and commentary GC Works Sub-Contract General Conditions GC Works Sub-Contract Model Forms GC Works Sub-Contract Guidance Note

1.8 International Chamber of Commerce (ICC)

The Commission on Commercial Law and Practice (CLP) (one of the Commissions of the ICC), based in Paris, France, is in the process of developing ICC model contracts and ICC model clauses, which give parties a neutral framework for their contractual relationships. These contracts and clauses are carefully drafted by the experts of the CLP Commission without expressing a bias for any one particular legal system. The idea behind ICC model contracts and clauses is to provide a sound legal basis upon which parties to international contracts can quickly establish an even-handed agreement acceptable to both sides.


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The contracts are constructed to protect the interests of all parties, combining a single framework of rules with flexible provisions allowing the parties to insert their own requirements. Currently, the following ICC model contracts are being developed:

• ICC Model Turnkey Supply of an Industrial Plant Contract

• ICC Model Major Project Turnkey Contract

1.9 Liaison Group of the European Mechanical, Electrical, Electronic and Metalworking

Industries (ORGALIME)

ORGALIME9 issued a new standard contract – the ORGALIME Turnkey Contract for Industrial Works – its most comprehensive contract publication to date. ORGALIME’s premise was that purchasers and contractors in the engineering sector, who had used existing models, had not found them as suitable for industrial works as for civil engineering contract.


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Chapter 2

Comparison of English Law and German Law

2.0 Introduction

The categories, or families, of law have been developed as a tool to classify legal systems. Various classifications may be proposed; a classical distinction is between systems of Common Law, systems of Civil Law, systems of Islamic law, and socialist systems.

The

classification into families is useful as long as it permits us to treat under one category different legal systems that have various features in common, and to distinguish them from other systems that have other characteristics. The relevance of a division into families will, therefore, depend on the features that the observer is focusing on from time to time. If the focus is, for example, on the state organization, the criteria for building families might be whether the states are organized as federations or as unitary systems, or whether the systems are secular or religious. In this case, the grouping into families might probably be different than if the focus is on commercial contracts. In the context of commercial contracts, the classic division between Common Law and Civil Law might be very useful, even if it does not cover all the major legal systems of the world (it leaves out, for example, the Islamic system). The division between Common Law systems

and Civil Law systems

is traditionally based

on the different sources of law, respectively the judicial precedent and the statutes. In the context of contracts, however, I deem it more relevant to focus primarily on the different way of interpreting a contract and on the different role that the legal system plays in integrating the contract; this, in turn, influences the way contracts are drafted in the respective legal traditions.

Further classifications are possible: for example, within what is

usually considered to be Civil Law, it is possible to distinguish between systems based on the French Code Napoleon,

systems based on the German Pandects

and Scandinavian (or,

more correctly. All these sub-categories of Civil Law systems may present their own specific features that distinguish them from each other, such as, for example, the emphasis on the principle of reasonableness to interpret the contract rather than on the systematic construction of the provisions. These differences, however, are marginal, if compared to the differences between the Civil Law systems and the Common Law systems. From the point of view of international contracts, therefore, the most interesting classification is that between Common Law and Civil Law: this is particularly true in view of the widespread use of English contract models even for transactions that are governed by a Civil Law system. When a contract is drafted on the basis of a model developed under the Common Law system, but it is regulated by the law of a Civil Law system, it becomes important to


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understand the main features that distinguish the Common Law from the Civil Law. In this way, it is easier to understand why certain contractual provisions have been inserted or written in that certain way in the original model that was meant to operate under a Common Law system. It is also easier to understand how those provisions should be interpreted or rewritten to obtain the same results under the governing Civil Law system. Nordic) systems.


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2.1 English law versus German law

2.1.1 Common law versus Systemdenken?

The question presupposes a fundamental difference, and one may well doubt whether it exists. Certainly, the differences between continental European civil law and common law should not be underemphasized; in fact, they have often been stressed. ‘There is no Wissenschaftat common law! The common law is a historical development rather than a logical whole, and the fact that a particular doctrine does not logically accord with another or others is no ground for its rejection. Arguments based on logical consistency are apt to mislead for the common law is a practical code adapted to deal with the manifold diversities of human life (…). The Englishman is naturally pragmatic, more concerned with result than method, function than shape, effectiveness than style; he has little talent for producing intellectual order and little interest in the finer points of taxonomy.’38 ‘By and large English lawyers and writers have tended to think of it as almost a virtue to be illogical, and have ascribed that virtue freely to their law; “being logical” is an eccentric continental practice which common-sensical Englishmen indulge at their peril. There is, however, opposite voices and tendencies as well. This is certainly true with regard to statutory law. To begin with, the Law Commission (in the phase before a statute is devised and enacted) arguably pursues a systematic approach and contributes to a systematic development of the law. Its task is ‘to take and keep under review all the law (…) with a view to its systematic development and reform’. Not surprisingly, statutes in the UK are drafted in a systematic fashion and display a systematic order. Consequently, systematic interpretation plays an important role here too. Thus, English courts resort to a ‘contextual interpretation’ in order to understand the meaning of words and sentences, thus referring to the ‘outer system’ of the law. Their interpretation rests on ‘guiding principles’ of the law, thus referring to the ‘inner system’ of the law. The shift from a rather formal approach to interpretation, constrained by the mischief rule, to the purposive construction has also contributed to a systematic method, based on the purpose of the law. As the example of Roman law illustrates, a case law approach can, at the same time, be systematic. Common law lawyers also emphasize the necessity of understanding the law as a coherent whole. And indeed, one can discern a systematic approach not only in statutory law but in the common law as well. Thus, it should be noted that the common law method of developing the law on a case-by-case basis requires a comparison of cases, likening and distinguishing, a method that is committed to the principle of equality.50 Even equity jurisprudence reveals signs of a generalizing tendency of justice. While its hallmark is the consideration of all aspects of the individual case, it does so in a relatively fixed order of rules developed over centuries. The law of restitution is another example. Based on the seminal works of Goff and Jones, as well as Birks, courts increasingly consider this area of the law as a structured whole. Not only legal practice, but scholarship too displays a systematic approach. Thus, standard textbooks not only present the material in a systematic


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order but place special emphasis on not only describing the individual rules but revealing the underlying principles. Indeed Lord Mansfield famously said about the common law that it ‘does not consist of particular cases, but of general principles which are illustrated and explained by those cases’. Lawyers trained in civil law systems, on the other hand, certainly do not disregard case law. On the contrary, even in a codified legal system, case law plays an important role. This is certainly true for areas where the law is not codified at all as is the case, for example, with the German law of industrial action (Arbeitskampfrecht). Furthermore, codifications often, perhaps even necessarily contain general clauses that need to be structured by case law. The principle of Treu und Glauben(good faith) in BGB is a prominent example. And finally, interpretation also contains an element of the development of the law and is thus open to further structuring by the courts. Indeed, as codifications grow older, the layer of jurisprudence that interprets, supplements and sometimes derogates from or covers it becomes thicker and, to some extent, a systematic approach may be complemented with a case-by-case approach. Much of what common law lawyers do thus certainly seems to be rather akin if not identical to a systematic legal method. And, on the other hand, civil law lawyers do proceed, in certain areas, on a case-by-case basis. In other words, the sources of the law seem to differ more than the methods. Indeed, the common law method has aptly been described as proceeding by analogy, a method that we have identified as being also inherently linked to a systematic approach. And where the English courts interpret statutes, they proceed on similar terms as continental courts. Here too, a systematic interpretation with its reference to both the outer and the inner system of the statute is a central part of interpretation.60 Thus, it is perhaps not so much a competition between methods that should be considered but rather a difference in the sources of the law. The question then is not whether a case-by-case approach is preferable to a systematic approach, but rather whether the sources require the one or the other. Indeed, we find ample examples of both systematic and case-oriented approaches where lawyers trained in common law countries and lawyers trained in civil law countries deal with a single subject. Consider some of the various books on EU employment law for example.

2.2 Internal and External perspectives

Let us consider the relation of a systematic approach to other disciplines. One may even add comparative law as a sub-discipline of law. In fact, the systematic method employed in System undPrinzipien des EuropäischenVertragsrechts’ has been criticised for insufficiently taking comparative law into account. Similarly (though with some differences) it could be


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criticized for not considering other disciplines such as art, economics, history, linguistics, psychology and sociology. A systematic approach is recently described as an internal perspective as opposed to the external perspective of the ‘law and …’ disciplines such as law and economics, behavioral law and economics, law and literature etc. Both English common law and continental civil law traditionally take an internal perspective. The internal perspective is the result of what lawyers perceive their task to be: Traditional scholarship is concerned with how courts (do and should) decide cases. Courts, however, do not make the law but, following the division of powers, apply the law. This is certainly true for the civil law but even applies with regard to common law jurisdictions. It is true that common law courts have a more open way of reasoning and arguing. Still, a case-by-case approach finds its justification in the binding force of precedent rather than in the law-making powers of the judge. Here too, the judge is being considered as a law-finder rather than a law-maker. This internal perspective is thus a common feature of both the systematic method and the case-by-case approach, and it distinguishes both from the external perspective of art, economics, history etc. As ‘other’ disciplines they stand outside the law and thus cannot – or not without further requirements – contribute to finding the law. If a legal rule is inefficient from an economic perspective, this does not invalidate the legal rule. If a legal rule is counterproductive because it disregards the insights of behavioral theory, again, this does not render from the rule invalid or inapplicable. If a legal rule disregards the lessons we can learn from history or the experience of other legal systems, this still does not derogate from the rule. This is not to say that other disciplines may never play any role for the internal perspective. Where, as for example in the law of capital markets, the legislator lays down the achievement of efficiency as an objective of the rule, lawyers may have to take economic insight into consideration when interpreting and applying the law (purposive or historical interpretation). Certain fields of the law may be open to or even require input from other disciplines. This is, for example, the case where the rules of competition law such as Articles 101(3), 102 TEU presuppose economic analysis. Similarly, the law against unfair commercial practices may be open to taking the insight of behavioral theory into account. Where the law pursues the enhancement of uniformity on an international scale, a national court may be entitled to consult a comparative legal insight. Again, where the law appeals to good morals, good faith or even justice, a judge may be entitled to have recourse to ethics or sociology. Furthermore, other disciplines or comparative law may have an inspirational function and open up the panorama of possible interpretations or developments. In this latter case, though, other disciplines or comparative law do not play a formal role in the interpretation and application of the law: A judge may or may not make use of such instruments: if he does not, he certainly cannot be accused of a déni de justice; if he does, on the other hand, he can still not evade the binding commands of the law. In other words: However inspirational the solution of another country’s legal system may be, however inspirational economic, psychological or sociological considerations for the ‘best’ law may be, a judge has to apply the law as it stands.


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Other disciplines thus need to find a door to enter into the sphere of the law in order to becomepart of the internal perspective, and these doors are rare and fairly narrow. Therefore, other disciplines play a limited role only in adjudication where an internal perspective is required. There is a good reason for this. It has already been mentioned that the division of legislative and adjudicative powers is the central principle that requires a distinction between internal and external perspectives. While the legislator may entrust the courts with the task of pursuing, say, economic goals such as efficiency, there are reasons of principle and of practicability that limit this option. As a matter of principle, a transfer of rule-making powers to the courts must be limited where a division of powers reigns. As a matter of practicality, the courts do not make good law-makers. They lack the necessary infrastructure to even adequately pursue comparative legal work. The sobering insight of different studies is that when courts engage in comparative law, there is a good possibility that they will get it wrong. Similarly, while some public agencies such as the German Bundeskartellamt, the EU Commission or comparable antitrust offices are specially equipped to carry out specific economic investigations, courts simply do not have the instruments to make economic, psychological or sociological studies. Where, however, the necessary economic, psychological or sociological material was available, we again encounter an objection of principle. Courts do not have the authority to decide which of various competing strands of thought of, say, economics, psychology or sociology the law should follow. That is a matter for parliaments to decide. If their contribution to the work of the courts is thus inherently limited, other disciplines maybe all the more important where we take an external perspective. To say that courts take an internal perspective does not mean that lawyers never take an external perspective. This is in particular the case where law-making is concerned. Take, for example, the rights of withdrawal. From a private law theory point of view, rights of withdrawal are certainly critical in that they interfere with the principle of the binding nature of the contract (pactasuntservanda). At the same time, they can be considered as minimally intrusive, given that they merely provide for a procedural mechanism that gives the consumer the possibility to have a second decision concerning the contract, yet with an inverse onus of action (he has to do something to avoid the contract). From the perspective of the law-maker, it has to be considered, though, whether rights of withdrawal actually work in practice, i.e. whether they give the consumer an effective opportunity to reconsider. Empirical studies seem to show that only a very small, even negligible, percentage of consumers make use of their right of withdrawal. This may indicate that such rights do not ensure an adequate protection of the free will and the self-determination of the consumer or protect them from disadvantageous contracts. It has been suggested that behavioural theory may provide some understanding of why consumers do not withdraw from a contract once concluded. Different psychological mechanisms may be at work here. One could be the so-called endowment effect: We value things more once we have acquired them. Furthermore, we avoid cognitive dissonance:


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Once we have made a decision, we endeavor to confirm it and selectively perceive information that supports our decision more than information that does not. An extraordinarily low withdrawal rate may be due to those (and/or other) psychological mechanisms. Following various EU directives, rights of withdrawal are a central instrument of consumer protection in the national laws of the Member States. If it should transpire that the right of withdrawal is not a good mechanism, this does not change the law. In this particular case, there is arguably little room for courts to take behavioural insight into account at all. In adequate cases (i.e.: where the national law so allows) the courts may, perhaps, use behavioural insight when they judge whether consumer information about the right of withdrawal has been sufficient. But, then again, why should they? The EU legislator had not taken today’s behavioural theory into account when it installed the rights of withdrawal. Neither had it instructed courts to do so – and perhaps for good reason. If behavioural theory should inform us that consumers behave in a systematically irrational manner, what follows from that? We (the legislator!) may accept such findings and decide to paternalistically steer consumer behaviour (‘de-biasing’), basically treating consumers like foster-children who cannot decide on their own. We (again: the legislator) may, on the other hand, install a legal mechanism that allows consumers to care for themselves once they overcome the behavioural barriers. Other consequences are conceivable too. There is, indeed, a vigorous debate between neoclassical economics and behavioural economics and the latter is by no means universally accepted. The discussion re-emphasises that we encounter value judgements of a nature that are not for courts but for legislators to make. The example can further illustrate that courts are not well equipped to make such value judgements either. While there may be behavioural explanations for a low withdrawal rate, these may or may not be correct or conclusive. Indeed, it seems that they can be challenged with the instruments of behavioural theory itself. Behavioural studies have pointed out that an endowment effect does not occur where the possessor acquires something with a view to later giving it away again. Other studies indicate that rights of withdrawal make consumers less happy with their choice as they leave the decision process open, thus effectively preventing the activation of mechanisms that would normally lead to the avoidance of cognitive dissonances. – I do not claim here that these insights could (fully) explain a low withdrawal quota. They do indicate, though, that there can be serious doubts as to whether behavioural theory conclusively explains a low withdrawal rate; the issue at hand may well be debated even on the ground of behavioural theory. Where lawyers do not have training in behavioural theory, they are thus not well equipped to rely on such theory. All this makes the discussion on the basis of behavioural theory intrinsically difficult. It does not, of course, prevent lawyers from taking adequate notice of the state of the art in, say, economics, psychology, sociology etc. As a bottom line, I would still maintain that lawyers can profit from taking an insight from other disciplines into account in the law-making


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discourse. Indeed, this will often seem an indispensable complement to the (limited) internal perspective where law-making and thus policy decisions are concerned. Beyond their role as tools for the legislator, other disciplines can enhance our understanding of the law. Take the example of the control of unfair contract terms. Controlling the content of contracts conflicts with the fundamental principle of freedom of contract which covers the freedom to determine the content of a contract. Where the law trespasses on the freedom of contract, this requires a justification. Economic theory can contribute to our understanding of the rules on the control of unfair contract terms.90 It tells us that in a market economy the legal system does not usually have to worry about the fairness of contractual exchange, given the control of supply and demand by market forces. While the theory of the invisible hand is nowadays much debated the basic tenet still holds true. With standard contract terms, market forces cannot fulfil their controlling function. For market control presupposes that the market works and this presupposes that demanders on the market can see, understand and compare what is being offered. While the price and the qualities of, say, a car are easy to detect and to compare, this is different for standard contract terms. They are difficult to understand in the first place and ‘competing’ standard terms of different offerors can hardly be compared, certainly not efficiently. Thus, it is certainly justifiable for the legislator to step in to rectify a market failure here. If we look at the EU Unfair Contract Terms Directive we find that the main subject-matter and the price are not, in principle, subject to judicial control. This conforms to our considerations on market control, as does the counter-exception pursuant to which the subject-matter and the price may be subject to judicial control if the clauses are not transparent. This economic rationale may also be useful for the application of the law in borderline cases. If the failure of market control is the underlying consideration, then judicial control is warranted where the market does not exert effective control. Aspects of the contract that receive sufficient attention by the consumer and are thus subject to market control do not need to be judicially controlled.

2.3 Conclusion

We have tried to demonstrate that the systematic approach has its merits. For one thing, it finds a solid basis in the principle of equality. For another, its core aspect of coherence conforms to the express or implied intention of the legislator. This is also true for EU legislation. The codification of existing directives and the Common Frame project are ample evidence of striving for coherence. While the common law tradition and the continental legal systems differ substantially with regard to the sources of the law, it is submitted that they do not differ as much with regard to the methods for finding the law. A case-by-case approach proceeds by analogy or distinction and is no less concerned with equality or coherence than a systematic approach on the basis of codified law. Both, common lawyers and civil lawyers have in common that they pursue internal approaches to the law. This distinguishes their approach from that of other disciplines such as comparative law, law and economics, behavioural law and


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economics etc. which take an external perspective on law. Such external approaches are of the utmost interest for legislators. Their contribution to the application of the lexlatais more limited, though; it requires a ‘door’ through which external insights can enter into the sphere of the law.

2.4 Indigenous and Received Influences in England

A first startling contrast between contract law theory development in England, compared to the US and (to a lesser extent) Japan, is its anti-theoretical nature. This stems from a lack of concern about what constituted a “contract” in the first place, because the case law developed around forms of action. With the abolition of the forms of action by the Common Law Procedure Act 1852, the grip of procedural considerations over substantive law began to decline. At about the same time the practice of writing treatises on the law of contract began to increase and the authors of these texts sought to rationalise the existing mass of case law in principled terms, and in doing so they relied heavily on the works of continental jurists. Pollock’s work drew heavily on 19th century thinking in Germany and France, and continental “will theory” provided a general framework for Anson’s influential textbooks first published in 1879. The impact of these works was heightened bypublication in 1886 of Finch’s casebook, inspired by their reformulations as well asLangdell’s case method developed in Harvard. Practitioner texts continued to disclaiminterest in underlying theory, in favour of commentary on case law. The leadingreference tool, first developed by Chitty, was only comprehensively reorganised by Morris in 1961. The tradition of expository writing based on late 19th century reformulations was reinforced by publication of the first edition of Cheshire and Fifoot in 1945, their casebook published the year after, another traditional casebook published by Smith and Thomas in 1957, an update of Anson’s textbook by Guest, and publication in 1962 of the first edition of a textbook by GuenterTreitel, whose family had immigrated Nazi Germany. The prestige involved in writing treatises, systematically and succinctly deriving principles from case law to provide definite solutions to problems, remains a sharply distinctive feature of the legal world in England compared to that in the US. McKendrick omits to mention a significant event over this post-War period: publication by Wolfgang Friedmann, another émigré, of a sharp critique of classical contract law. In 1951, Friedmann argued that contract’s social functions – insuring against risks, and securing freedom of movement, individual will, and equality – could no longer be plausibly obtained by adhering to freedom of contract, in a world in which laissez faire had been displaced by contracts of adhesion, collective bargaining, expanding welfare provision, and socio-economic upheavals. This theory presented intriguing parallels with German and US


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developments in contract law theory; but as Despite the endorsement of Lord Denning [in a preface], Friedmann’s work, though a tremendous personal success and generally accepted in ‘the sociology of law’, made little impression on contract law scholarship [in England]. The only work it appears to have provoked there was Atiyah’swelfarist review of developments in contract on ‘The Future of the Law of Contract in the frist two editions of his textbook [in 1961 and 1971]. Atiyah went on to publish in 1979 a revisionist history of The Rise and Fall of Freedom of Contract, detailing 19th century classical law’s displacement of reliance and benefit based ascriptions of responsibility in favour of the primacy of consent and private autonomy, and positing a reversal of this trend in England over the 20th century. This monumental work was intended to pave the way for a thorough reconstruction of contract law theory. This did not ensue, although Atiyah’s later work served to introduce the work of Fuller, and then Fried and the early Posner, to an English audience. By contrast, the impact of CLS is readily apparent from the first edition of the textbook published in 1986 by Hugh Collins, following study at Harvard. Reviewing English, and indeed some US case law, he argued that contemporary contract law was thoroughly infused by welfarist values of paternalism, fairness and cooperation.139 Also influential was his mentor in labour law, Sir Otto Kahn-Freund, another émigré who in 1949 translated from the German an influential study by Karl Renner on the socialisation of private law.140 Friedmann’s work was also not lost on Collins. Further, it influenced Roger Brownsword’s exposition in 1987 of the ideological tension between formalism versus and realist-inspired “market-individualism” and “consumer-welfarism”, which developed into another popular student textbook. Collins work’ over the 1980s advanced stronger distributivist and Marxist arguments, however, adding a note of outright ideological dissensus and creating a parallel with polarization of political, jurisprudential and contract law theory discourse noted in the US since the 1970s. In parallel, there emerged a steady trickle of empirical studies into aspects of contract law in action, beginning with an analysis of practices and expectations among manufacturers in Bristol, carried out by Hugh Beale and Tony Dugdale over 1973-1974. Inspired by Macaulay’s research, they found remarkably similar patterns: strong reluctance to plan many transactions through detailed and enforceable contract documents, and to refer to any such documents or contract law rules in the event of a disruption to contract performance (such as a delay) or other disputes. David Yates examined the usage of exemption clauses in 31 engineering, 8 insurance and 12 finance companies in Bristol and Manchester. He established that limitation and “procedural” clauses (such as arbitration clauses) were much more common than outright exclusion clauses, which were used mainly to prevent liability arising from narrow causes beyond suppliers’ control, and were driven by a desire to avoid court proceedings, reduce


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liability for consequential loss, and to conform with common practice. In 1982, Richard Lewis sharply criticized a Law Commission proposal to make “firm offers”, showing that its concern for withdrawal of tender offers by a sub-contractor (after the main contractor had acted on them) was not generally a problem in the construction industry, according to his empirical research. Other studies in England have included examinations of how commercial arbitration grew in popularity as contract law theory and courts were re-organized from the 19th century; how lawyers have struggled in vain to claim a more prominent position in construction contract disputes; and patterns in contract litigation over 1975-1991.148 More recently, a major empirical research bringing together lawyers and economists generated a rich collection of empirical data and conclusions. One study suggests that (at least in comparison to German counterparts) English firms manufacturing mining equipment and kitchen furniture: (i) still not infrequently deal without written contracts, and perceive themselves not to have “binding contracts”; (ii) rely more on repeated individual contracts (but inchoate expectations of ongoing business) as opposed to detailed long-term contracts, not for instance including “hardship” clauses; and (c) are prepared to bring legal action for contract breach (correlated with more uncertain legal rules), but also demonstrate a significant attitude of “give-and-take”. Another study based on twenty in-depth interviews of manufacturers concluded that while most firms dealt on the basis of written documentation perceived as legally enforceable (but not necessarily so): Non-legal mechanisms exert a far more powerful discipline on the exchange arrangement than formal, legal mechanisms: “Fundamentally, it’s a partnership. We have mutual interests: us to get the business; they recognise they’ve got a quality supplier who gives them a good deal. Trust and reputation are fundamental; you don’t get to the starting block without them”. Firms do not like to plan for failure in a written contract. Failure to deliver on time rarely occurs, but when it does it is dealt with by “giving them a sore ear down the phone”, and many disputes are settled “over a beer at the pub”, if necessary with a senior colleague who acts as an informal arbitrator. Ultimately, the effectiveness of non-legal mechanisms depends on the extent to which the firms have invested in building up personal relationships: successful exchange is not conducted by the autonomous, socially dislocated agents of neoclassical economic theory. Such findings are consistent with those of Beale and Dugdale, highlighting a continuing gap between commercial practices and expectations, and comparatively strict legal rules regarding contract formation, terms, and relief from contractual obligations due to changed circumstances.152 It seems likely that English law’s strict approach is related the preponderance of reported cases in the House of Lords dealing especially with charter parties, and to lesser extent carriage, insurance, sales of goods, construction and employment. As a small-scale empirical investigation by one commentator in Australia showed a decade ago, that country’s contract law is based on a much higher preponderance of case law particularly regarding sales of land, possibly underpinning a more flexible approach at least


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in some areas of law. The need for clear rules and certainty allegedly required in these transactional contexts may explain English law’s continued reluctance to move sharply and consistently away from a classical model of contract law, for example by openly espousing a general duty of good faith. However, others have questioned the empirical foundation of the claimed need for certainty. In 1991, promoting the notion of a good faith principle protecting “the reasonable expectations of honest men”, Justice Steyn (now a Law Lord) pointed out that good faith was widely adopted in civil law jurisdictions; the law of the EEC (now the European Union or EU); and the United Nations Convention on Contracts for the International Sale of Goods (CISG), “for which the international market place is voting” by accession (unlike, still, England). He regarded “as unproven the assertion that the pragmatic approach of our law necessarily leads to greater certainty and predictability than the more general methods of the civil law”. McKendrick also criticises opposition to CISG based on the mere fact that English law is apparently still often selected in contracts which end up in the (suggesting that Oliver Williamson’s governance theory, based on assumptions of opportunism and bounded rationality which may not be inconsistent with neoclassical economics in contemporary incarnations, helps explain most patterns of contract planning and dispute resolution mechanisms in six industry sectors). Commercial Court, pointing out that, there is no empirical evidence one way or the other. It is probably safe to assume that businesses wish to avoid unnecessary upheaval and uncertainty in the law of contract, but are they really interested in the finer points of English contract law? The experience of the recent Arbitration Act1996 suggests that they might not be. The thrust of this legislation is to give greater autonomy to the parties to arbitration and to free English arbitration law from some of its self-imposed limitations. One of these limitations was that English law did not recognise the validity of a clause giving the arbitrator the power to decide ex aequoet bono or to act as an amiable compositeur. The function of the arbitrator was to decide the case in accordance with the law and not simply according to any notions of equity and fairness. More generally, this legislative intervention appears to have been driven by a belated awareness that London was losing its pre-eminent status as a venue for international commercial arbitration, in favor of the International Chamber of Commerce in Paris and venues in Switzerland since the 1960s, and the American Arbitration Association since the 1980s.157 The latter venues had also encouraged the evolution of a “new lexmercatoria”, applying broader standards of good faith and fair dealing, despite some indications of formalization of arbitral procedures and perhaps substantive norms from the 1980s until at least the mid-1990s. This implies that English arbitrators and judges failed to pick up, and react to, trends in the international arena. Indeed, a recent survey confirms that English arbitration specialists remain significantly more conscious of “risks” in invoking the lexmercatoria than their counterparts overseas (especially in continental Europe). More generally, Collins points out that the English higher courts (including the Commercial Court) process only about 300 cases per year, a


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work load presumably dwarfed by arbitration and other means of resolving disputes out of court. He draws on studies suggesting that English arbitrators have remained consistently more sensitive to commercial context, rather than insisting on the formal application of strict contract law rules, to argue that English businesses wish for flexibility in adjudication as well as their everyday dealings. Further, a recent article by a Commercial Court judge indicates an awareness that the Court has been too strict, and should learn from businesses’ experiences with – and preferences for – alternative dispute resolution (ADR) and concomitant flexibility. This attitude presents a sharp contrast with the views expressed by Justice Devlin (later a Law Lord) in 1951, at an early stage of his judicial career. Based on his experiences as a barrister until then, he noted that English businesspeople did not expect strict application of the law; but concluded that the courts should ultimately undertake the latter, primarily to promote liberal ideals of the rule of law. These works indicate the growing importance of empirical research into contracting, and the ability of contract law theorists to draw on path breaking studies going back many decades. In his inaugural lecture at the London School of Economics, delivered in 1995 and published in 1997, Collins clearly signaled his intention to move away from the more abstract exploration of “a new set of moral principles as the foundation of the systematic exposition of the law”, the approach he (and others like Brownsword and Atiyah) had adopted in the 1980s to undermine classical contract law theory. Collins declared his preference for a methodology more amenable to empirical inquiry: Recalling the insight that law’s objective is the governance of social, economic, and political relations, the research agenda commences with an examination of how particular relations are constructed and how they function. It then elucidates how the law both succeeds in helping to construct these relations, then regulates them, and yet at times stifles or obstructs them. The science of legal study aspires to the deeper understanding of the techniques and consequences of regulation of society for the purpose of serving more effective and targeted government through law. This method abandons the quest for foundations in moral principle as the framework for maps of the law. The task is rather to elucidate the channelling and constitution of social relations through law. The morality of law is assessed not in its principles, but in its consequences for human activity . He went on to draw on work by Macaulay and others to argue that contract law does not contribute significantly to the creation of binding market commitments, by offering a credible threat against breach of contract. More important were self-help remedies (such as payment in advance, threat of future boycotts), transaction-specific investments, investments in reputation, “hostage-taking” (such as taking of security), provision for ADR, guarantees by third parties, and prevention of misleading advertising and the like. Contract law’s main purposes, therefore, were seen to be the construction of “the facility for ex ante price-setting”, essential for markets as institutions for enhancing wealth; and providing “one of several mechanisms for transfers of title to property”.


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Secondly, Collins proposed that legal support for the largely social practice of entering exchanges: comes at the price of distorting the complexity of the underlying norms, for the sanctity attached to contracts insists upon a narrowing or oversimplification of the obligations. The controls on freedom of contract then enter the picture to counteract this distortion, in order to restore the variety and complexity of the normative expectations arising in the practice of entering exchanges. Thirdly, however, Collins indicated that such a “re-contextualization” of contract law to pursue ideals of a “social market” faces challenges arising from the autonomous tendencies of legal doctrine relative to social and economic action. Collins suggested that the broader generalized standards such as good faith, driven by developments in EU law, will become an increasingly important part of this process; but that third-party vetting of contractual terms would be essential, perhaps by courts but also by arbitrators in particular cases, and by regulatory bodies (such as the Office of Fair Trading) for standard terms prevalent within an entire trade or industry. These three themes have been extensively developed in Collins’ richly theoretical and empirical work on Regulating Contracts, published in 1999 and hailed for providing hope that “British scholarship, so long laughably off the pace, might now give the lead to the development of the law of contract”.166 His renewed debt to US scholarship is apparent from the first and second themes, notably the insights of Macaulay and Macneil. Taking seriously the dictum of Justice Steyn that the central theme of contract law is the protection of “reasonable expectations”, Collins broadens the scope of inquiry as follows: As well as expectations based upon the express commitments contained in the contractual undertakings (the contractual framework), the parties also form expectations with respect to both the norms of the “business deal” and the “business relation”. These expectations of the business relation derive from two dimensions of the “embeddedness” of economic transactions that is the context of particular market conventions acknowledged by the parties, and the personal relations between the parties. Macneil also now finds an even keener adherent in David Campbell. However, Collins remains more interested than Macneil in the contemporary roles for markets and the potential for regulation, arguably reflecting the political climate ushered in by the Blair administration.169 His third theme, and his recent book, also draw heavily on the work of GuenterTeubner, a German contract law theorist and legal sociologist who joined him at the London School of Economics around the same time. The latter’s theory of the relatively autonomous (“autopoietic”) nature of social sub-systems – including law – was driven by debates in his native Germany the 1980s about the potential for regulation in a post-welfare state, characterised by problematic tendencies towards and expectations regarding the “juridification” of socio-economic relations. Both influences – Macneil and Teubner – are also apparent in the recent studies by Peter Vincent-Jones, developing theory based on extensive empirical inquiries into contemporary contracting in England, especially the changing interface between public and private governance regimes.


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Collins’s interest in autopoiesis appears to have cemented a move away from a strong version of the “transformation thesis”, the view that underlying socio-economic changes (away from a commitment to laissez-faire economics and rugged individualism) have generated a new set of basic values infusing and respecifying the English law of contract. Already, in 1994, he had admitted that new values were difficult to determine and weigh, new contract law doctrines did not necessarily evolve while old ones could be applied in new ways, and competing theoretical frameworks (notably economic analysis, reliance-based theories still rooted in liberal theory, and communitarianism) could be invoked to explain perceived transformations. In another innovative textbook published in 1996, John Wightman also stressed the pluralism in values and rules in contemporary English law, adding that 19th century developments (especially in hiving off new regimes for specialised contractual dealings) had already undermined the dominance of laissez faire and classical contract law. In the third edition of his textbook, published in 1997, Collins maintained that “the modern law of contract differs from the classical tradition in its motivating ideals, in its methods of reasoning, and in its sources of law”, but there were already inklings of a change of tack derived from a growing interest in empirical inquiry.174 Brownsword has also recently refined his posited dichotomy between consumer-welfarist and market-individualist ideologies, suggesting that “static market individualism” (imposing its view of contracting onto the regulated and “constituting” the market) is being displaced by “dynamic market-individualism” (“reflecting the practice and expectations especially of the business community”). However, he retains more interest in a philosophical approach and case law developments. The increasingly sophisticated discussion about the transformation thesis is matched by an escalating debate about the impact on English contract law from developments in the EU, including recent proposals for a European Civil Code. Going beyond the obvious, namely that such developments provide a contemporary instance of “the world elsewhere” affecting the path of English law, commentators now address fundamental issues in philosophy, ideology, empirical research, and comparative law methodology. Boosted by concerns about England’s lethargic response to acceding to CISG, to provide a comprehensive set of modern rules on international sales reflecting sensible business practices, this debate may revive more profound debate on the merits of codifying substantial areas of contract law in England. Discussion about codifying commercial law in the Victorian era appears to have centred on a fairly crude calculus of costs and benefits, no doubt affected by the top-down utilitarian view of law-making advocated by Bentham in the 19th century. This led to some piecemeal local enactments, in contrast to the export of a full contract code to govern relationships in India. Other issues in codification, such as the advancement of analogical reasoning and related substantive considerations, appear to have played a minor role in that debate over a century ago. Similar obstacles seem to have promoted the demise of a project to codify contract law, launched in 1965 by the English Law Commission. A Law Commissioner’s response to a


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South African professor’s critique of codification, both published in May 1967, argued with admirable foresight that codification should advance harmonization with the laws of continental countries and related international conventions, as well as with the civil law of Scotland (perceived as fundamentally different, in being founded on good faith). It also contended that rendering English contract law into more accessible form would make it more “exportable”, especially to colonies gaining independence. The positive experience of the UCC was noted in these respects, and to counter the suggestion that codification would result in a great uncertainty. However, while suggesting that England’s common law of contract had not “continued to display its customary ability to adapt itself to changing conditions” and that “legislative intervention [had] not tackled any of the fundamental principles”, the Law Commissioner’s response did not venture any possible new principles of law or methodology to guide codification. Similarly, in a review published a year later, Aubrey Diamond noted that codification would need to be careful to encourage judges not to construe provisions narrowly, and should promote accessibility and improvement of contract law; but she did not venture any broad principles for such encouragement or it seems not unreasonable to infer that even those sympathetic to codification around this time were wary of advocating Llewellyn’s vision of a “Grand Style” of appellate judging (involving “overt recourse to situation-sense”) and the “three most important general substantive concepts” of the UCC: “good faith, commercial reasonableness, including the current course of business and financing, and facilitation of continued expansion of commercial practices through custom, usage and agreement of the parties”. These had been specifically mentioned by SoiaMentschikoff, in an article also published in the Modern Law Review back in 1964, However, perhaps tailored to an English audience, the article had focused overwhelmingly on specific rules enacted in that Code; and Llewellyn’s underlying philosophy and approach to commercial law had drawn almost no attention in England at that stage. From this perspective, it is also disconcerting that one recent comparative work on good faith in European contract law, co-edited by Simon Whittaker, focuses overwhelmingly on rules applied in specific contexts and how these allegedly tend to generate convergent results. 186 Recently, however, Brownsword has revealed the philosophical and other broader considerations glossed over by that study.187 More generally, the ideological ramifications of a proposed European Civil Code, issues in comparative law methodology arising from this initiative, and their relationship to contract law theory, have been raised periodically over recent years. In sum, McKendrick was probably too harsh when he wrote in 1996 that English contract law scholarship has exhibited more negative features – not being interdisciplinary or empirical, nor “rich in its theoretical content”, and unwilling to follow Pollock’s lead to draw on developments in Europe – than positive features, namely affecting some doctrines in the law (such as economic duress), and focusing still on “exposition of the law” (a “particular strength”). In fact, the early studies by Friedmann and then Atiyah were given a stronger political flavor notably by Collins, who more recently has drawn on a growing number of empirical studies since the 1970s, to re-engage with European legal theory and EU law in a theoretically sophisticated manner. Although contract law theory in England


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appears to have been bypassed by US legal realism prior to World War II, impeding development of the more substantive reasoning long characteristic of US contract law theory,190 it has been able to draw on some of that tradition to grow from seeds planted over the last few decades. Contract law theory in England is now flowering, providing a more solid basis for the expansion of substantive reasoning in its contract law more generally, particularly now that theory appears to be reclaiming the place it struggled to obtain in relation to legal practice in the late 19th century.


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Chapter 3

CONTRACT LAWS OF TURKEY AND AUSTRALIA

3.1 Introduction

Contract law is an extremely significant area of the law for all of us since every day we make agreements of varying degrees of importance. Some of these contracts engage huge amounts of money for instance the buy of house and the other contracts involve small amounts of money like the purchase of a cup of coffee, however usually; the similar lawful principles apply to every contract, huge or small. There are many explanations of contracts. Some of them are: “Contract is a promise or set of assures that the law will implement”. Or, “contract is a lawful binding agreement that is enforceable in a law”. In other words, “contract is a binding agreement between two or more parties for performing, or refraining from performing, some specified acts in exchange for lawful obligations”. “A contract is a legal transaction which may be expressed as a switch of consent of parties, resulting in a responsibility to do or to abstain from doing specific thing that is enforceable by law”. Contract is described in Turkish Code of Obligations as an agreement creating legally enforceable obligations. There are a lot of agreements which are relevant these classifications however they are not contracts, they do not generate lawful relations and violation of them does not require any sanctions as well. For example (A) and (B) reciprocally have the same opinion that they will meet up in front of the (X) cinema and watch movie together. This is not contract because the agreement reflects social, not lawful relations. (A) cannot sue (B), if he does not come. Moreover, to illustrate, (A) and (B) might undertake to marry each other. Such a promise is not completely enforceable. In case that (A) does not marry to (B), there is no efficient sanction. In this study, legally binding contracts will be outlined and the differences between Contract Laws of Turkey and Australia will be examined.

In order to contract to be legally binding in the Turkish legal system, five fundamental principles are required. These are:

1. Agreement

2. Intention

3. Legal cause

4. Capacity

5. Genuine assent

The most significant difference between the Turkish Contract Law and the Australian Contract Law is that the “consideration” part of the structure of contracts. Consideration is a common law expression and idea of consideration is unfamiliar to Turkish law. However,


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Turkish law necessitates all contracts to include a cause - legal ground so the parties are required to have a reason when they take part in a contract.

3.2 Agreement

The first requirement for a legally binding contract is an agreement, which generally is composed of an “offer” and an “acceptance” and involves a “meeting of the minds- or consensus” among two or more parties.

An offer is a statement of purpose by one party, identified as the offeror, whereby he or she states his or her readiness to join in a contract. Outstandingly, a declaration supposed to be an offer has got to point toward voluntariness by the offeror to be bound without additional negotiations.

There are three fundamental elements to a legal offer and these necessities are required in Australian Contract Law as well:

1. It has to be made with the genuine purpose of generating a legal relation. The offeror must be absolutely conscious that this suggestion represents an offer and has to be prepared to perform his responsibilities in the case of acceptance. If the offeror is not serious and just makes a joke, a real offer is not existed.

2. The offer has to be exact and certain. Or else it would be not probable for the other party to comprehend the genuine objective of the offeror and consequently an agreement could not be existed.

3. The offer has to be communicated to the offeree. An offer can just be accepted by the offeree. An offer might address to one person, group, or even to the whole world. The offer could be made to the community by showing products with fees or making a public offer of a reward. As a result, under the Turkish law, to make a valid contract, to address an offer to particular people is not compulsory.

Public offers are considered as an offer in both Turkish and Australian legal systems. However, where the offeror does not specify one of the essential terms of the contract, it can be accepted as an invitation to make an offer. At this point, an offer has to be differentiated from an invitation to treat. As explained “an invitation to treat is not an offer, it is an offer to consider offers”. In accordance with Article 7 (1) of TCO, where the characteristic of transaction reveals that the offerer's goal is not clear to generate a binding obligation or he adjoins to the offer a statement about rejecting responsibility, this declaration is considered an invitation to make an offer. For instance, distributing brochures and price lists or placing goods for sale in a shop window do not represent an offer. In addition, advertisement in a newspaper or other form is considered as an invitation to make offer, if not it is an offer of reward.(?)

An offer remains available until the offeree admits it or it lapses (?). An offer is not lawfully present anymore when the offer lapses and the offeree cannot accept it any longer. In both Turkish and Australian legal systems, an offer can be terminated in these ways:


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1. Revocation: As a general rule in common law, an offer could be ended at any time earlier than being accepted even it includes a guarantee not to withdraw for a specific time. The revocation of an offer is required to be communicated to the offeree directly or indirectly, or else it will not be efficient. Along with Article 9 of the TCO; if the revocation of offer arrives to the offeree before or at the same time with the offer, it can be revoked successfully. Moreover, offer can be withdrawn effectively even though the withdrawal arrived after the arrival of the offer; in that case, offeree should read the revocation before reading the offer.

2. Rejection: If the offeree rejects the offer and this rejection communicates to the offeror, the offer is terminated and once an offer is rejected by the offeree, it can no longer be accepted.

3. Counter-offer: If an offeree supplements to his respond additions, limitations or other alterations that is considered as a rejection of the original offer and constitutes a counter-offer. A counter offer is offeree’s answer indicating readiness to emerge a binding contract however on different base to the offer. There is not any regulation about counter-offer in the TCO. Therefore, this issue was introduced under doctrines.

4. Lapse of time: When the offer indicates that it is open until a specific date, the offer finishes on that date if it is not be accepted. If a particular time is not fixed, the offer lapses after a reasonable time which is related to the conditions. According to the TCO 3, if the offeror stipulates a time limit for an acceptance, he is bound until the expiration of the time limit. As well, an offer could be made with no time limit. According to Article 4 of the TCO, if the offer is made to person who is present, the respond ought to be given immediately. On the other hand, according to Article 5 of the TCO, if the offer is made to person who is not present without time limit, the offeror is bound until the time when he should receive the acceptance.

5. Death or disability of either party: According to the TCO, if either the offerer or offeree dies or becomes insane before the acceptance of an offer, the offer is automatically ends. The same with the Turkish law, in Australian legal system the general rule is that an offer lapses on death of either offeree or offeror.death of offerer.

6. Failure of condition: This situation is described as a “subsequent illegality” in the Turkish law. According to the TCO, if the performance of the contract becomes illegal after the offer is made, the offer is terminated. For example; if an offer is made to sell alcoholic liquors but a law prohibiting such sales is enacted before the offer is accepted, the offer is terminated. Or else; if a contract is made subject to the happening of an event and this condition is not satisfied, the offer lapses.

An offer cannot become a contract until it is accepted by offeree. An acceptance is a declaration of intention to agree to the terms of the offer without changing any conditions. In both Turkish and Australian legal systems only the offeree can accept the offer and just he/she is entitled to turn the offer into an agreement.An acceptance of any other party is ineffective. Also the acceptance has to be communicated to the offeror in both law systems.


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According to the TCO, an acceptance can be made either express or implied. In general, silence does not amount to acceptance in both Turkish and Australian law systems. However, according to the TCO 6, if the offeree does not reply after receiving the offer, the contract is considered to be concluded, unless the offer is rejected within a reasonable time. Not only Turkish contract law but also Australian contract law in order to create an efficient acceptance, the acceptance is obliged to be communicated to the offeror either clearly or by conduct. Differently from the Turkish Contract law, in Australian legal system there is a special rule for the communication of acceptance. Consistent with “the postal rule” when the acceptance is left in the post office to transfer to the offeror, acceptance made by post is efficient at the moment.

3.3 Intention

The other vital component of legally binding contracts is that parties have got to state an intention to make legal relations. There is no difference between Turkish and Australian legal systems about this issue. A contract does not exist without intention. If the court discovers that the parties did not intend their promises to be lawfully obligatory, the consequence is that there is not agreement; neither legal rights nor legal obligations have existed and the supposed contract is void from the commencement.

3.4 Legal cause (consideration)

The idea of consideration is the major distinguishing feature of the common law however serious promises are significant and enforceable in the civil law. In Turkish law, legal ground is compulsory for each contract. For example; in a contract of sale the obligation of the seller is to transfer the goods, and the buyer's obligation is to pay the cost. The reason of the obligation undertaken by the seller that is to secure the buyer's obligation. In a contract of bailment or credit, the cause is to transfer certain goods or a certain amount of money. In a contract in the nature of a gratuity, the cause is to make a donation, or give a gift. At common law each party has to promise to perform consideration. Consideration is the cost that is requested by the promisor in switch over for their promises and is necessary requirement in Australia before a contract will be binding. There are some rules relating to the consideration in Australian Contract law:

1. Each party has got to offer consideration.

2. The consideration must have price.

3. The consideration ought to be legal.

4. The consideration has got to be exact and real.

5. The consideration has got to be current or future but not past.

6. The consideration has to move from the promisee.

Capacity:


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The legal validity of contracts is related to the capacity of the people who take part in a transaction. People might be incapable to act for themselves because of natural or legal incapacity. People who are lack of capacity to enter into a contract are:

• Minors.

• People suffering a mental disability.

• Convicts.

• Bankrupts.

• Corporations.

• Aliens. (just in Australian law system)

3.5 Genuine Assent

The law systems require consent to a contract should be free and voluntary. Parties' genuine assents to become involved a contract might be influenced by a number of matters. These issues are mistake, fraud and duress in the Turkish Contract Law. Apart from them in Australian Contract Law there is undue influence as well.

3.6 Mistake

Mistake takes places where the expression is not deliberately conflicting. Where a mistake has occurred which shows that the parties have agreed to different things, or where there are such different beliefs.

In the Turkish Code of Obligations there are two major mistakes. These are:

1. Immaterial mistakes: A mistake concerning with the causes for joining in the contract is not material and not a reason to void a contract.

2. Material mistakes: Only material mistakes can be reason to void a contract. These mistakes might be regarding to; the identity of subject matter – mistake in object-, the identity of parties – mistake in person- , the nature of the transaction, or quantity. In the case of material mistake, the contract can be terminated by the mistaken party and this right can be used within one year of the making of the contract; or else, the contract is assumed confirmed.

In the Contract Law of Australia, mistakes are divided in terms of common mistake, mutual mistake and unilateral mistake.

1. Common mistake: Should the parties have agreed however made the same error as to an essential fact, the common mistake takes place and the validity of contract is based on the type of common mistake made.

2. Mutual mistake: Should both of the parties are mistaken regarding to an essential part of the contract, there is not consensus and agreement between the parties as a result there cannot be a contract; the contract is void from the commencement.


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3. Unilateral mistake: Should only one party is mistaken, there is a unilateral mistake. At common law as a result of unilateral mistake regarding to the term of a contract, contract possibly could be void. On the other hand, a unilateral mistake regarding to the identity of the other party might make the contract void if the mistaken party can demonstrate that the identity of the other party was a material factor.

3.7 Fraud (Misrepresentation)

Fraud is an intended misstatement declared by one party trying to gain an unfair benefit over another. According to Turkish Code of Obligations if a party takes part in a contract because of the fraud of the other party, the defrauded party is not bound by the contract and could state of invalidity of the contract within one year of the making of the contract or may be bound by the contract however can require compensation for any damages suffered.

At common law misrepresentation could be fraudulent, innocent, or negligent. If one party making the representation knows it is false, or makes the representation irresponsibly, a misrepresentation is fraudulent. A misrepresentation is innocent if the party making the representation does not plan to mislead the other party. Finally, if the party making the representation is under a duty of care, a misrepresentation is negligent.

The misled party can revoke the contract or the court might consider the contract valid if a misrepresentation is really serious because that is considered to be a condition of the contract. If a misrepresentation is less serious, the court consider it to be a warranty and the wronged party still has to be bound by the contract however allowed just to request damages for the loss.

3.7.1 Duress:

Duress is compulsion by threatened injury or obstruction preventing party from performing his or her free will. Duress can be physical, mental, psychological or financial. According to Articles 29 and 31 of the TCO, if a party encouraged to join into a contract on account of duress by the other party, he or she is not bound by the contract if he or she informs that within one year of the making of the contract. According to Australian Contract Law, if the party's assent is achieved through duress, it is not real and the contract is voidable. The existence of duress permits to oppressed party to withdraw the contract.

3.7.2Undue influence:

Undue influence occurs where dominant party affects the will of the other party to get that party's assent to a contract. According to courts assumption regarding to this issue, there can be undue influence in certain specified and limited relationships such as parent over child, solicitor over client, or doctor over patient etc. The innocent party can void the contract because the contract encouraged through undue influence.


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3.8 Termination of the Contract:

According to Turkish Contract Law and the Turkish Code of Obligations the commitments in an agreement may be terminated in these ways:

1. In general contracts are discharged by performance and in that case the contract is entirely terminated.

2. Agreements can be terminated by other agreements. There might be a certain or implied condition in the original agreement regarding to termination, or the parties may make a following agreement or may decide on other methods such as relinquishment.

3. According to impossibility principle, an obligation is fulfilled to the extent of its performance becoming impossible by circumstances for which the obligor cannot be responsible.

4. According to statute of limitations principle, under the TCO the statutory period of limitations for contract actions is ten years and the rights and obligations of contracts are freed after this specified time.

5. A contract may be terminated by one party unilaterally if the other party does not perform his obligations accurately.

According to the Australian Contract Law the termination of contracts occurs in these ways is charge by performance

1. Discharge by agreement

2. Discharge by subsequent agreement

3. Discharge by frustration

4. Discharge by operating of law

5. Discharge by election after breach

As a conclusion, the main aim of this study was to show differences between Australian Contract Law and Turkish Contract Law. In general, these two legal systems have many similarities regarding to formation of contracts even though Australia is based on common law system and Turkey is based on civil law system. The significant difference between contract law of Turkey and Australia is “consideration” section. The importance of contracts and contract laws is not deniable because even we as ordinary people make contracts every moment during day.


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Chapter 4

Contract Law in the United States: An Overview

4.0 Introduction

The world of Contracts, in a capitalist society, is the world we all live in: This is the domain of voluntary agreement and cooperation---and particularly of bargain and exchange. Unlike the world of torts---which impinges on our lives only in the occasional disaster or odd catastrophe---this form of economic activity is a major preoccupation for most of us, and comes to absorb the greater part of our active lives.

The function of the law of Contracts is to make possible, or at least to facilitate, this activity---it is to help private parties in planning for the future by protecting the expectations that arise from the making of bargains. Consider, for example, a simple agreement in which a seller promises to deliver corn to a buyer in six months, and in which the buyer promises to pay $10,000 for the corn on delivery. If when the time comes the seller should fail to deliver the corn, the buyer will have to buy substitute corn in replacement; if the price of corn has risen, the buyer needs a legal remedy---since his expectation was precisely that the agreement would provide protection against just such a rise in the market. The seller, of course, has a comparable interest in being protected against a falling market. Once such a simple deal is recognized, the parties might wish to engage in more sophisticated forms of planning for the future: They might, for example, extend the delivery period to five years; they might make the agreement cover many different installment deliveries under a long-term relationship; they might leave the quantity of corn flexible---for example, making it vary in terms of what the buyer might "require" in feeding his livestock; they might also leave open the price---making it vary according to some formula based on published market quotations. In all of this the parties need a legal framework that will give them a predictable, reliable, stable basis for their private ordering of their affairs.

Private, consensual, agreement has always been with us, of course. But in England and in the United States, it was only in the middle of the 19th century that the courts first began to elaborate, in a systematic way, the doctrines of Contract law that are familiar to us now; and it was only in the middle of the 19th century that commentators first began to produce "treatises" setting out these doctrines for practicing lawyers and law students. The great English cases of this period in which the rules of Contract law were first fixed---cases such asHadley v. Baxendale [decided in 1854, and dealing with the measurement of damages for breach of contract], Raffles v. Wichelhaus [decided in 1864, and dealing with misunderstandings and the "meeting of the minds"], Dickinson v. Dodds [decided in 1876, and dealing with revocation of offers], and Foakes v. Beer [decided in 1884, and dealing with promises to perform "pre-existing legal duties"]---all these are still familiar by name, and are still read by virtually all American law students to this day.


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The fact that Anglo-American contract law is largely a creation of the 19th century has some important implications that continue to affect us. Contract law "reached its zenith in the nineteenth century as the legal underpinning of a dynamic and expanding free enterprise economy"; as the free market developed and grew, contract doctrine became the legal reflection of that market, and came to take on many of its characteristics: "The individualism of our rules of contract law, of which freedom of contract is the most powerful symbol, is closely tied up with the ethics of free enterprise capitalism and the ideals of justice of a mobile society of small enterprisers, individual merchants, and independent craftsmen." And many of the "rules" of contract doctrine, as we will see, dovetail neatly with the assumptions of liberal economics and with the 19th century's laissez faire, free-enterprise economic philosophy.

Now I hardly mean to suggest that Contract law has remained unchanged since that time---where social conditions and expectations change, it will be natural to find the law changing along with them. Our notions of how the economy should be regulated---and in general of what individuals in society owe to one another---have profoundly changed since what has been called "the golden age of the law of contract" in the 19th century. Legal regulation of private conduct in the public interest, and restrictions on what was once thought to be "freedom of contract," have intensified. But when this has occurred, more often than not it has taken the form of legislation that has simply removed whole areas from the domain of "contract": For example, insurance contracts, labor agreements, consumer credit transactions, are all highly regulated areas that are no longer "contract" at all---but separate and distinct fields of law. It remains largely true, then, that the law of Contract "concerns and provides legal support for the residue of economic behavior left unregulated," the free market.

4.1 Sources of Contract Law

Contract law is essentially "common law"---that is to say, it is found in the body of many thousands of judicial decisions that have been handed down over the last century by courts faced with similar disputes. At least in theory, what courts have done in these past cases will tend to determine the outcome of later ones. Even if courts do not actually see themselves as bound to follow earlier precedent, they are likely, at the very least, to look to earlier cases as a source of law, from which they can reason inductively to determine the general principles that should govern. Nevertheless it is the nature of a common-law system that it is continually evolving: The law changes unevenly over time, and from one jurisdiction to another, but decisions of courts are often little more than signposts that identify the direction in which future movement can be expected.

By comparison with civil-law jurisdictions, "doctrine" and treatises have played a much smaller role in the development of the law in the United States. What comes closest in the


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United States, perhaps, is the various "Restatements" of the law. The "Restatements" in different fields---Contracts, Torts, Property, Agency, and so forth---are a curious mixture of summaries of past cases, predictions of future ones, and prescriptive pronouncements by the drafters as to what the most satisfactory result ought to be. They are promulgated by the American Law Institute, a prestigious organization composed of professors, judges, and practicing attorneys, and have been extremely influential, often relied on by courts.

To say that contract law is "common law" is also to say that statutes have played a very limited role. It is critical, however, that the student be familiar with the Uniform Commercial Code. Drafted during the 1940's and 1950's, and promulgated by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, the Code contains a number of separate "articles" dealing with a wide variety of commercial subjects---such as Bank Deposits and Collections, Negotiable Instruments and Letters of Credit, and Security Interests. For our purpose, however, the most important article is Article 2, which governs transactions in the Sale of Goods.

Article 2 of the Uniform Commercial Code (the "UCC") has been enacted---with minor substantive variations---in every state of the United States with the exception of Louisiana (whose legal system, of course, is heavily influenced by the civil-law model). But while the Code may thus be more or less "uniform," it is not really a "code" in the civil-law sense. It does not even purport to address entire subjects that make up "the law of contracts," many of which I will be talking about today. Article 1-103 of the Code makes it explicit that "unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant . . . shall supplement its provisions": Therefore, where no provision of the Code---even when liberally construed---applies to a particular case, it will still be necessary to resort to the general body of contract law principles. And even where the Code doesapply, it can only be understood in light of, and against the backdrop of, the pre-existing case law as it has developed over the last century.

Nevertheless, the UCC has been one important source of the law of Contracts. Article 2 of the Code only expressly governs transactions for the sale of goods. However, in many other contexts---for example, contracts involving real estate, construction, franchising relationships, and employment---courts will frequently look to the provisions of the Code and will try to reason from their underlying principles "by analogy," finding the policies embodied in Code provisions to be applicable in these other areas as well. This process is particularly important since the Code not only contains rules applying specifically to transactions in goods (such as rules relating to shipment terms, inspection and the risk of loss), but also provisions susceptible of much wider application (such as its imposition of a duty of "good faith" and its prohibition of "unconscionability").

In addition to the UCC, mention should be made of the United Nations Convention on Contracts for the International Sale of Goods (the CISG, or the "Vienna Convention"), which became effective in the United States in 1988. The CISG is intended to


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be a uniform text governing international sales transactions: It will apply---instead of the UCC---to contracts for the sale of goods between parties whose places of business are in different countries, at least if both such nations have ratified the Convention.

Finally, to say that contract law has traditionally been "common law" is also to say that it has traditionally been thought to be the domain of the individual states rather than of the federal (that is, the national) government. The UCC has been enacted individually by the legislatures of the various states, and there has been no attempt to ensure uniformity across the country through federal legislation. A revision of Article 2 of the Code is currently in progress, and is certain to be eventually accepted, in largely the same form, by all the 49 state legislatures that have enacted the current version. Nevertheless it will be many years---at least a decade---before we can expect this process to be completed.

4.2 What Kinds of Promises Should Be Enforced?

Now "no legal system devised by man has ever been reckless enough to make all promises enforceable." One major task of Contract law, therefore, is to separate the sheep from the goats---to distinguish between those promises that we think it undesirable---or simply not worth the trouble---to enforce, from those that we think ought to have the support of the legal system behind them.

4.2.1 The Doctrine of Consideration

A unique feature of Anglo-American Contract law consists of its traditional answer to this question---the doctrine of "consideration." Itself a product of a long and complicated historical development, the core idea of "consideration" is this: Promises worthy of enforcement ought to be part of an bargain, where something is offered by one party as an inducement to obtain something that he desires from the other party in exchange.

Thus, assume that the parties have agreed to sell a plot of land for $10,000. The seller's conveyance of the land is "consideration" for the buyer's promise to pay $10,000; the buyer's promise, thus "supported by consideration," is enforceable. (There would also be "consideration" for the buyer’s promise if the seller had merely promised to convey the land in the future). By the same token, the buyer's payment of $10,000 is "consideration" for the seller's promise to convey the land, making the seller’s promise enforceable. (There would also be "consideration" for the seller’s promise if the buyer had merely promised to pay the money in the future. The typical commercial deal, of course, consists of a mutual exchange of promises, both of which will be performed at some point in the future---an "executory" contract).


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This identification of enforcement with "bargain" underlines the notion that (in the words of the "Restatement of Contracts") "bargains are widely believed to be beneficial to the community in the provision of opportunities for freedom of individual action and exercise of judgment and as a means by which productive energy and product are apportioned in the economy." In addition---and quite consistent in this respect with all the assumptions of liberal free-market economics---the classical doctrine of consideration rejected any notion that the price fixed by the contracting parties had to be "adequate": Only the market itself, as evidenced by what a willing seller paid a willing buyer, could be the measurement of value.

Thus, in the example given above, a court would enforce the contract to convey the land and would refuse to consider whether the promised $10,000 was a "fair" or an "adequate" price to pay for it.

However, even though courts will not inquire into the "adequacy" of the consideration, the reality of the arrangement must be that there is true exchange going on. At least in theory, the parties are not free to manufacture a sham bargain in order to oblige a court to enforce what is in reality---in substance---little more than a gift. "A mere pretense of bargain does not suffice."

Suppose, for example, that, the owner of the land was a father, who wishes to make a binding promise to his son to convey the land to him. Being advised that a gratuitous promise is not binding, he writes to his son offering to sell him the land for $1 or other piece of "nominal" consideration. The son’s promise to pay the $1 is not consideration.

Virtually any agreement that calls for some sort of performance on each side is likely to be regarded as "supported by consideration," so the requirement is not difficult to meet. The promise of a lessor to lease commercial premises may still be supported by consideration, even though the lessee has the right to terminate the lease "on 10 days notice"---since "at the very least the lessee bound itself to pay rent for 10 days." A very common form of business transaction allows a buyer to return goods if they fail to meet with his "approval"---even though they may not be defective and may be wholly as guaranteed by the seller; the "buyer’s willingness to receive and test the goods is the consideration for the seller’s engagement to deliver and sell." Occasional exceptions might be found in cases where the promise of one party is so dependent on own future willingness to perform, that in fact he has made no real commitment at all---his promise may in fact be merely "illusory." Such, for example, might be a case where the buyer has promised to take any of the seller’s goods that he may "want to purchase"---conditioned entirely on his own "will, wish, or want." But even here, it would be easy enough for a court to interpret such an arrangement as nevertheless limiting the buyer’s future freedom of action, by obliging him to take all of his business "requirements" from the seller---and thus preventing him from using other, competing suppliers who might be able to undercut the contract price.


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So the requirement of consideration should not be a problem in most commercial transactions. Nevertheless, the doctrine still occasionally causes some problems---and this is true even in commercial settings, where "logic" has sometimes seemed to dictate that even some promises made in the course of commercial dealings are not binding because they lack consideration. For example, an offer to enter into a commercial deal could traditionally be "revoked’ at any time by the offeror---even though the offeror had expressly made his offer irrevocable; the "explanation" was that he had not, after all, received any consideration for his promise to hold the offer open. And a promise to pay more for goods or services than one had originally agreed to pay---even where the increase was voluntary and justified by changed circumstances---was traditionally not binding; the "explanation" was that the promisor had received no new consideration but was only receiving what he was already entitled to. Such results are not necessary implications of the bargain requirement, and they represent a highly formalistic, wooden view of the law. Such holdings are, happily, less common today than they were in the past: Where the promise is freely agreed to, there should no longer be any problem in holding an offeror to his promise of irrevocability, or in enforcing a one-sided modification of a pre-existing agreement.

4.2.2 Promises to Make Gifts

The principal significance of the doctrine of consideration is, as we have seen, that it makes unenforceable promises to make future gifts. When a promise to make a gift is broken, some courts explained, the promisee is after all "no worse off than he was. He gave nothing for it," and so "has lost nothing by it." And in addition, gift promises are often "lightly made, dictated by generosity, courtesy, or impulse, often by ruinous prodigality." Lacking a mechanism to make gift promises routinely enforceable, Anglo-American law has been spared the necessity of developing---as the civil law has had to do---complex rules for the undoing of gifts after the fact, on such grounds as the donee’s later ingratitude or the donor’s inability to make proper provisions for his heirs.

In early English law---and continuing into this century---it was possible to make promises---even gift promises---binding through a written, signed document "under seal": A document was "sealed" when wax, softened by heat, was attached to the instrument and some personal insignia---often a signet ring---was used to make an impression on it. Use of the seal would make a promise binding by virtue of the formality alone; the ceremony was calculated to have a "cautionary" effect on the promisor---ensuring that the nature and the importance of what he was about to do were present to his mind.

But changing social conditions eventually made the seal an anachronism. "In the United States, the history of the seal has been one of erosion of the formality until it can be met by a printed form." Over the centuries, it came to be recognized that a "seal" could take the form of an impression directly onto the paper of the document, or of a red gummed wafer


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affixed to it. From there it was an easy step to give effect to the mere printed word, "seal." With the decay of the seal as a meaningful formality, pressure built up to eliminate the legal effects of a device which no longer served any function of preventing a promisor from entering into hasty or inconsiderate action. Today, in most states, statutes have eliminated any distinction between sealed and unsealed documents; even where the seal persists in theory, decisions are few, and there is apparently "no recent instance in which any court in the United States has enforced a gratuitous promise under seal." In contracts for the sale of goods, the Uniform Commercial Code has "wiped out" the seal completely.

With the decline of the seal, there does not appear to be any ready means to assure the enforceability of gift promises---at least where neither party has as yet acted on the promise. However, it is sometimes possible to reach such a result by looking outside the strict borders of "Contract law." and by having recourse to the rules of the law of "Property." Obviously, if a gift has been executed---if, say, a piece of jewelry has been handed over to a donee, creating a completed gift---then the transaction cannot be undone; the donee now has a present property interest in the jewelry, and the law of "Contracts" has nothing to say about this. There are some modern decisions holding that present ownership of property can be transferred merely by the formality of a signed unsealed writing. Alternatively, the traditional institution of a "trust" allows a donor to declare himself the trustee of donated property, and bind himself to hold it for the benefit of the "real" owner, the donee (or "beneficiary"). There is at least a theoretical distinction between such present transfers of "property" interests(even where the donee is to enjoy the fruits only at a later time), and a mere promise to make a future transfer---but human behavior rarely fits neatly into such doctrinal categories, and the line is often difficult to draw with confidence.

4.2.3 Reliance as an Alternative Basis of Enforcement

It is often possible to characterize a transaction as a "bargain" even when it takes place on the periphery of the marketplace---or indeed, outside the marketplace completely. If we truly believe, with the liberal economists, that society will ultimately be better off if people are left free to pursue their own interests in their own way, then it follows that certain idiosyncratic uses of wealth have to be tolerated.

For example, in one famous case, an uncle promised his nephew (then aged 15) that if he would refrain from smoking, drinking and gambling until he reached the age of 21, the uncle would give him $5000. The nephew apparently complied---and when he reached the age of 21, the court held that he was entitled to the promised sum.

Now it might indeed be possible---if somewhat artificial---to find a "bargain," and thus "consideration," in this story. The uncle here apparently wanted to obtain something---his


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nephew’s virtuous conduct---that he valued for his own reasons, and he was willing to pay $5000 in order to induce his nephew to act in the desired way. But an important aspect of the story should not be overlooked---that the nephew did actually change his position because of the uncle’s promise: That is, the nephew has "relied" on the uncle’s promise to give him $5000, by altering his behavior---perhaps with some difficulty, certainly with no joy---over a period of many years, and by giving up his freedom to act differently.

In many cases like this, the fact that a promisee has relied on a promise to his detriment would often tend to influence a court in the direction of enforcement. This was often hard to do consistently with well-established doctrine---and so in the past, the promisee’s change of position would often have a covert influence on the result. A court might wish to respond to the equities of the situation---by giving some relief even in the absence of true "consideration"---but might be reluctant to admit openly that it was doing so. During the first half of this century, however, there was an increasing tendency to honestly recognize that reliance on a gratuitous promise was being made the basis of enforcement. The "Restatement of Contracts" first made this explicit by providing, in its famous section 90, that "a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee . . . is binding if injustice can be avoided only by enforcement of the promise." This principle has been baptized "promissory estoppel"---the idea being that since his promise has caused the promisee to change his position, the promisor should be precluded (‘estopped") from denying lack of consideration. Promissory estoppel has now become a well-established and well-understood alternative basis for the enforcement of promises. As we will see, its use has been extended beyond cases of gift and family promises, into even commercial settings.

For example, after an employee had worked for a company for 37 years, the employer promised that if she chose to retire---which she could do at any time she wished---she would receive a pension of a certain amount for the rest of her life. The employee later chose to retire, and the employer, after paying the pension for a few years, stopped doing so. In the meantime, the employee had become ill and was no longer able to obtain employment. The court enforced the employer’s promise. The employer’s promise had not required the employee to work for any particular period of time before being entitled to retirement benefits---so she had not given any "consideration" in exchange for the promise. Nevertheless "her retirement, and the abandonment by her of her opportunity to continue in gainful employment, made in reliance on the employer’s promise," made that promise enforceable.


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4.2.4 The Nature of the "Rules" of Contract

Much of the remainder of this discussion will be concerned with the "rules" of Contract law---"rules" for the formation of contracts, for the interpretation of agreements, and for defenses to or discharge of contractual liability. But the main purpose of Contract law, after all, is to promote and protect private exchanges and the private ordering and structuring of transactions: And since this is true, it follows that all or almost all of the so-called "rules" of Contract law can be altered or varied by the parties themselves. Very little about Contract law is mandatory or imposed by law: Most of these rules are just "presumptions" to "fill the gaps" left by the parties in what they have explicitly agreed to, and which will apply in the absence of some stipulation by the parties to the contrary. (So these are often called "default" rules---that is, background rules that apply for lack of or in default of any other agreement).

A set of "default" rules is aimed at duplicating what the parties probably intended---and what they would have expressly incorporated into the contract had they taken the time and trouble to negotiate on the subject; it thereby saves them the time and trouble of doing so. If the parties to a contract had the time and the foresight to negotiate and express every element that could conceivably matter to their relationship---and had imagined any possible contingency, and any possible question that might arise---there would be little need for any "rules" of Contract at all. The UCC is rich with these implied terms: They tell us, for example, that a merchant seller is deemed to guarantee the title to, or the quality of, the goods he sells, and they also tell us how and when the goods are to be delivered, and how and when the price is to be paid, and who bears the risk of loss or damage to the goods.

And at the same time, the Code makes it clear that in accordance with "the principle of freedom of contract," its provisions may with rare exceptions be "varied by agreement": The parties may choose to "opt out" of these rules. It is true that some obligations---such as the continuing obligation on the parties to act in "good faith"---cannot in theory by disclaimed, but even there "the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable."

4.2.5 The Process of Contract Formation

4.2.5.1 The Mechanism of "Offer" and "Acceptance"

When private parties are contemplating an exchange of goods or services that will be of benefit to them, there is probably a wide range of possible solutions---say, a wide range of possible prices---that would be minimally acceptable to each of them. So, as in an Oriental bazaar, they are likely to spend a certain amount of time devoted to the tedious process of


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haggling. At some stage of the process, each party reaches the conclusion that any advantages from additional bargaining are too small to justify further struggle: At that point, they are ready to make a deal. The "rules" of contract formation are aimed at (1) distinguishing this moment of agreement---the culmination of the process---from all the bargaining activity that has gone before, and (2) protecting the agreement arrived at from any effort by either party to change his mind---and to start the bargaining process up again, either with the same adversary or with someone else.

The formation of an enforceable contract has traditionally relied on a familiar, two-step model with which everyone living in a capitalist society is instinctively, intuitively familiar. Under this model, contracts are formed by an "offer" by one party---the "offeror"---which is "accepted" by the other---the "offeree"; the offer can be "revoked" until it has been accepted, but once accepted, the deal has been sealed. The acceptance, usually in the form of a return promise, not only concludes the process of contract formation but also serves as "consideration" going to the promisor.

4.2.5.2 Offers

An offer is a proposal to enter into a transaction: To be characterized as an "offer," a proposal must authorize the offeree to believe that he is being given the power to conclude the deal by signifying his own acceptance.

This definition requires us to formulate a strategy as to how we should interpret what people say. The problem of interpreting what is alleged to be an "offer" is really the same problem as that of interpreting any term in a contract, or interpreting any manifestation of a party’s intention. For example, what if the speaker later claims that he in no way intended to make an offer---but that he was in fact joking? We may believe him now when he says this. But such a claim cannot be decisive---he cannot be allowed to avoid liability if at the time, the listener took him seriously and believed that an offer was being made. So a true "meeting of the minds"---in the sense of a subjective, internal agreement between the two parties---is not at all necessary to the formation of a contract: The so-called "objective theory" of contracts proposes that "a contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties"; "the standard by which his conduct is judged is not internal, but external." The question is whether a reasonable person in the position of the offeree would believe that he is being given the power to conclude the deal by accepting; if he does---if he has no reason to believe the contrary---then the speaker should be bound. Whatever his internal state of mind, the speaker carelessly misled the listener into believing that an offer was being made.

So, in the offer and acceptance mechanism, some communications should reasonably be taken as proposals to enter into a deal, but others should be interpreted instead as mere invitations to begin the process of bargaining and negotiation---perhaps, for example, the seller wants to drum up interest on the part of potential buyers, to see what his property is


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worth on the market without committing himself in advance. The key principle of interpretation is that a court is free to look at all the relevant circumstances surrounding the transaction. And one important guide to the reasonableness of interpretation is what the common usage and understanding would be in the particular trade: A usage of trade that has "such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed," will be the "framework of common understanding" that will "furnish the background and give particular meaning to the language used."

Multiple or mass mailings, circulars, and advertisements are not usually interpreted as "offers": The apparent reason is that if large numbers of readers or recipients were to try to "accept," the result would be that the sender would be bound to large numbers of people---they would all have a contract right against the "offeror"---even though he might not have enough stock to supply them all. Since this presumably could not have been the sender’s intention, the conclusion is that no recipient has the power of acceptance. Shoppers are presumed to understand that by the time they get ready to buy, the advertised goods may or may not be available. (It might of course be possible for a court to read into any mass mailing or advertisement the possible limitation that it is open only to those who respond while the seller still has goods available---in other words, to construe it as including a term of "subject to prior sale," or "first come, first served." If a mass mailing or advertisement actually says this, it would make more sense to characterize it as an offer, since the fear of multiple liability is not present. But courts have not adopted this as a general principle of interpretation).

A seller writes, "I am eager to sell my car but will not take less than $10,000 for it: Please let me know whether you are interested." Is this an "offer," that will become a binding contract if the addressee says, "I accept"? Or is it merely an invitation to make an offer that the owner can then take under advisement? The answer will depend on a factual inquiry into the surrounding circumstances, and thus the reasonableness of the addressee’s understanding. For example, if the two parties have been bargaining for the last month, trading proposals and counterproposals in an effort to find a mutually acceptable price, then the seller’s statement that he "will not take less" than a certain price may indeed be treated as an offer. If on the other hand there has been no prior bargaining, then perhaps the seller’s letter would be seen as merely the first step in an auction---indicating the minimum selling price, rather than the price he is now prepared to accept as final.

To be treated as an offer that creates a power of acceptance, a communication has to be sufficiently well defined to constitute a contract. Does this mean that all the terms of the ultimate contract must be spelled out in the offer? There is an increasing willingness on the part of American courts to find that an offer has been made, and a contract concluded,


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even where are "gaps" in the parties’ communications----that is, even though they could not, or did not, agree on a number of terms. This is true even though the omitted terms may be "essential to a determination of their rights and duties." For example, if the parties have intended to make a contract, the fact that the offer did not specify the price of the goods will not prevent a court from giving effect to their intention by supplying a "reasonable price." Where a seller has offered to sell a certain quantity of goods but has not specified the assortment of the goods---for example, how many of each size or of each color---a court will presume that the buyer is being given the option to make his own specifications as to assortment, at least if he acts "in good faith and within limits set by commercial reasonableness."

4.2.5.3 Termination of Offers

A contract is formed when the offeree exercises his "power of acceptance." But until that time, there is as yet no bargain; until that time, then, the "power of acceptance" granted by the offeror may be terminated. Termination of the offer may occur in a number of ways:

4.2.5.3.1 Lapse of Time

The offeror may in his offer have specified a time limit---"this offer is effective only until a certain date." Even if he does not specify such a limit, the offer will be open only for a "reasonable time." After that time, the offeror is entitled to think that the offeree is not interested---and can thus consider that he is now free to deal with someone else.

What is a "reasonable time" will, once again, depend on all the circumstances surrounding the transaction: "In general, the question is what time would be thought satisfactory to the offeror by a reasonable man in the position of the offeree." Where the property being sold is subject to rapid fluctuation in value, the time for acceptance will necessarily be brief---"not only because the offeror does not ordinarily intend to assume an extended risk without compensation but also because he does not intend to give the offeree an extended opportunity for speculation at [his] expense."

4.2.5.3.2 Revocation by the Offeror

Even before the expiration of a "reasonable time," the offeree can lose his power of acceptance when the offeror "revokes" his offer: Revocation occurs when the offeror lets the offeree know that the deal is off, and that he wishes to free himself from any outstanding offers and return to the market. It is clear that the offeror cannot escape contract liability merely by changing his mind in private, or by selling the property to someone else: An offer can only effectively be "revoked’ when the offeror’s change of mind is communicated to the offeree. Again, remember the "objective theory" of contracts mentioned above: Until he


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actually learns of the revocation, the offeree is entitled to believe that the offer is still open, and that he has the power to conclude a deal by communicating his acceptance to the offeror.

The general view of Anglo-American law is that offers are generally "revocable" by the offeror at any time before the offeree has made an effective acceptance. This is of course true when the offer itself specifies that it may be withdrawn at any time; it is also true when the offer is silent on the subject of revocability. Indeed it has traditionally been held that until acceptance takes place, an offer may be freely revoked even though the offer by its terms purports to be irrevocable until some stated time. This was thought to be a consequence of the doctrine of consideration: Without some consideration going to the offeror, his promise not to revoke could not be binding.

One way to make offers irrevocable has always been for the offeree to "purchase" an option. If, for example, the offeror has promised to leave his offer open for some specified period in exchange for $1000, an offeree who has paid or promised the $1000 will have acquired the right to buy the land later: He may choose to accept the offer even though the offeror may in the meantime have changed his mind. This is a classic "option contract," an additional, subsidiary contract binding in its own right. The presence of consideration has made the promise of irrevocability binding, and until the promised period is over, the offeree may effectively accept even if the offeror attempts to revoke.

In many cases, though, the seller of property is perfectly willing to make a so-called "firm offer"---that is, a commitment to hold his offer open for a limited period---even if he has not sold an "option" or as yet gone through any process of bargaining at all. He may wish to do this simply because he may think that his chances of ultimately selling the property are increased if the buyer has a limited time to appraise the property, make investigations, conduct testing, line up financing, and so forth, all without being exposed to the danger of having the rug pulled out from under him by a revocation. A prospective buyer may be unwilling to take these costly steps unless the owner commits himself to an option under which the buyer, while not obligated to buy, has a limited period of safety before making up his mind.

Recognizing that such an arrangement is "an appropriate preliminary step in the conclusion of a socially useful transaction," some courts will now hold that a promise by a seller to hold his seller open for a short period of time is enforceable even in the absence of real consideration. This will particularly be true if the seller has made this promise in a signed writing---which at least gives some assurance that the promise was made, not lightly but only with some care and after some reflection. The UCC now also eliminates the requirement of consideration for "firm offers": Under the Code, if an offer to hold an offer open is made in a signed writing, it is not revocable for lack of consideration during the time stated or for a reasonable time not to exceed three months; this is true whether the offeror is a buyer or a seller, as long as he has the status of a "merchant."


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Finally, as we have seen earlier, there may be alternative reasons to enforce promises in addition to the presence of "bargained-for consideration"; it is now generally understood thatreliance and change of position by a promisee can provide a sufficient basis for enforcement even in the absence of consideration. In recent years this principle has been broadened out from the setting of gifts and family arrangements, and extended into the realm of commercial transactions. So, for example, if an offeree who has been assured that an offer will remain open has acted in reliance on that assurance, here too the offeror may be "estopped" from trying to revoke.

The classic case involves the process of bidding on construction contracts, although it is by no means limited to that context. A General Contractor wishes to bid on a major construction job. He is, however, not able to do the entire job himself, and so before he can submit a bid, he must in turn solicit bids from Subcontractors for particular portions of the work---for example, the paving, the plumbing, or the electrical work. A Subcontractor hoping to get the job submits a low bid, and the General Contractor uses the Subcontractor’s bid in calculating the amount of his own bid to the Owner of the project. The General Contractor is later awarded the main contract; however, before he can actually "accept" the Subcontractor’s bid, the Subcontractor---claiming that he has made a mistake and accidentally bid too low---attempts to revoke.

Under the traditional law of offer and acceptance, the Subcontractor was free to revoke----the General Contractor had not yet "accepted," and until he does so, the Subcontractor’s bid could not be binding. But this of course would be very unfair to the General Contractor, who in "locking himself in" to his own bid acted in reliance on the Subcontractor’s figures. So courts now tend to hold that an "option contract" has been created by the General Contractor’s reliance. There is only an actual contract of sale when the General Contractor communicates his acceptance to the General Contractor---but the General Contractor is given an opportunity to do this if he wishes, and can ignore any attempted revocation.

Such cases are striking for a number of reasons. First of all, note that in this case the Subcontractor did not actually make an express promise not to revoke his bid: The court’s holding was that in this type of situation, the Subcontractor "had reason . . . to expect [the General Contractor] to rely on its bid"--- the nature of the bidding process made such reliance inevitable. Therefore, it followed that a promise not to revoke would be "reasonably inferable in fact." If the Subcontractor wanted to make it plain that his offer was revocable, the burden was on him to make it clear that this was the case. In addition, note that the effect of finding an "option" here is always


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one-sided: The party who has relied---the General Contractor---is protected and able to enforce the Subcontractor’s bid, but until he has actually "accepted" the bid, he is not obligated to do so: He can try to find another subcontractor who may be willing to do the work even more cheaply.

4.2.5.3.3 Rejection by the Offeree

Another means by which an offer may be terminated is if it is rejected by the offeree. Assume that a seller has offered to sell a car for $10,000. If an offeree clearly indicates his rejection---"no, I will never buy at that price"---then his power of acceptance has been lost; the offer is "dead," and the offeree may not later change his mind and try to accept it.

A similar case is where the buyer responds that "I want the car but that price is too high; I will only pay $9000 for it." This is likely to be construed as a "counter offer"---that is, a substitute offer from the buyer. The seller is entitled to think that the negotiations are over. If he meets someone else who is willing to pay $10,000 immediately, the seller should be free to accept it---he can’t be expected to risk losing that profitable deal in order to contact the offeree again. So, if the offeree later tries to "accept" the $10,000 offer, it is too late; the counter-offer, like the rejection, brings all negotiations to an end and destroys the effectiveness of the offer,

Different responses may be construed somewhat differently. The buyer, for example, may respond, "I don't know---won’t you take $9000?" "A mere inquiry regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer, is ordinarily not a counter-offer." If the court is willing to interpret the buyer’s response as a "mere inquiry," it follows that (a) the seller cannot "accept" the $9000 price and bind the buyer; the buyer, after all,. has not made a (counter-)offer of his own that gives any power of acceptance to the seller, but (b) the buyer may later choose to accept the original $10,000 offer, since that offer has not terminated.

The traditional common-law view was that an acceptance had to be the "mirror image" of the offer, mirroring exactly the terms of the offer. If the offeree’s response varied in any way---if for example it found the price acceptable but added additional or different terms relating to delivery, security, warranties, or a dispute resolution mechanism---it would still be treated as a counter offer and thus a rejection. This is generally sensible, since all the terms of a transaction are probably interconnected; any change in terms may add to the costs or increase the risks of the offeror, and the offeror is entitled to assume that he is not bound until his conditions---and only his conditions---have been accepted in their entirety by the offeree. However, the traditional "mirror image" rule does not work as well where the offeree’s additional terms are minor or immaterial; nor does it make much sense where a contract is formed by an exchange of standard pre-printed form that are in practice rarely read. The UCC has attempted to devise a special solution for the exchange of forms, and I will deal with this a little later.


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It frequently happens that because of the operation of these rules, the writings of the parties---the "offer" and the response---do not technically form a contract, but nevertheless the parties go ahead and act. Say, for example, that the buyer makes an offer, and the seller’s response, because it contains deviant terms, is not construed as an acceptance but as a counter-offer. Nevertheless the seller proceeds to ship the goods, and the buyer accepts and uses them; only later does a dispute arise over the quality of the goods or over some other terms (for example, does a dispute have to be submitted to arbitration?) The common-law analysis here is that when the buyer accepted and used the goods, he indicated his agreement to the seller's counter-offer; since he has accepted the seller’s counter-offer, the seller’s terms govern. As we will see, the UCC has created a special rule here for contracts for the sale of goods, but the result would still remain valid for other-common-law cases not governed by the Code.

If an offer takes the form of an irrevocable option, then a rejection or a counter-offer will not terminate the power of acceptance. One possible explanation for this rule is that it is a presumption of the probable intent of the parties. (It seems unlikely that an offeree who has managed to obtain an option would give away this right for nothing; by making a counter-offer he is probably still "just negotiating.") However, if the offeror relies on an explicit indication by the offeree that he is not interested---if the offeror has, for example, made an alternative deal with a third party---the offeree’s power to accept the offer, even within the original option period, will have ended.

4.2.5.3.4 Methods of Acceptance

The most common method by which an offeree will accept an offer is by making a return promise: A seller's offer to sell goods can be accepted by the buyer's return promise to take and pay for the goods. The contract that is formed here is called "bilateral," because there is an enforceable promise on each side, by each party.

An acceptance by promise is of course usually verbal, but it doesn't necessarily have to be: Any behavior that communicates to the offeror a willingness to form a contract may be adequate. For example, services may be rendered, or goods may be shipped, to an offeree, and the offeree may take the benefit of them---in circumstances when he knows that they are not gifts, but that payment is expected, and it would be easy and not burdensome simply to reject them. Such behavior will naturally give rise to the implication of a promise to pay the offered price. (I have already mentioned an example of this principle when discussing the shipment of goods following a seller's "counter-offer"). Or again, the parties may have engaged in a prior course of dealing where, over many past transactions, the offeree would follow the practice of notifying the offeror if he did not intend to accept the offer: In such cases, the offeror may be justified in taking the offeree's silence to be an acceptance.


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It has traditionally been assumed that there exist other kinds of contracts, in which the offeror does not wish to be bound by a return promise from the offeree: He may feel that a return promise from the offeree is worthless, or the circumstances may make it unreasonable for him to expect a firm commitment from the offeree; in this kind of contract, the offeror does not intend to bind himself in advance of the offeree's actual performance. "I have had enough of your promises in the past and want no promise from you, but if you will put my sugar-house machinery in good repair I will pay you $1000 for the job." The offeree, therefore, can only "accept" such offers by "performance"; since there is a promise on only one side here, these are often referred to as "unilateral" contracts.

At one time formalistic and rigid "logic" suggested that since "acceptance" of offers for unilateral contracts could only take place if performance was complete, the offeror couldrevoke his offer at any time before complete performance---even if the offeree had in the meantime changed his position by beginning work, such as by starting to put the machinery in good repair! But the obvious unfairness to the offeree from such a result has led to a different rule: It is now clear that where the offeree "begins the invited performance," the offeror may no longer revoke. An "option contract" is created; the offeree is not bound to complete performance---since this is a "unilateral" contract---but the offeror is bound to pay once the offeree completes performance in accordance with the offer.

The offeror is "the master of his offer": He can stipulate for any means or method of acceptance that he wishes, and no contract is formed unless the offeree complies with that stipulation. But in most cases, of course, the offeror doesn't particularly care about the method of acceptance---and is likely to be completely indifferent as to whether acceptance takes the form of words of promise, or of acts of performance. Therefore the current tendency is to presume that an offer "invites acceptance in any manner and by any medium reasonable in the circumstances"---unless the offer "unambiguously" indicates otherwise. The offeree may "choose" to accept "either by promising to perform what the offer requests or by rendering the performance"; if a buyer orders goods, for example, the seller may "accept" either by a prompt shipment or by a prompt promise to ship. Given this presumption, the case of a true "unilateral" contract is becoming increasingly rare---limited in practice to somewhat unusual settings like offers of rewards or of prizes in a contest, made to a large number of people but to be accepted by only one.

In the usual case where the offeror is content to allow the offeree to accept either by promise or by performance, it is still necessary that both parties be protected. If the offeree makes a return promise, then of course both parties are bound. If the offeree purports to accept by the beginning of performance, the offeror may no longer revoke---and in addition, it is presumed that such an acceptance "operates as a promise to render complete performance." Unless an option contract was clearly contemplated by the offeror, then, the offeree is expected to be bound as well as the offeror.


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4.2.5.3.5 Contracts by Correspondence:

A common problem in the formative period of Contract law was posed by agreements that were not concluded face-to-face, but at a distance, through the post: What if communications from the offeror and the offeree were to cross in the mail, or what if one of the parties were to change his mind before the arrival of a letter? Despite technological revolutions that have seen the development of electronic means of virtually instantaneous communication, such problems continue to recur today.

Again, the starting point is that most offers are assumed to be revocable by the offeror. When can the offeree who wishes to accept be confident that the deal has been concluded; at what point can he assume that he is free of any risk of revocation?

The traditional Anglo-American answer is the so-called "mailbox rule": An acceptance is effective when it is mailed or otherwise "put out of the offeree's possession." The apparent policy here is that the offeree needs a dependable basis for understanding whether or not he has a deal, and a dependable basis on which to arrange his behavior. For example, a seller may have received three offers to purchase his property, and the deadline for deciding among them is imminent. In the very act of accepting one of these offers, he is necessarily passing up alternative possibilities; he may be losing the possibility of dealing with the other buyers if this deal falls through. An offeree who has mailed an acceptance---but who has received no notice that the offeror may have changed his mind---will have immediately formed certain expectations about having a deal; these expectations may cause him to rely in all sorts of other ways, such as preparing to perform. The "mailbox rule" has the further advantage of allowing and indeed encouraging the offeree to proceed with such preparations immediately, rather than incurring the "dead time" of having to wait and see whether his acceptance has reached the offeror before revocation.

It also follows from the "mailbox rule" that where an acceptance is seriously delayed in the mail---or indeed, if it is lost and never received by the offeror at all---the offeror is nevertheless bound to a contract. Of course, the offeror---as the "master of his offer"---is always free to vary the mailbox rule by stipulating that an acceptance must actually be received by a certain time. Where receiving notice of acceptance is essential to enable the offeror to perform his own obligations, a court will be more likely to interpret an offer as containing a requirement of receipt.

Some concrete examples follow. Assume the following sequence of events:

(1) Offer Mailed and Received

(2) Revocation Mailed by Offeror

(3) Acceptance Mailed by Offeree


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(4) Revocation Received by Offeree

(5) Acceptance Received by Offeror:

A contract will have been formed here: The offeror's revocation is only effective when the offeree learns of it, but the offeree's acceptance is effective earlier, when it was mailed.

It is interesting that in some civil-law jurisdictions, the same policies are advanced by very different means. Under German law, for example, an acceptance is only effective when it isreceived. But since offers are presumed to be irrevocable, the offeree is equally protected against the offeror's changes of mind and is equally given an immediate and dependable basis for his actions. The rationale of the mailbox rule does not apply as strongly to cases where the offer was originally irrevocable, since in such cases the offeree was never exposed to the risk of revocation in the first place; in the United States, also---although there is little support in the decided cases for such a result---the Restatement of Contracts provides that the mailbox rule does not apply to option contracts.

Here is another possible sequence of events:

(1) Offer Mailed and Received

(2) Acceptance Mailed by Offeree

(3) Offeree Changes His Mind, and Sends Telegram of Rejection

(4) Telegram of Rejection Received by Offeror

(5) Acceptance Received by Offeror

A contract should also be formed here, at least to the extent of binding the offeree. It cannot be assumed that the offeror intended to allow the offeree to speculate at his expense. If the offeree is not bound, he would be able to mail a letter of acceptance and then---assuming it takes three or four days for the letter to arrive--wait and see what happens to the market, which may be fluctuating rapidly. Suppose the offeree is a buyer, and that the offer was to sell him goods for $100. If the market price for the goods remains at $100 or goes higher, the buyer can simply let his letter take its course---since he has put the acceptance in the "mailbox," he is protected against revocation; however, if the market price declines below $100---so that he can buy more cheaply somewhere else---he would wish to send an overtaking rejection.

However, it does not follow from this that the offeror too must be bound to a contract. Since the offeror has received the rejection first---and may have no reason at all to suspect that an acceptance has been mailed---he may have assumed that he was free to deal with someone


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else, and may indeed have done so. If he has reasonably relied in this way on the offeree's rejection, the offeror should be protected against liability---even though the offeree might change his mind once again and attempt to invoke the mailbox rule in order to enforce a contract. The real question, in short, is not the abstract question----"does a contract exist?"--but the more concrete question whether "this particular plaintiff can get what he is suing for from this particular defendant in these circumstances?"

The American Bar Association has developed a "Model Electronic Data Interchange Trading Partner Agreement" dealing with the increasingly common use of "e-mail" for the transmission of contract documents between businesses that deal regularly with each other. Section 2.1 of this Model Agreement provides that "no document shall give rise to any obligation, until accessible to the receiving party at such party's Receipt Computer." On the face of it, this looks like a reversal by contract of the mailbox rule. It seems obvious, though, that in new technologies like this which are "substantially instantaneous," the question posed by the mailbox rule---whether a revocation can be effective during the period it takes for an acceptance to be communicated---is not likely to arise. In such cases the governing principles should be the same as they are when the parties are actually in each other's physical presence.

4.2.5.3.6 "Battle of the Forms" in Contracts for the Sale of Goods

While the law of contracts in England and the United States is largely a creation of the 19th century, the pressures of the modern world have placed considerable tension on what is increasingly seeming to be an archaic structure. In no area, perhaps, has this been clearer than in the case of the standard-form contract.

The use of printed forms provides obvious benefits to businesses in the form of increased efficiency: They simplify decision-making, since only a limited number of blanks need to be filled in to describe any specific transaction and it is unnecessary to consider or address other terms; they permit a business to seek to establish favorable, standardized terms on which they will buy or sell goods; they limit the discretion of lower-level personnel; and they enable large, bureaucratic businesses to systematically keep track of their transactions through the use of multiple copies of each form.

So a buyer---say, an automobile manufacturer---may wish to buy a standard component from one of several suppliers. A purchasing agent for the buyer may telephone or write several sellers to ascertain prices and product availability. Based on this information, the buyer selects a seller, and sends a purchase order on its own standard, pre-printed, form. The front of the form may set forth the component, the number of units, the price, the delivery date, and possibly other specially negotiated terms as well. The back may be titled "Conditions"---and may be printed on gray paper in only slightly darker gray small print.


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These "Conditions" contain the buyer's standard purchase terms, carefully crafted long in advance by the buyer's attorney to maximize the buyer's legal position in the event a problem arises. When the seller receives this purchase order, the seller's clerical staff will check the terms on the front and, if they're acceptable, an "acknowledgment" may be sent to the buyer on the seller's own standard form. The front will contain blanks that will reflect the information about the order taken from the buyer's purchase order form; the back contains printed "Conditions" crafted by the seller's attorney to maximize the seller's legal position in the event a problem arises. Typically, purchasing and sales agents are instructed to use their own forms exclusively and not to sign or acknowledge the existence of the other party's forms. But of course, the probability that all the standardized terms will be identical is precisely zero. This is the famous "battle of the forms."

Now at common law, as I have said, the "mirror image" rule would preclude the finding of a contract on these facts. Yet despite the failure of the forms to coincide, there is little doubt that the parties thought that they had reached a binding agreement: With agreement on the main, "dickered" (i.e., negotiated) terms, the "proposed deal . . . in commercial understanding has in fact been closed." The law cannot be blind to the reality that business people rarely read the standard language on purchase forms and acknowledgments---it would in fact be inefficient to expect them to do so---and yet they may be relying on the existence of a contract despite the clashing language in these forms. Where one party is trying to back out before performance, this is most likely due to afterthoughts caused by changes in the market, rather than to any disagreement over terms. And in most cases, the goods will be shipped, and accepted, and used, before any dispute at all arises.

So in the first instance, the law should reflect the understanding of the parties that they had entered into an enforceable agreement. The second, and more difficult, question, is what are the terms of this enforceable agreement? Since the forms are by hypothesis unread, is there a danger that one of the parties will be subject to unfair surprise, by being bound to a term to which it did not consent? It is useless to ask "just what terms the parties intended" to govern their transaction, since there was apparently no such intent. The parties were content to leave their rights uncertain; greater uncertainty could only have come with negotiations, the costs of which clearly would have exceeded the cost of leaving things open to the possibility---a remote possibility---of later dispute.

The Uniform Commercial Code devised a response to this problem that has been much criticized. It is indeed not without its flaws, yet it is both a comprehensive and an elegant solution:

• Under article 2-207 of the Code, if the second form is a "definite and seasonable expression of acceptance," it will be treated as an acceptance of the offer contained in the first form. The term "definite and seasonable expression of acceptance" is presumably intended to restrict the reach of this section to cases fitting squarely within its rationale--- "proposed deals which in commercial understanding have in


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fact been closed." Discrepancies on the face of the forms relating, for example, to such subjects as price or quantity, cannot of course allow a contract to be concluded. But a second form may be an "acceptance" even though its terms are different---and even though they are different in "material" ways. If the second form is not to be an acceptance, the offeree must expressly say so---must expressly make his acceptance "conditional on [the offeror's] assent to the additional or different terms."

• If the second form is an "acceptance," it is of course an acceptance of the terms proposed by the offeror. The different or additional terms it contains are treated as proposals to add to the contract. Different or additional terms that are "material"---that is, that are surprising, unusual, or particularly burdensome---simply disappear, and are eliminated. (An example would be a seller's clause that disclaims the standard implied warranty that accompanies sales of goods). Similarly, any different or additional terms to which the offeror may object are also eliminated. If both parties have the status of "merchants," then different or additional terms that are not material, and not objected to, become part of the contract.

• If the second form is not an acceptance---perhaps because it expressly says so---then of course, no contract has been formed by the exchange of writings alone. If, however, the parties engage in conduct that recognizes the existence of a contract---perhaps by shipping and accepting the goods---then a contract will of course be recognized. In that situation priority is given to neither form; the terms of the contract will consist of (a) those terms on which the two forms happen to agree, plus (b) any supplementary, "gap-filling" default rules supplied elsewhere in the Code.

As I said, this is a comprehensive solution for all "battle of the forms" situations, and it is also rather neat and elegant. However, it will immediately be seen that the Code solution gives an immense advantage to the person sending the first form---or "firing the first shot," as the cliché has it. His terms are presumed to prevail, since his "offer" has been "accepted." And since these forms are by definition unread and unattended to, it may well be doubted whether this is justifiable. (Before the Code was enacted, the common law's approach was to say that the party who put forward the last terms and conditions---not objected to by the other party---would prevail; that is, a "last shot" principle). However, here we see the force of my earlier point that these rules---like almost all legal rules---are merely background rules and presumptions. It is always open to the parties to vary them. For example, the Code invites the party sending the second form simply to add standard ("boilerplate") language, to the effect that there is no acceptance at all unless his terms (that is, the second party's terms) are assented to (e.g., acceptance is "expressly conditional on assent to the additional or different terms contained herein"). Resort to this language is indeed widespread---and it results in no contract being formed unless the parties actually begin to act and conduct themselves as if there is one.


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The solution adopted by the CISG (the "Vienna Convention" on Contracts for the International Sale of Goods) is quite different from that of the UCC---but the Convention scheme, in many ways a compromise between common-law and civil-law notions, can hardly be considered any sort of improvement over the Code. On the contrary.

• Article 19 of the Convention makes an exception only for terms that do not "materially alter" the offer: If the second form contains only such minor variants, a contract is nevertheless considered to have been concluded, and the minor variants are incorporated into the deal unless the first party objects. But if the second form contains variations that are material, then no deal has been concluded at all. By "material," again, we usually mean something like surprising, and unusual, and burdensome---but the Convention makes it clear that anything at all that can possibly matter (including the quality of goods, the place and time of delivery, and the "settlement of disputes" [including arbitration] will be considered "material." Also, if the offeror objects even to the immaterial terms in the second form, the result is that no contract has been formed. In both of those cases (i.e., the addition of material terms, and the objection to any terms by the offeror) the Uniform Commercial Code in the United States would find that a contract had been formed.

What are we to make of this scheme of the Convention? On the one hand, the Convention's solution does prevent the second party from being bound against his will to any material or important terms. (That the party sending the second form might be found against his will to such terms would---at least theoretically---be possible under the Uniform Commercial Code, but, as I mentioned, this result is easily avoidable: The second party merely has to add standard, "boilerplate" language to his answer, making it explicit that his assent is conditional on agreement to his own terms). On the other hand, the Convention result may be thought undesirable, because it seems to infinitely increase the number of cases whereno contract will be found at all, even though the parties may have thought that they had struck a deal. (But again, where the second party routinely adds a standard-form disclaimer to his response, the same solution of "no contract" would also be reached in the United States under the Code. The importance of the precise content of "the law" is , here and elsewhere, minimized by the ability and the incentive of private parties to "contract around" the rule in their own drafting and planning.)

· The Convention seems to make no provision at all for the situation where no contract has been formed in a "battle of the forms," but where the parties begin to act as if there were, by shipping and using the goods. Is the implication that the seller, merely by shipping the goods, has necessarily accepted and acceded to the buyer's form? Or that the buyer, by accepting and using the goods, has necessarily "accepted" and acceded to the seller's form? This is apparently the case, since the Convention seems to adopt an "offer-acceptance" paradigm requiring a court to pinpoint the exact moment that a contract is formed: Under the Convention, "a contract is concluded at the moment when an acceptance of an offer


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becomes effective";in addition, "conduct * * * indicating assent to an offer" ---presumably including the shipping or accepting of goods---may constitute an acceptance. This would be a most unfortunate result, and strikes an American lawyer as particularly retrograde---since it reproduces a common-law result long in effect prior to the enactment of the Uniform Commercial Code. Such a rule would unwisely privilege one particular form---the "last" one sent---and would seem to artificially impose on the parties a structure that does not correspond in any way to their expectations.

Therefore, under both the American Code rule, and under the Convention rule, the parties continue to have an incentive to engage in "strategic behavior"---not to negotiate terms openly, but to bombard the other party with forms hoping to be able to fire "the first shot" (under the Code) or the "last shot" (under the Convention). But "when the parties to the contract send their forms blindly, and after no, or only cursory, examination of the bargained terms file the forms they receive, it makes little sense to give one an advantage over the other with respect to unbargained terms simply because he filed the first [or the last!] form." A truly satisfactory solution for this common problem seems to have escaped the drafters of codes and conventions. And yet one would think that this is one of the most fundamental of contract-law questions, one to which every business client would expect an answer. One can expect that the search for an answer will continue.

In this respect I should mention, finally, the approach taken by the proposed and pending revision to the Uniform Commercial Code. The current proposed draft involves an approach that is both more simple and more focused than any of the existing alternatives.

Under this revision, the parties may "manifest assent" to an agreement represented by a standard form either expressly, or by conduct. Now, as an initial matter, consider the case where one party has agreed in this way to a standard-form contract prepared by the other: Assume, for example, that the buyer orally orders goods; the seller ships the goods accompanied by a standard form disclaiming any warranties of quality; the buyer receives the standard form, and without objection accepts and uses the goods. In such a case, the party agreeing to the form is bound to all the terms of that form---except, however, for terms that the party who prepared the form knew or had reason to know would cause the other party to reject the contract if they were brought to his attention. Such terms are not included in the contract. So the recipient of a form has a "duty to read" even a standard-form contract---except for terms that one party tries unfairly to "sneak into" a contract, taking advantage of his knowledge that the other party will not read it.

Now for the true "battle of the forms" problem: What if both parties have prepared standard forms, and in some instances these forms are conflicting---the terms in one form "add to or vary" terms of the other? In such a case, a will only be bound to such terms that "he had notice of, from trade usage, prior course of dealing [that is, from prior transactions between the parties] or course of performance [that is, the behavior of one party in performing the contract that is accepted or acquiesced in by the other without objection]."


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The "contract in fact" will then consist only of (1) the terms on which the parties have expressly agreed in their standard forms, (2) any supplementary terms incorporated as "gap fillers" or default rules under the Code, and (3) the terms of which the parties had knowledge or reason to know, such as by trade usage.

The choice of any rule should be made with an eye to its functional effects---that is, its practical effects on the conduct of the parties---and this proposal would seem to have some desirable effects: It provides an incentive for those who wish to incorporate terms important to them, to insure that the other party is aware of those terms and agrees to them: As Richard Speidel, the Reporter for the Code revisions has noted, such changes "place a premium on negotiation and informed consent, rather than upon strategic behavior." And by doing so, the proposed revision also eliminates the risk of unfair surprise---a risk under current conditions for a party who cannot be expected to sit down and read all the lengthy terms of a form before proceeding to fill a routine order. At the same time, under this revision, identifying one particular form as the "offer," and the other as the "acceptance"---and thus the whole traditional law of offer and acceptance built upon this model---is increasingly becoming an irrelevant exercise.

The "battle of the forms" I have been discussing arises when a written offer is sent by one party, and where the other responds with a second form containing different terms. A different, but analogous, problem sometimes arises when the offeree responds, not in writing, but with actual performance. For example, a buyer may order goods of a certain quality and the seller---without promising anything---sends a different, and inferior, grade of goods. At common law (and presumably under the CISG) the seller's shipment would be treated as a counter-offer: And if the buyer accepts and uses these inferior goods, he is deemed to have assented to the seller's counter-offer--thereby agreeing to a contract for these inferior goods! The UCC, on the other hand, treats this case in a way very similar to the way in which it deals with the battle of the forms: Under the Code, the seller's shipment operates as an acceptance, and it is an acceptance---and not a counter-offer---even though it is a deviant shipment of different goods. Here too the seller may, if he wishes, expressly indicate that he is making a counter offer---he may "notify the buyer that the shipment is offered only as an accommodation." But if he does not say so expressly, he is presumed to have accepted the buyer's offer. And since his shipment does not conform to the offer, it is simultaneously both an acceptance and a breach, leaving him open for liability for breach of contract.

4.2.5.3.7 Open Terms

The model of the commercial transaction that informed the early development of Contract law was the discrete arrangement---a one-time sale with a very limited time horizon. The parties were treated as isolated atoms---that come into momentary contact with each other


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and then bound off again into space. Contract law undoubtedly evolved with this model in mind---the "offer and acceptance" mechanism seems to reflect it very well. This model does now, however, correspond very well to our current reality. The more typical transaction will occur in the context of a long-term relationship, in which, for example, one party agrees to serve as the exclusive outlet, or the exclusive source of supply, of goods produced or needed by the other. The traditional model thus imposes considerable tensions on our ways of thinking about the law of contracts.

We are all aware that we are unable to predict the future with any great precision. To deal with this uncertainty, business people will require flexibility--they will expect the law to provide a framework that will provide them the assurances they need, but which will at the same time allow them to adjust the terms of their deal over time, as circumstances change and as the future reveals itself. The work of the attorney, in cooperation with the client, is often to devise mechanisms to combine the necessary contractual security with the possibility of adjustment.

When the future needs of a buyer, or the future capacity of a seller, are uncertain, a "requirements" or "output" agreement might be structured to leave this quantity term open. Earlier American cases expressed some doubt about the enforceability of these kinds of arrangements, but it is now well-established that they are both useful and binding----the primary focus of the law has instead been on monitoring and policing these transactions, to ensure that neither party is abusing its position. A buyer who commits himself to take all of his requirements from the seller undertakes, at the very least, to deal exclusively with that supplier, and to give up any right to satisfy his needs by buying elsewhere. But courts will infer that he has assumed other obligations as well: The buyer is required "to conduct his business in good faith and according to commercial standards of fair dealing in the trade" so that his "requirements will approximate a reasonably foreseeable figure." He has no right to order quantities "unreasonably disproportionate" to any "normal or otherwise comparable" "requirements"---for example, he may not, if the market price rises dramatically above the contract price, rapidly expand his orders to exploit the opportunity to resell the seller's goods. On the other hand, the buyer may choose not to buy at all, but only if he can point to a "business reason" for doing so "independent of the terms of the contract"---such as a drop in the demand for his own products,. The buyer may be liable, however, if he ceases to buy simply because he has made a reassessment of the advantages and disadvantages of the contract---this would be a violation of his duty to act in "good faith."

This standard of "good faith" and "commercial reasonableness" is typical of the vagueness and open-ended nature of much modern American Contract law: It can make decisions hard to predict in advance. But since it is so fact-intensive, it does give to the courts the tools they need to reach a sensible result in the particular case at hand. Here is a challenge for the lawyer who operates in a common-law system---the premise of which is that actual content


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will be infused into broad "standards" of law over time, on a case-by-case basis, through individualized adjudication.

Another common problem is uncertainty about the appropriate contract price. Here, among the available contractual mechanisms, indexation clauses are a familiar example. Sometimes, however, the parties may think it necessary or desirable simply to leave the price term completely open. At an earlier time courts would frequently hold that such an "agreement to agree" was simply a contradiction in terms, and could not possibly give rise to contractual liability. Modern cases can still be found in which such holdings persist, particularly in settings other than the sale of goods: "Courts cannot write a contract which the parties have not made." In contracts for the sale of goods, however---where the market is likely to provide an objective basis for computation---the rule appears to be otherwise. The UCC provides that the parties may conclude a contract of sale even though the price has not been settled: If they leave the price "to be agreed later" and cannot later agree, or if they simply say nothing about price, then the contract price will be "a reasonable price at the time for delivery." The only requirement here is that the parties have intended at the time to conclude a contract of sale: It is possible, of course, that they did not intend to be bound unless and until the price has been fixed or agreed; in such a case there should be no contract. In applying this standard it is often very difficult, of course, to distinguish between "an agreement with an open price term," on the one hand, and "mere preliminary negotiations" on the other; this is, once again, "a question to be determined by the trier of fact."

By contrast with the Uniform Commercial Code, the provisions in the CISG that deal with the open-price contract have aptly been termed "a mess." Article 14 of the Convention requires an offer to be "sufficiently definite," and mandates that such definiteness is met only if the proposal "expressly or implicitly fixes or makes provision for determining" the price. Article 55, on the other hand, later states that "where a contract has been validly concluded," but does not expressly or implicitly fix or make a provision for fixing the price, the parties are considered "to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned."

It is very difficult to know what to make of all this. Some commentators simply believe that the requirement of a price term under article 14 can be satisfied by the gap-filling provisions of article 55. Other commentators reconcile the two by saying that article 14 is merely concerned with the definition of an offer: It functions simply as a means of distinguishingbetween an offer---which can have legal consequences---and a mere proposal, or invitation, to make an offer---which does not. On this analysis, the parties need not be prevented at alater time from agreeing, together, to bind themselves to an arrangement that leaves the price for later determination. And finally, still other commentators believe that article 14 and article 55 simply contradict each other:


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This, it has been suggested, is a result of profound differences between the various states with different legal traditions involved in the drafting of the Convention---differences, for example, between common-law and many other industrialized states who wanted "a flexible rule for the determination of price," and developing countries who found the contract price "an essential element that absolutely must be determined" in advance. Article 14 had already been approved when Article 55 was discussed, but a majority could not be found to modify it later.

4.2.5.3.8 Preliminary Negotiations

The "offer and acceptance" model no longer represents very accurately---if indeed it ever did---the nature of modern contracting behavior. Large and complex agreements are often "hammered out" over a considerable period of time, through a process of face-to-face negotiation. During the negotiation of such deals it is rarely possible to identify a discrete "offer" or "counter-offer" to be accepted; there is instead a gradual process in which agreements are reached piecemeal, through the exchange of "drafts" to which neither party is as yet fully committed. Each exchange of drafts leaves fewer and fewer issues in disagreement, to the point that only small technical points remain for the parties’ lawyers to discuss separately. When this negotiation process finally reaches a successful conclusion, the contractual commitment will typically be set out in a lengthy set of documents, signed by the parties in multiple copies and exchanged more or less simultaneously at a "closing."

Sometimes, however, this process will not yet have produced a single, complete, and detailed document to which both parties are clearly committed. When the negotiations abort before this document is produced, a number of different legal problems may arise:

4.2.5.3.8.1 Intention to be Bound

This is a pattern common in modern commercial life: The parties to a substantial transaction may be in the midst of negotiation---they may be feeling their way along towards final agreement, and becoming increasingly optimistic that such an agreement will eventually be reached. During this negotiation process, many issues will be agreed to on a piecemeal basis---and perhaps even some of the principal "stumbling blocks" to a deal will have been resolved. The remaining issues may be considered too small and unimportant, or too easily settled, to be a cause of serious concern. And so, perhaps, in a burst of enthusiasm and euphoria, the bargainers may reach across the table and shake hands---"We have a deal." They may even sign a "letter of intent," or "agreement in principle," setting out the outlines of the deal. Such an agreement may specify that it is "subject to execution of a definitive agreement"---following such matters as completion of certain legally required formalities, appraisal of the assets, clearing of title, or approval by the parties’ attorneys to take care of any possible question or contingency---as the phrase goes, to "dot all the ‘i’s’ and cross all


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the ‘t’s.’" For one reason or another the deal later collapses, and one party claims that the preliminary agreement is itself legally binding---independent of the final definitive contract. Are the parties bound, or are they free until the final writing is signed?

The answer will depend on an assessment by the court, or a jury, of the intention of the parties. It is possible that the parties intended to contract informally, and that the later final, definitive agreement consisted merely of "technical requirements of little consequence," meant to serve only as a housekeeping device, to memorialize their agreement or to make sure that minor legal details were in order. If the parties do intend to contract orally or informally, the mere fact that they intended to commit their agreement to a formal writing at a later time does not prevent a court from saying that a contract has already been entered into. On the other hand, it is possible that the final written agreement was intended to be the final culmination of the negotiations, so that the parties did not consider themselves bound at all until the very last minute. In making that determination, courts will be influenced by such factors as (1) the extent to which all essential terms of the alleged contract had been agreed on, (2) whether the parties had begun to act or perform under the alleged contract, and (3) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected.

"Agreements in principle," "letters of intent," and "memoranda of understanding" are frequently necessary in the relatively early stages of commercial transactions, but the intended use of these documents may vary considerably---and whether they constitute a binding commitment or a mere stage in the bargaining process is often unclear. Obviously, the more likely it is that a court in later litigation will "fill" what appears to be a "gap" in the parties' "agreement," the greater care transactional attorneys must take: They must take steps in advance to make it clearly understood, both by the other party and by a court that may later hear a dispute, that preliminary agreement on particular aspects or issues in a negotiation is just that---"preliminary" and "tentative"; they must take pains to clearly demarcate in practice the precise moment when an agreement is intended to ripen into a binding obligation from which the client may no longer withdraw

4.2.5.3.8.2 "Pre-Contractual" Liability

In the cases I have just been talking about, if an "intention to contract" is found---and if there is some "reasonably certain basis" for giving a contractual remedy---then the promisee will be entitled to all the usual remedies provided by Contract law. On the other hand, if no such "intention" is found, there is no contractual liability at all. Traditionally this has been thought to mean that both parties remain "as free as the breeze"--- able to walk away, without consequences, for any reason whatever. This result would mean that if one of the parties has changed his position in any way---if, say, he has begun to act in the hope and confidence that a deal would eventually be struck---he is simply out of luck.


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In a number of cases, however, courts are beginning to impose liability for conduct in the bargaining process, and to provide remedies for harm suffered during that process even before we can say that any "contract" at all has been entered into.

In one celebrated case, for example, the owner of a small-town bakery engaged in lengthy discussions with a supermarket chain over the possibility of opening a grocery store as one of the company’s franchisees. The company urged and encouraged the baker to take all sorts of steps to prepare himself for opening such a store, and to gain the necessary experience---it insisted that he raise a certain amount of money, sell his existing bakery, buy a small grocery store in another town, and incur some personal moving and rental expenses. All of this was presented as a precondition to entering into a franchise agreement---but not much was ever said by either party about the specific terms of the proposed franchise, or the "size, cost, design, and layout" of the proposed store. After the company dramatically raised the amount of the capital investment that the baker was expected to make, the negotiations broke down.

The court assumed that the company had never made an "offer" of a franchise in any form---"agreement was never reached on essential factors necessary to establish a contract." Nevertheless the court held that "injustice would result" if the baker were not granted some relief, because the company had "induced" him to "act to his detriment." Relief for "reliance loss" was therefore given on the basis of "promissory estoppel."

Cases like this seem to rest as much on the principles applied in "torts" cases as on those applied in contracts cases---they seem to represent the imposition of liability for negligent misrepresentation, or negligent inducement of harm, during the negotiation process. They also suggest that in some circumstances, parties may come under the duty to "bargain in good faith" towards the consummation of a contract even in pre-contractual situations where no deal has as yet been agreed to. Such cases remain rare, and each rests on its particular facts. But such cases obviously pose a serious risk to prospective offerors in the position of the grocery chain: Negotiations that fail are obviously an everyday occurrence, and when this happens, it seems inappropriate to expect that one’s losses in bargaining should be compensated for---even if such losses result from actions "recommended" by the other party. And it also seems inappropriate to hold a party to one single term---say, the amount of the initial capital investment required from the baker---that is agreed to in the course of negotiations, even though the rest of the deal still remains open. After all, a deal has to be evaluated as a whole, and the conventional wisdom in negotiation is that "one hasn’t really agreed to anything until one has agreed to everything."


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4.2.5.3.9 Special Applications: Auction Sales

We have already seen that in an increasing number of cases (for example, cases involving the exchange of pre-printed forms and cases involving preliminary negotiations) the traditional model of contract formation by "offer and acceptance" has been eroded---and indeed. often seems to have become simply irrelevant. There are many other areas of Contract law in which special rules have evolved, and where it seems difficult to fit contract formation neatly into the usual "offer and acceptance" mechanism.

One example is the law of auction sales, whose rules are in large part a codification of many centuries of history and custom. A sale at auction is complete when the auctioneer, acting for the seller, so announces by the "fall of the hammer or in other customary manner." The auctioneer is free to complete he sale at any time---and, on the other hand, is free to reject all bids and withdraw the goods from sale any time until the hammer falls. Until that time, any bidder for his part is perfectly free to withdraw his bid. In many cases, then, this makes it look as if the auctioneer is inviting offers from prospective bidders, and makes a bidder look like the offeror---who may "revoke" his offer before the auctioneer’s acceptance. This is indeed the "normal procedure," and what the law will presume in the absence of some indication to the contrary. However, auction sales are often held "without reserve"---in which case the normal understanding is that the goods may not be withdrawn, but must be sold to the highest bidder. In that case, it is the auctioneer who has in effect made an offer---and an irrevocable one. Yet, curiously, even in such cases the last and highest bidder is not bound to his bid---but he may still retract it at any time until the hammer falls.

4.2.5.4 Requirements of Form: Statute of Frauds

There is no general requirement in the United States that contracts, to be legally binding, must be in writing and signed. In theory, important contracts---even contracts involving large sums of money---can be made orally and still be enforceable, provided that the court or jury believes the evidence that has been introduced concerning the existence and the terms of the alleged contract.

However there are statutes, in force in every state, that do impose a writing requirement for certain types of contracts. These statutes are all modeled after a 17th century English statute and are usually referred to, as that statute was, as "the Statute of Frauds." Where the statute of frauds applies, it makes unenforceable an agreement that meets all the other requirements of a binding contract, e.g., offer, acceptance, consideration, and so forth. And it prevents the enforcement of a contract even though the evidence is overwhelming that in fact an otherwise enforceable agreement was reached---even though, for example, the making of the oral contract took place in front of ten disinterested witnesses, all of whom are willing to testify that full agreement was reached.


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In general, the types of contracts covered by [the usual phrase is "falling within"] the statute of frauds are the following:

1. Contracts for the Sale of Goods for the Price of $500 or More.

This requirement of a writing is found in the UCC. However, the CISG provides that "[a] contract of sale need not be concluded in or evidenced by writing," and while ratifying countries are permitted to exclude this provision, the United States has not done so.

2. Contracts for the Sale of Land or for an Interest in Land

3. Contracts "Not to Performed Within One Year from the Making Thereof"

What this usually means, as it has been interpreted over the centuries, is that there is a requirement of a writing only if there is no possibility that the contract can be fully performed (as opposed to prematurely discharged) within one year. So, an oral agreement to hire a 21-year old athlete, in perfect health, for the rest of her life is enforceable---because she may after all die within a year. On the other hand, an oral agreement to hire a 90-year old man on his death bed for two years may not be enforceable, because---although there is every likelihood that it will be prematurely discharged by impossibility of performance within one year---it cannot be performed within a year.

4. Contracts to Answer for the Debt of Another

This prevents the enforcement of oral promises to act as a surety---that is, to pay another’s debt if he does not. An important exception to this provision is the so-called "main purpose" rule: If the surety’s promise is made primarily for his own economic advantage---for example, a surety’s promise of payment if a creditor will forbear from seizing property of a debtor in which the surety has an interest---then the promise is not "within" the statute and need not be in writing.

In most jurisdictions, the statute of frauds does not require that the actual contract between the parties be in writing---all that is required is that (in the words of the UCC) there must be "some writing sufficient to indicate that a contract . . . has been made between the parties and signed by the party against whom enforcement is sought." Thus, several different documents referring to the same transaction, or a letter or other memorandum signed at a later time---or even a letter repudiating the agreement---may satisfy the statutory requirement if they provide sufficient evidence of existence of the alleged agreement.


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Over the years, a number of exceptions have developed to the writing requirement of the statute. In many cases, it has appeared to the courts that strictly applying the "statute of frauds" would permit a defendant to act unjustly---that allowing him to escape an obligation that he had freely assumed towards the plaintiff would result in perpetrating fraud, not preventing it. These exceptions are generally specific to the particular kind of contract involved---that is, behavior that will "take a contract out of" [that is, create an exception to] the writing requirement for sales of land, will not necessarily create an exception to the requirement for other kinds of oral agreements.

What these exceptions tend to have in common, though, is judicial sensitivity to the situation where one party has relied on the oral agreement---has acted to his detriment in the belief that a contract existed. For example, "part performance" of a contract for the sale of land may make that contract enforceable even without a writing: In most states, an oral agreement to sell land becomes enforceable once the buyer has taken possession of land with the seller’s assent, and has paid part of the price or has made improvements on the property. Oral agreements to sell goods may become enforceable if the seller has made a "substantial beginning of their manufacture or commitments for their procurement," and if the goods are to be "specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business"; the statute of frauds will also not apply as to goods for which payment has already been made, or which have already been received and accepted.

If a plaintiff can bring his case within one of these established exceptions, the oral agreement will be fully enforceable. If he cannot, he still may be able to recover on a theory of "restitution" for the reasonable value of any "benefit" that he has conferred on the defendant. "Restitution" is a term with rich historical connotations, that has a number of meanings in American law: It is one possible remedy for a breach of contract, where an innocent party has conferred a benefit on the other breaching party---for example, by making a part payment or by furnishing services under the contract; the court may then require the other party to "disgorge" the benefit that he has received by returning it or its value. But restitution can also constitute a substantive basis for recovery even if a contract does not exist; the overriding principle is still the prevention of "unjust enrichment."

So an oral agreement between a niece and her elderly aunt, by which the niece agrees to take care of the aunt until she dies in exchange for the family farm, is "within" the statute of frauds---because it calls for the transfer of an interest in land. But if the niece works for the aunt for a period of time until the aunt changes her mind, the niece may still be able to recover for the value of the services she has rendered, in "restitution." This does not violate the statute, since in theory the action for restitution is not dependent on the existence of a contract---it is not "the contract" that is being "enforced." It is obvious that in many cases, courts will strain to find that some sort of


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"benefit" has been conferred as a means of avoiding the statute and of giving some compensation to a deserving claimant.

4.2.5.5 Interpretation and the Effect of a Writing

In cases not falling within the statute of frauds the parties are free to contract orally. Nevertheless, typically, the final point in the bargaining process is a written agreement. Parties may choose to reduce their agreement to writing in order to provide trustworthy evidence of the fact and of the terms of their transaction, and to avoid reliance on uncertain memory. However, all sorts of things will have been said earlier in the course of negotiations---in the bargaining process tentative agreements will have been reached, and assurances given. If a lawsuit should arise later, one of the parties may seek to introduce evidence of the earlier negotiations in an effort to show that the "real" terms of the agreement are somewhat different than is shown in the writing. Can he do this?

The "parol evidence rule" reflects the assumption that the document itself contains all the elements of the deal, and that duties, restrictions, and qualifications that for any reason do not appear in the written document---even though apparently accepted at an earlier stage---were not intended by the parties to survive. Under the rule:

1. If a written agreement is an "integrated agreement"---that is, if it was "intended by the parties as a final expression of their agreement with respect to such terms as are included therein"---then it may not be "contradicted" by "inconsistent" prior agreements. If the written agreement provides that land will be conveyed for a price of $10,000, the seller will not be allowed to show a prior oral---or even a prior written---promise by the buyer to pay $15,000.

2. If the written agreement is "completely integrated"---that is, if it was "intended also as a complete and exclusive statement of the terms of the agreement"---then, within the scope of that agreement, even consistent additional terms may not be shown. Obviously, if a defendant is being sued on a written contract for the sale of coal, he will be allowed to show that he has a claim against the other party based on a prior contract for the sale of aluminum---this is a so-called "collateral contract." But on the other hand, if there is a written contract for the sale of a tract of land, the buyer---who may have intended to use the property as a vacation home---may not be permitted to show that the seller had orally promised, as part of the transaction, to remove an ugly "ice house" standing in plain view across the road. The promise to remove the ice house, a court held, is "so closely related to the subject dealt with in the written agreement" that it may not be proven; the purpose behind the rule "was a wise one . . . notwithstanding injustice here and there."


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The real problem that the "parol evidence rule" poses is this: How can we know whether or not the parties "intended" their writing to be the final and definitive statement of their agreement? Many courts, particularly during the first half of this century, held that such intention can be found only by looking at the writing itself (in a frequent phrase, "within the four corners" of the document). For these courts, the question is whether the writing appears to be final and complete "on its face." This approach is particularly likely if the writing contains a standard "merger clause," stating that the writing represents a final and complete integration of the parties’ agreement.

On the other hand, the more modern tendency is to look outside the document to the surrounding circumstances---including the prior negotiations themselves---to see whether the writing was intended to supersede or discharge prior oral understandings. On this view, "a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties." This view of the parol evidence rule may reduce it to something of a truism---a writing has the legal effect of superseding earlier agreements if the parties wanted it to do so! But even on this view, the rule remains important as a device for controlling the flow of information to a jury: The legal effect of writing must be determined by the court before allowing any evidence of the alleged prior agreement to be submitted to the jury, which is the ultimate fact-finder in most civil cases.

A number of exceptions have developed over the years to mitigate the possible harshness of the parol evidence rule:

1. Probably the most important exception is that evidence of prior agreements or negotiations may always be considered in order to explain or interpret the writing: It is obviously necessary to know first what the writing means, before we can know whether it is being "contradicted’ or "supplemented." An earlier view held by many courts was that prior agreements or negotiations could only be used for this purpose if the writing was "unclear" or "ambiguous"; however, it seems generally recognized today that "even though words seem on their face to have only a single possible meaning, other meanings often appear when the circumstances are disclosed."

2. Since the parol evidence rule supposes that a writing was intended to supersede all earlier agreements, it obviously does not prevent the proof of oral agreements made subsequent to the writing. Contracting parties are always free to modify or terminate, by later oral agreements, their existing obligations and adopt different terms that better suit their interests.

But what if the parties wish to prevent the possibility of future oral modifications---perhaps in order to "protect against false allegations" of modification, or to control their own agents in the field who might be tempted to make unauthorized promises? Can they create their own private statute of frauds by inserting in their contract a clause making later oral


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modifications ineffective? At common law, courts tended to hold that the parties could not do this---after all, they reasoned, can’t the parties choose to orally cancel their entire contract, including the "no oral modification" clause itself? The UCC, however, now provides otherwise: If the parties’ signed agreement excludes future modifications except by a further signed writing, such a clause will be given effect. Even under such a provision, though, the effectiveness of a "no oral modification" clause must be limited if one the parties has materially changed his position by relying on the modification.

4.2.5.6 Modification and Renegotiation

Assuming that a valid contract has been formed, it may be thought desirable at some later time to make some alterations in the original deal. Circumstances may have changed in a way that had not originally been anticipated by the parties, so that the party furnishing goods or services may want or need a revised and higher price, or the party receiving goods or services may want or need a revised and lower price. Earlier English and American cases---applying a fairly rigid version of what "Contract doctrine" seemed to require---held that any promise to pay more money for the same goods or services that were called for under the original contract (or to accept less money for the same goods or services) would be unenforceable. Typical of such cases is an early English decision which refused to enforce the promise of a ship’s captain to pay more money to members of the crew when, during the course of the voyage, some seamen had deserted: The captain’s promise was "void for want of consideration," since the crew members had already "sold all their services till the voyage should be completed," However, even courts that purported to follow such a doctrine would often seize on "slight variations" or "trifling circumstances" in the contractual adjustment in order to satisfy the requirement of consideration---and thus to depart from the rule when it seemed fair to do so.

Now one can imagine two very different sorts of stories about cases where the parties have agreed, say, to a higher price for goods or services than was called for in the original contract. In one story, the buyer has relied on the seller to supply the goods, and has passed up alternative sources of supply that are no longer available. At that point, the seller---aware of the precarious situation that the buyer finds himself in---threatens to withhold delivery unless the buyer agrees to pay a higher price, and the buyer is forced to acquiesce. Such unscrupulous behavior on the part of the seller---a form of "extortion"---obviously should not result in an enforceable modification. In an alternative story, the seller's costs for raw materials have increased dramatically---perhaps because of a foreign war that has reduced his sources of supply, or the threat of a nationwide strike; similarly, a contractor may have encountered unexpected soil conditions which have made excavation and extraction of minerals more costly. Under serious business pressure, the seller or contractor requests an upward modification in the price, and the other party agrees. There may be many reasons why he may do so: Leaving aside a sense of fairness, he may feel that there is a "symbiotic"


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relationship between his business and the sellers' business---that is, the continued economic health of the seller is important to his own business, and that insisting on the "letter of the bargain" to the fullest extent may under the circumstances actually be injurious to them both. A very similar story may involve an employer whose business is suffering because of a war, and whose employees agree to take a cut in pay in the hopes of keeping the business afloat.

Leaving aside any legal technicalities, the law should obviously distinguish between these two extreme cases. The UCC does so explicitly: It distinguishes between, on the one hand, "the extortion of a 'modification' without legitimate commercial reason" and, on the other hand, a modification made in "good faith," which "may in some situations require an objectively demonstrable reason for seeking a modification." In the latter case, no consideration is necessary for an agreement that modifies the contract. We can see that the focus of attention has once again shifted away from the existence of consideration, and towards the policing and monitoring of agreements to insure their ultimate fairness. The Official Comment to the Code suggests that "such matters as a market shift which makes performance come to involve a loss may provide such a reason [for modification] even though there is no such unforeseen difficulty as would make out a legal excuse from performance."

It seems an inevitable feature of the common-law system that the broad and flexible "standard" incorporated in the Code will be the subject of much litigation---as sellers try to demonstrate that their case is more similar to the second scenario I mentioned (the "good faith" modification due to an increase in seller's cost), and buyers who have agreed to a modification and then changed their minds try to demonstrate that it is more similar to the first scenario. Customs and usages with respect to what is considered to be legitimate and acceptable reasons for seeking modification can be expected to add some predictability to the practical application of this standard.

4.2.5.7 Defenses to Contractual Liability

4.2.5.7.1 Bargaining Misconduct: Fraud and Duress

If the enforcement of bargains is justified on the grounds that it promotes individual autonomy and the proper allocation of "productive energy and product" in the economy, then such a rationale does not readily apply in cases where one party’s misconduct has made the other’s "agreement" less than meaningful. We can have no assurance that the bargaining process has reached the "right result" if, for example, one party has misrepresented to the other the identity or the character of the property or service being sold---or has induced the other party to sign the agreement by placing a gun to his head. In these circumstances, the victim should be able to "avoid" the contract.


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In the classic case of misrepresentation, one party has made an assertion to the other that "is not in accord with the facts." The contract can be avoided if the misrepresentation is "fraudulent"---that is, where the speaker either knows or believes that his assertion is not true, or at least does not have the confidence in his assertion that he implies. But it is not necessary that there be any intent to defraud---even an innocent misrepresentation is enough, if it is "material"---that is, likely to induce a reasonable person to agree---and if the other party has been induced to enter into the agreement by justifiable reliance on this false assertion. (Reliance on mere "opinions," or mere expressions of "judgment as to quality, value, authenticity, or similar matters," may not be sufficient).

Traditionally, this principle was not extended to cases where---rather than lying about a particular fact---the party with greater knowledge simply kept silent. No general duty to disclose existed---even where it was clear that the other party was ignorant of the fact being withheld, and that knowledge of this fact would materially affect his decision to enter into the contract. Negotiation, after all, cannot be turned into a discovery proceeding; the dilemma is to reconcile the notion of negotiation as an adversarial relationship---in which the parties jockey to make "the best deal possible"---with the standards of honesty and fair dealing that should be encouraged in parties dealing with each other. Increasingly, however, courts are adopting the principle that in some cases, silence can be the legal equivalent of a misrepresentation: The Restatement, for example, treats nondisclosure as amounting to a false assertion at least where the mistaken party was "entitled" to know the truth because of some "relationship of trust and confidence" between the parties, or where one party is mistaken as to a "basic assumption" of the contract and non-disclosure would amount to a "failure to act in good faith and in accordance with reasonable standards of fair dealing."

Note that I have been talking only about misrepresentation as giving rise to a right on the part of the innocent party to escape or "avoid" the contract. The right of avoidance for misrepresentation overlaps with other legal principles---where the remedies of the injured party may be somewhat broader. If the misrepresentation was fraudulent, or even negligent, then there may be an affirmative right to recover damages in tort in the traditional tort action of "deceit." Alternatively, a seller’s misrepresentation about the quality of goods may be functionally equivalent to a contractual undertaking---that is, a promise---that the goods will conform to that quality: Such an "affirmation of fact" or "description" of the goods, if made "the basis of the bargain," can constitute an express warranty on the part of the seller, the breach of which will give rise to the recovery of normal contract damages.

It is easy to see that agreements induced by the threat of unlawful conduct---such as a threatened crime or tort---can be avoided by the victim. Courts have readily extended that principle beyond such simple cases, recognizing that other forms of "duress" or coercion may be equally improper means of procuring "assent" to a proposed contract---for example, a threat in bad faith to bring litigation. Where one party to an existing contract of sale attempts to exploit the buyer’s desperate need for the goods---by threatening not to


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deliver them unless the buyer pays a much higher price than originally promised---the buyer can escape his promise to pay the higher price on the same grounds of duress. (We have, already, seen alternative possible explanations for a refusal to enforce this kind of promise---for example, that it lacks consideration, or that it is a modification made "in bad faith" and "without legitimate commercial reason").

Courts regularly repeat, however, that the mere fact one party is taking advantage of another’s "desperate financial straits"---the mere "threat of considerable financial loss"---cannot constitute duress, unless the financial difficulty of the complaining party is due to the other party’s conduct. "Such economic stress must be attributable to the party against whom duress is alleged." It is after all inherent in a market economy governed by "freedom of contract" that market forces may constrain individuals of unequal bargaining strength to agree to terms less advantageous to them than they would like: "The adverse effect on the finality of settlements and hence on the willingness of parties to settle their contract disputes without litigation would be great if the cash needs of one party were alone enough to entitle him to a trial on the validity of the settlement.".

4.2.5.7.2 Mistake and Changed Circumstances

Sometimes an agreement is made on the basis of an assumption of fact that simply turns out to be untrue---a "mistake," not discovered until sometime later. Where this mistake was shared by both parties---a "mutual mistake"---and was a "basic assumption on which the contract was made," which would have "a material effect on the agreed exchange of performances," courts have allowed the injured party to avoid the contract.

One classic example, beloved of all American law students, is a 19th-century case where the parties had made an agreement for the sale of a cow. The cow was assumed by both parties to be barren and unable to breed, and was sold at an "insignificant" price appropriate for cows intended for slaughter. It turned out, however, that the cow was in fact with calf---and therefore of great value---and the court allowed the seller to avoid the contract. The court held since "a barren cow is substantially a different creature than a breeding one," the cow was simply not in fact the animal that the seller intended to sell or the buyer intended to buy.

A more modern way of explaining the result in this case would be to say that under the circumstances, the risk of the cow’s turning out to be fertile should not be allocated to the seller. The way in which the parties fixed the price may be some evidence of their tacit assumption that the seller was not bearing this risk; to allow the buyer to keep the cow would not serve the purposes of Contract law, since it would give him a "windfall" that he had neither expected nor bargained for. The court might, however, allocate the risk to the seller in cases where the seller had acted out of "conscious ignorance"---aware that he had only limited knowledge with respect to the facts, but satisfied to treat this as sufficient.


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Where the mistake of fact is not "mutual," but "unilateral"---typically, where one party in fact knows the truth and, what is more, knows that the other party is proceeding on a mistaken assumption---we have in effect the problem of nondisclosure that I have already mentioned. In some cases, as we have seen, keeping silent in such circumstances can be seen by courts as equivalent to an affirmative misrepresentation.

In the cow case, the parties discovered after making the agreement that the true situation had, all along, been different from what they had originally supposed it to be. Similar questions can arise when there is no mistake of fact at all, but later events---equally unforeseen and unexpected---occur to affect the performance of a contract. The principle is limited to "extraordinary circumstances"---but such circumstances can sometimes make performance so vitally different from what was expected by the parties as to alter the essential nature of that performance; in such cases, the party adversely affected by the change may claim excuse from the contract. So, for example, a promisor may claim that:

• it has literally become "impossible" to perform the contract according to its terms. The leading English case of this type involved the burning down of the defendant’s music hall before the date when the plaintiff had contracted to rent it; the court held that "the music hall having ceased to exist, without fault of either party, both parties are excused." Another example is the death of an individual who has contracted to perform personal services---"it is sufficiently rare for a party to under take a duty to render personal service in spite of his death or incapacity that an intention to do so must be clearly manifested."

• the party’s performance, while not literally impossible, has become economically impracticable because of extreme and unreasonable difficulty, expense, injury, or loss. In the leading American case, a buyer agreed to take from the seller’s gravel pit all the gravel he needed for the construction of a bridge. After taking all the gravel above water level, he was excused from further performance: Although there was more gravel on the land, "it was so situated that the [buyer] could not take it by ordinary means, nor except at a prohibitive cost"---for all practical purposes, then, the situation was "not different from that of a total absence" of gravel.

• even though performance is neither impossible nor even "impracticable," circumstances have so drastically changed that the performance for which one party agreed to pay under the contract has simply become worthless to him---the purpose of the agreement has thus been "frustrated." In the leading case of this type, one party agreed to rent a room overlooking the planned route of the coronation procession of King Edward VII; the rental rate for this privilege was far in excess of the normal rental of the room. When the coronation procession was canceled because of the King’s sudden illness, the court allowed the renter to avoid the contract.


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The Uniform Commercial Code has generalized all of these cases in a provision limited to sellers, and which excuses a seller from liability "if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made." Here as with the cases of "mistake," determining whether a particular event was or was not a "basic assumption" involves a judgment as to which party assumed the risk of its occurrence. In contracts for the delivery of goods at a fixed price, the seller has obviously assumed the risk of increased costs within a normal range: Indeed, one of the reasons parties make contracts in the first place is to protect themselves against adverse changes in market conditions---neither an increase in cost, nor a rise or a decline in the market, can itself justify excuse, for that is exactly the type of business risk which fixed-price contracts are intended to cover. For this reason, cases where the principles of "impracticability" or "frustration" are actually applied to excuse a party’s performance remain quite rare.

Nevertheless, occasional dramatic events, resulting perhaps in a severe shortage of raw materials or of supplies due to war or crop failure, may sometimes justify a court’s conclusion that such events were not "sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part or the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances." As this comment suggests, the fact that an event was "unforeseeable" may be significant as suggesting that its non-occurrence was a "basic assumption" on which the contract was made: However, foreseeable and even foreseen events may qualify also, since the parties may not have thought it sufficiently important a risk to have made it the subject of explicit bargaining. "Virtually nothing is truly unforeseeable"---and the true task of a court should be to try to identify those occurrences which were or should reasonably have been part of the decisionmaking process and included in the negotiations leading to the contract.

4.2.5.7.3 "Contracts of Adhesion" and Unconscionability

As we have seen, contract law in its traditional form did not impose any requirement that an exchange be "fair" in order to be enforceable. The doctrine of consideration, as I discussed earlier, did not attempt to weigh the relative values of the things exchanged---the operative model was that of two parties of roughly equal bargaining power arriving, by a process of free negotiation, at a deal which they thought advanced both of their interests. Such a non-interventionist attitude was particularly suited to classical free-market economic theory and to the laissez faire capitalism of the late 19th and early 20th centuries which it served---encouraging actors in the marketplace to make the best deals they could, with confidence that those deals would be enforced no matter how one-sided.


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More recently, American law has taken a somewhat different approach. While still adhering to the general notion of "freedom of contract," both courts and legislatures have deemed it appropriate to engage in some greater degree of "policing" of bargains--- particularly in the area of "consumer" contracts where the free-market model seems to have the least legitimacy. As consumers, we are all familiar with the realities of this market: We all are familiar with the experience of being presented with a standard, printed form "contract" in situations where we have virtually no opportunity or ability to read, understand, or "bargain" about the terms---when, for example, we are buying a car or a computer, leasing a car or an apartment, opening up an account at a bank, or taking out an insurance policy. Such mass-produced agreements are given to us on a "take it or leave it" basis; we have no choice as to the terms, and indeed our only choice is whether or not to "adhere" to them---hence the term, "contracts of adhesion." Of course such transactions are an inescapable fact of contemporary life---it is hard to see how modern business could proceed without them, and there is nothing necessarily illicit about them. Yet challenges to the terms of these agreements are increasingly common, and courts have developed doctrinal tools for use in scrutinizing these contracts in an attempt to prevent the more extreme forms of unfairness and "indecency."

While in the past courts might attempt to police unfair contracts by use of the doctrines of "fraud" and "duress," or by construing contractual language in such a way as to favor the weaker party, these devices have in recent years been generalized and reinforced by a broader principle---that courts may refuse to enforce contracts, or terms of contracts, that were "unconscionable" at the time the contract was entered into.

The contours of "unconscionability" remain vague and ill-defined. The Code cautions that the principle remains "one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power": This is consistent with the links between "unconscionability" and the traditional law of fraud and duress; and it is also consistent with the continuing reluctance of courts to police bargains for substantive unfairness alone---reflecting their awareness that it is not usually thought of as part of their job description to redress fundamental imbalances in society's distribution of wealth. Although the main focus of ""unconscionability" is therefore on possible defects in the process of bargaining, it is true that "gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party," may certainly be relevant to the inquiry----they may at least "confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative . . . " It is common to say that "unconscionability" has two possible components---"procedural," involving abuses of the bargaining process, and "substantive," involving an unreasonable imbalance in "overly harsh" or "one-sided" terms; it is also commonly assumed that while both elements usually have to be present, they exist on a sliding scale---so that the more of one that is present, the less need there is to be able to find the other.


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The primary applicability of "unconscionability" has been in consumer contracts---in cases where terms hidden in a maze of hard-to-read "fine print," and obscured by difficult to understand "legalese," would otherwise lead to harsh and surprising consequences for the consumer. (This is not, however, exclusively true---cases can also be found where the beneficiary has been an "inexperienced" or "unsophisticated" small businessman.). Of course, regulation of consumer contracts is no longer left exclusively or even principally to the courts as an application of ordinary "contract law." In recent years heightened involvement in consumer protection has taken place on the part of state and federal legislatures and administrative agencies---which have shown particular interest in such matters as product warranties and defective consumer products, consumer credit, and the regulation of "unfair or deceptive acts or practices" in consumer sales. This development illustrates my earlier point that as particular fields of activity attract legislative interest and regulation, they become specialized areas that have simply been removed from the domain of "pure contract."

4.2.5.8 Remedies for Breach of Contract

1. Material Breach: Rescission and Restitution

2. Specific Performance as an "Exceptional" Remedy

3. Damages

a. "Expectancy Damages"

b. "Mitigation"

c. Reliance

d. Liquidated Damages


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4.3 COMPARING CONTRACT LAWS- America vs Europe

Several issues arise in an endeavor to compare contract laws from different countries. One question is what to compare. These materials mostly compare specific rules of contract law. For example, they observe that under American contract law, the party who makes an offer generally can revoke the offer at any time, while an under European contract law, the offeror generally must keep the offer open for a reasonable time. A comparative study might avoid considering specific rules or basic principles and just look at results; in other words, it could focus on the ultimate question of whether particular promises that are enforceable in one legal system would be enforceable in another. A second question is what to look for when comparing different laws. These materials mostly consider differences between American contract law and European contract laws. Differences are important because they show the non-inevitability of particular rules and thus invite questions about the policies underlying the rules. Differences thus often lead scholars to reconsider points that they previously had taken for granted. But focusing exclusively on differences has a disadvantage. By overlooking similarities, the approach may make legal systems seem more dissimilar than they actually are. A third question is how to assess the importance of differences between legal systems. Sometimes differences that appear significant when rules are compared directly to each other actually turn out not to matter very much. or instance, to return to the example above, Americans unlike Europeans can revoke offers without having to keep them open for a reasonable time. This difference at first may sound very important. But in reality, most people in both Europe and the United States in fact do keep offers open for a reasonable time; after all, the purpose of making offers is to obtain acceptance. A fourth question is how to observe differences between American and European contract law. These materials frequently compare rules stated in the Principles of European Contract Law to the rules in the Restatement(Second) of the Law of Contracts and the Uniform Commercial Code. But they also look at cases, especially those involving “choice of law” issues. In these choice of law cases, courts frequently determine that a contract is enforceable under one body of law but they would not be enforceable under another. The cases thus pin down and illustrate important differences that actually have arisen and that have had consequences worth litigating over.

4.4 MANDATORY RULES AND DEFAULT RULES

Contract law generally consists of two kinds of rules: mandatory rules and default rules. Mandatory rules are rules that the parties cannot waive or alter by agreement. For example, in both European and American law, the parties must act in good faith during the performance and enforcement of a contract. They cannot dispense with this requirement by consent, disclaimer, or otherwise. In this sense, good faith is a mandatory rule. By contrast, a default rule is a rule that applies only if the parties decide not to alter the rule. For example, as discussed in Section 7-1 below,


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American and European contract law contain the default rule that a prevailing plaintiff in a contracts lawsuit is entitled to recover damages measured by the difference between what the plaintiff expected under the contract and what the plaintiff actually received. But the parties have at least some ability to waive this rule. As explained in Section 7-5 below, the parties can agree in advance that the party in breach will have to pay a different measurement of damages. Although a comparative study of European and American contract law may reveal differences in default rules, these differences may not matter much in practice. If parties have the freedom to alter the rules, then they likely will alter them whenever the rules do not satisfy the needs of a particular transaction. So the rules ultimately applicable to European and American contracts, after modification by the parties, will resemble each other.


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Chapter 5

Case Analysis with respect to Evaluating Reasonableness of a

Contract

5.0 Introduction

From the foregoing it appears that there are several approaches to the question of how far a judge may go in evaluating the reasonableness of the contract’s content. An outline of the main features peculiar of each system follows below, so that we can understand how the different solutions are obtained.

5.1 Norway

In respect of contractual terms contained in general conditions, as well as in respect of individually negotiated terms, we have seen that Norwegian law has evolved from an approach that aimed at interpreting the general conditions restrictively on the ground that the parties accepting the conditions might not have been aware of the strict best provisions contained therein. This approach was used as an indirect control of the content of the provisions that mostly departed from the usual standard for similar contracts, and therefore as an indirect control of the provisions’ reasonableness. This approach was partially superseded when, in1983, the Acton Formation of Contracts was amended to contain, which openly permits the judge to directly set aside or modify terms of the contract that are not reasonable. This rule applies not only to general conditions, but also to individually agreed terms.

In determining the reasonableness of a provision, the judge may take into consideration, among other things, the remaining content of the contract, the position of the parties, the circumstances at the moment of entering in to the contract, subsequent circumstances.

The discretion of the judge is, according to this rule, rather broad; to restrict somewhat the scope of applicability is the reference to “the position of the parties” as a criterion for determining the reasonableness of the contract. If the parties are on an equal footing and


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there is no imbalance between their bargaining powers, the judge will be more reluctant to intervene on the contract, than if one of the parties was a consumer or in an evidently weaker contractual position than the other party.

Another limitation to the applicability of such clause is to be made in respect of the so called “Agreed Documents”. In certain branches of business, standard contracts have been developed as a result of negotiations between associations that represent each of the contractual parties: for example, in respect of construction or of freight, standard contracts have been negotiated between organizations representing each party of those types of relationship (both the principal and the constructor, both the carrier and the cargo owner). The result is contracts that represent the state of the art in respect of the contractual and commercial practice within that particular branch, as well as that they represent the most balanced compromise between the opposed interests of each of the parties. In view of the special quality of these contracts, the Supreme Court has been willing to enforce clauses that might otherwise have been deemed as unreasonable, as long as they were part of an Agreed Document.

5.2 Germany

In respect of general conditions of business, German law has a double approach similar to the Norwegian one. The first measure to ensure a fair use of general conditions is to restrict the scope of what is considered to be agreed between the parties: BGB provides that provisions contained in general conditions are not to be deemed a part of the agreement between theparties,if,accordingtothecircumstances,theyaresounusual,thatthe partyacceptingtheconditionscannotbeexpectedtohavetakenthemintoaccount. The second paragraph specifies that, in case of uncertainty, the interpretation shall be in favor of the party that has not drafted the conditions. This rule serves, as we have already pointed out, as an indirect control of the conditions’ content: if it departs significantly from the usual regulation of similar situations, it will not be given effect, on the ground that it was not agreed.

BGB provides a direct control of the conditions’ content: a condition is to be deemed as unenforceable, if it unduly and against the principle of good faith negatively affects the party that has not drafted it. It is specified that a condition may fall within the scope of this rule if it is not sufficiently clear and understandable. Moreover, an undue prejudice against good faith is (in case of uncertainty) to be presumed, if the Rt1994s. ,where the Supreme Court enforced a clause containing a limitation of liability in favor of the carrier, even if the damage to the cargo was due to the gross negligence of the carrier.

Condition is not conforming to the principles underlying the rules of law that the


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condition is derogating from. The rule does not sanction derogation from the law as such, because it is not referring to mandatory rules of law; it is the principles that inspire declaratory rules of law that are made reference to as a term of comparison and therefore as a guideline for what may be considered as an undue regulation against good faith. Moreover, it specifies that an undue prejudice against good faith is (in case of uncertainty) to be presumed, if the condition limits the rights and obligations arising out of the agreement in such a way that it prejudices the possibility to reach the purpose of the agreement.

Unlike Norwegian law, however, German law does not extend the rule on control of the contract’s content also to cover individually agreed terms. However, the rule that requires a party to perform its contractual obligations according to good faith and fair dealing, contained in BGB, is interpreted as having also a barrier function that prevents a party from abusing a right that it has according to the contract. In particular, this rule may be invoked to avoid enforcement of a contractual clause if the consequences of its enforcement are in a considerable imbalance compared to the situation (for example, termination of a contract as a consequence of an immaterial breach).

The rule of BGB, however, may not be invoked to correct the regulation of the parties’ interests as it is contained in the contract. In case of dramatically changed circumstances, the rule of BGB may be invoked to correct the regulation of the contract, but this is allowed only under exceptional circumstances and may not be looked upon as an ordinary means to correct a not very appropriate contractual regulation.

5.3 Italy

Italian law is less inclined than Norwegian and German law to control the content of a contract, whether directly or in directly. In respect of general conditions, the Codice Civile provides some measures to ensure that the party that has not drafted them as aware of them; however,

These measures are less invasive than the corresponding Norwegian and German rules. Article1341 provides that general conditions are binding on the parties if they were known or could have been known by the party that did not draft them. By specifying that they are binding if they could have been known, article1341 is putting on the party that has not drafted them the burden of acting diligently for obtaining knowledge of the conditions. For conditions that contain a particular prejudice of that party’s position, article 1341 requires, as a prerequisite for their en forceability, that the conditions are


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specifically signed. The requirement of the double signature should, in the intention of the rule, ensure that the conditions have been specifically approved. As long as the party that has not drafted the conditions has signed twice (once for the whole document and the second time for the conditions specifically referred to), the conditions become binding and enforceable, even if they contain a regulation that might be considered as unfair to that party.

In respect of individually agreed terms, Italian law does not provide measures to ensure that the content is reasonable. As we have seen above in paragraph3.4.3, the criterion of good faith is not a criterion that maybe used to correct the clear language of the contract or the balance of interests as regulated in the contract, and this is confirmed by both legal doctrine and judicial practice.

In some situations, specific statutory rules require the judge to substitute unreasonable contractual clauses; for example, art.1384 requires the judge to reduce the size of a contractual penalty, it if is manifestly to oonerous, andart.1526 requires reducing the size of the indemnity forrescission of a sale contract with reservation of title. However, withou t a specific statutory rule expressly justifying the replacement of a certain kind on unfair clause, the judge will not be allowed to modify the regulation agreed upon between the parties, even if it is unfair.

The criterion of good faith is used to ensure that the contract is performed properly (art. 1375), but this is more directed to ensure the accurate implementation of the rights and obligations as regulated in the contract, rather than to correct these rights and obligations to ensure a reasonable contractual regulation.


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5.4 England

English law is even less inclined than Italian law to regulate a director in direct control of the contract’s content.

Case law affirms also in England the rule that general conditions have to be brought to the attention of the party who has not drafted them, even more so, when their content is prejudicing this party’s position in an unusual way.

Beyond this, however, there seems to be little possibility to control the content of the general conditions. The Unfair Contract Terms Act of 1977, which applies principally to consumer contracts, extends to commercial contracts when these are entered in to on the basis of general conditions. However, as we have seen in section4.3.1 above, the act contains along series with exceptions that significantly reduce its scope of applicability to commercial contracts.

Case law had developed the theory of the fundamental breach of contract, according to which a condition limiting the liability of the party who drafted the general conditions could not been forceable, if the violation of contract for which that party would otherwise be liable amounts to a fundamental breach of that contract. The reasoning of this rule was that a fundamental breach of contract leads to a termination of that contract, and in case of termination of the contract also the condition limiting the liability would cease to have any effect. This rule, however, has been set to rest by the House of Lords in 1980: the House of Lords made reference to the Unfair Contract Terms Act that had been recently enacted, regulating the efficacy of limitation of liability clauses. The House of Lords pointed out that there is no need of a judicial rule on fundamental breach of contract to integrate the statutory rules, and it underlined that in the context of contracts between parties with equal bargaining power (which are the contracts that interest us here) the parties should be free to allocate the risk as they please and their regulation should be respected.

The attitude above described is even more valid in respect of individually agreed terms: the parties are free to regulate their interests as they deem fit.


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In their contract, and the interpreter has no possibility to correct the balance of interests agreed upon by the parties, not even if that is advisable for the sake of good faith or fair dealing.

If the parties had not included a clause on termination in the terms described above, the immaterial breach could not have been invoked as a basis for termination. This result, however, would not be achieved by applying the criteria of reasonabless or good faith that, as we have seen, are not present in English law. The result would be achieved applying the distinction between condition of contract and warranty. The former is used to describe those terms that go to the root of the contract; they are so fundamental, that a breach entitles the other party to terminate. Breach of a warranty, on the Other hand, entitles only to request reimbursement of damages. For the terms that are difficult to classify, English law has developed the category of intermediate terms, the breach of which may be basis for termination if they represented a substantial performance. By these categories, English law achieves in part the same objective of the Civil Law doctrines of good faith and reasonableness, i.e.it prevents the abuse of one party’s right. However, as already mentioned, this is not applicable if the parties have inserted in their contract a clause that entitles one party to terminate upon any breach, irrespective how immaterial the breach is.

5.5CISG

The CISG does not contain reference to good faith or fair dealing as a corrective of the contract’s content (the only reference to good faith, inarticle 7, is not directed at regulating the parties’ conduct, but the judge’s interpretation of the convention). The convention presents, as already pointed out, a series of rules that are meant to integrate the contract’s content. However, applicability of the convention’s rules may be in full or in part excluded by agreement of the parties, according to art. 6 CISG; therefore, it does not seem that there is any basis for assuming that the CISG contains rules or principles that may supersede the terms of the contract.


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5.6 Conclusion

As we did in the case of interpretation contracts, we see that Common Law and Civil Law take two opposite positions in respect of the possibility to control, directly or in directly, the content of a contract in accordance with principles of good faith or fair dealing. However, there is a significant difference of degrees within the Civil Law and Trans-national law systems that brings some of these systems closer to the Common Law than to the most extreme Civil Law Systems.

This may be noticed particularly in respect of contractual terms that were individually agreed: on one extreme we have the Norwegian system, that grants the judge discretion to modify the contract’s terms so as to correct a (not significant) imbalance between the parties, on the other extreme we have Italian law, that take a position similar to the English one and do not permit to override clear terms of the contract.

The differences between Common Law and Civil Law can be explained in light of the different role that the will of the parties plays in the respective systems. We have already seen that all examined systems gave a central role to the individual autonomy starting with the beginning of the 19th century, since this reflected the developments that were taking place in the European

Society from an industrial, commercial and social point of view. However, we saw that the systems of Civil Law had inherited a mitigation of this attitude through head option of the declaratory rules on the various types of contracts, which in turn stemmed out of the doctrine of natural law and were therefore based on the ideal of equitable justice. Moreover, the Civil Law systems evolved, particularly during the 20th century, granting more and more protection to the weaker contractual party.

Also the English legal system could have evolved in the same direction, since it contained the feature of the consideration that originated from the natural law’s elaboration of the Roman causa; as we have seen. English law maintains to this date the element of the consideration, whereas the systems based on German law have abandoned it and the Italian system attaches little practical importance to it. This, however, should not lead the observer to the conclusion that English law recognizes to the elementoftheconsiderationthesamesignificancethatthenaturallawyerssaw in it, and that therefore English law pays attention to ensuring an equitable content of the contracts. Quite to the contrary, the element of the consideration is essential for the existence of an en forceable contract, but the English judge is expected to ascertain the formal existence of the consideration, not to examine the adequacy of the consideration. Evaluating the adequacy of the consideration, i.e. verifying whether the contract is reasonable or not, is considered to be paternalistic, and is not in compliance with the expectations that English lawyers have in respect of their legal system. Even the equitable relief for a so-called unconscionable bargain,


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which could at first sight be deemed to be equivalent to an assessment of the transaction’s reasonability, is not meant to reinstate the balance between the contractual parties, but is based on its value as evidence that a fraud has taken place. A significant in adequacy of the consideration, in other words, might be considered as one of the elements to prove that a fraud has taken place and might therefore serve to exclude the enforceability of that contract even if the contract is binding at law. The question of ensuring reasonableness in the exchange, however, is not relevant at all. The attitude of English law towards the risk of being bound by a contract that is not reasonable is clearly expressed in the formula used by Lord Mansfield in 1778 and still often referred to: caveat emptor, the buyer has to pay attention. We have already pointed out that this is usually justified by reference to the central role that maritime and financial transactions have played and still play in the English system, whereby the interests of the operators are deemed to be better served by ensuring enforceability of the contracts according to their words rather than by intervening on the agreement between the parties in the name of an unpredictable justice.

Within the Civil Law systems the different degrees of importance given to the criterion of reasonableness can be explained in light of the different role that the judge has towards the law. We have already seen that the German system, influenced by the historical school, has always granted the judgea wide scope of evaluation of the legal rule’s purpose and application. The social situation following the First World War, with the dramatic hyperinflation, was the background for the Supreme Court’s active application of the general clause on good faith contained in BGB. This was used to revert the BGB’s focus on the will of the parties, and to privilege an equitable balance of the parties’ interests from a substantive point of view rather than the formal application of the words of the contract. Since then the German courts have applied so often and in so many active ways, that a systematization and classification of court practice requires about 800 pages in the most acknowledged commentary on BGB.

The same attitude is to be found in Norwegian law that not only is influenced by German law, but has traditionally a pragmatic approach to the law, aimed at creating substantive justice in the specific case rather than obeying by a blind respect of formalities.

Italian law, on the contrary, has an already mentioned positivistic approach that is difficult to combine with such a creative role for the judge. The legislator, however, has recognized the necessity to protect the interests of the weaker contractual party, and has issued a series of rules to correct excessive unjust consequences of unreasonable bargains, including also some general clauses that do not contain specific rules but reference to a general standard and would therefore give the judge a certain room for evaluation. These rules, however, are applied with the known positivistic approach.


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The evolution that the legal system’s focus has undergone during the past two centuries is clear. During the whole 21st century the focus was on the protection of the freedom of contract; this means the protection of the bargain that the parties have agreed to,and this again means an advantage for the stronger contractual party, that can impose unreasonable conditions to the other party and may rely on the legal system to enforce them. During the 20th century and even more in this early 21st century the focus is on the protection of the weaker party, particularly, but not only, of the consumer. The different roles of the judge highlighted above have permitted to obtain this evolution by judicial practice in Germany and in Norway, whereas England and Italy have requested the formal intervention of the legislator.

The trans-national compilations of principles take a middle-position, reflecting the modern necessity to protect the interests of the weaker party, but not adopting the most progressive solutions, probably for the sake of not alienating the consensus of the countries that have more formal traditions.


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Chapter 6

Cases comparing American and European Laws

6.1 GRATUITOUS PROMISES

6.1.1 MILLS v. WYMAN

Massachusetts Supreme Judicial Court 20 Mass. 207 (1825) * * * This was an action of assumpsit* brought to recover a compensation for the board, nursing, &c., of Levi Wyman, son of the defendant, from the 5th to the 20th of February, 1821. The plaintiff then lived at Hartford, in Connecticut; the defendant, at Shrewsbury, in this county. Levi Wyman, at the time when the services were rendered, was about 25 years of age, and had long ceased to be a member of his father’s family. He was on his return from a voyage at sea, and being suddenly taken sick at Hartford, and being poor and in distress, was relieved by the plaintiff in the manner and to the extent above stated. On the 24th of February, after all the expenses had been incurred, the defendant wrote a letter to the plaintiff, promising to pay him such expenses. There was no consideration for this promise, except what grew out of the relation which subsisted between Levi Wyman and the defendant, and Howe J., before whom the cause was tried in the Court of Common Pleas, thinking this not sufficient to support the action, directed a nonsuit. To this direction the plaintiff filed exceptions. PARKER C. J. General rules of law established for the protection and security of honest and fair-minded men, who may inconsiderately make promises without any equivalent, will sometimes screen men of a different character from engagements which they are bound in foro conscientiae to perform. This is a defect inherent in all human systems of legislation. The rule that a mere verbal promise, without any consideration, cannot be enforced by action, is universal in its application, and cannot be departed from to suit particular cases in which a refusal to perform such a promise may be disgraceful. The promise declared on in this case appears to have been made without any legal consideration. The kindness and services towards the sick son of the defendant were not bestowed at his request. The son was in no respect under the care of the defendant. He was twenty-five years old, and had long left his father’s family. On his return from a foreign country, he fell sick among strangers, and the plaintiff acted the part of the good Samaritan, giving him shelter and comfort until he died. The defendant, his father, on being informed of this event, influenced by a transient feeling of gratitude, promises in writing to pay the plaintiff for the expenses he had incurred. But he has determined to break this promise, and is willing to have his


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case appear on record as a strong example of particular injustice sometimes necessarily resulting from the operation of general rules. What a man ought to do, generally he ought to be made to do, whether he promise or refuse. But the law of society has left most of such obligations to the interior forum, as the tribunal of conscience has been aptly called. Is there not a moral obligation upon every son who has become affluent by means of the education and advantages bestowed upon him by his father, to relieve that father from pecuniary embarrassment, to promote his comfort and happiness, and even to share with him his riches, if thereby he will be made happy? And yet such a son may, with impunity, leave such a father in any degree of penury above that which will expose the community in which he dwells, to the danger of being obliged to preserve him from absolute want. Is not a wealthy father under strong moral obligation to advance the interest of an obedient, well disposed son, to furnish him with the means of acquiring and maintaining a becoming rank in life, to rescue him from the horrors of debt incurred by misfortune? Yet the law will uphold him in any degree of parsimony, short of that which would reduce his son to the necessity of seeking public charity. Without doubt there are great interests of society which justify withholding the coercive arm of the law from these duties of imperfect obligation, as they are called; imperfect, not because they are less binding upon the conscience than those which are called perfect, but because the wisdom of the social law does not impose sanctions upon them. A deliberate promise, in writing, made freely and without any mistake, one which may lead the party to whom it is made into contracts and expenses cannot be broken without a violation of moral duty. But if there was nothing paid or promised for it, the law, perhaps wisely, leaves the execution of it to the conscience of him who makes it. It is only when the party making the promise gains something, or he to whom it is made loses something, that the law gives the promise validity. * * * For the foregoing reasons we are all of opinion that the nonsuit directed by the Court of Common Pleas was right, and that judgment be entered thereon for costs for the defendant. Questions arise: 1. What promise by Wyman (the father and defendant) did Mills (the plaintiff) seek to enforce? Did the court hold that the promise was enforceable? Did Mills give Wyman anything in exchange for the promise? Did Mills rely on Wyman’s promise? 2. Was it possible for Wyman to make an enforceable promise to pay Mills? 3. Would Wyman’s promise be enforceable under European contract law?


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6.2 OFFER AND ACCEPTANCE

6.2.1 LEFKOWITZ v. GREAT MINNEAPOLIS

SURPLUS STORE, INC. Minnesota Supreme Court 86 N.W.2d 689 (Minn. 1957) MURPHY, Justice. This is an appeal from an order of the Municipal Court of Minneapolis denying the motion of the defendant for amended findings of fact, or, in the alternative, for a new trial. The order for judgment awarded the plaintiff the sum of $138.50 as damages for breach of contract.This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper: “Saturday 9 A.M. Sharp 3 Brand New Fur Coats Worth to $100.00 First Come First Served $1 Each” On April 13, the defendant again published an advertisement in the same newspaper as follows: “Saturday 9 A.M. 2 Brand New Pastel Mink 3-Skin Scarfs Selling for $89.50 Out they go Saturday. Each ... $1.00

1 Black Lapin Stole Beautiful, worth $139.50 ... $1.00 First Come First Served” The record supports the findings of the court that on each of the Saturdays following the publication of the above-described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules. The trial court properly disallowed plaintiff’s claim for the value of the fur coats since the value of these articles was speculative and uncertain. The only evidence of value was the advertisement itself to the effect that the coats were Worth to $100.00,” how much less being speculative especially in view of the price for which they were offered for sale. With reference to the offer of the defendant on April 13, 1956, to sell the “1 Black Lapin Stole * * * worth $139.50 * * *” the trial court held that the value of this article was established and granted judgment in favor of the plaintiff for that amount less the $1 quoted purchase price. 1. The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose


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notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms. Montgomery Ward & Co. v. Johnson, 209 Mass. 89, 95 N.W. 290; Nickel v. Theresa Farmers Co-op. Ass’n, 247 Wis. 412, 20 N.W.2d 117; Lovett v. Frederick Loeser & Co. Inc., 124 Misc. 81, 207 N.Y.S. 753; Schenectady Stove Co. v. Holbrook, 101 N.Y. 45, 4 N.E. 4; Georgian Co. v. Bloom, 27 Ga.App. 468, 108 S.E. 813; Craft v. Elder & Johnson Co., 38 N.E.2d 416, 34 Ohio L.A. 603; Annotation, 157 A.L.R. 746. The defendant relies principally on Craft v. Elder & Johnston Co. supra. In that case, the court discussed the legal effect of an advertisement offering for sale, as a one-day special, an electric sewing machine at a named price. The view was expressed that the advertisement was (38 N.E.2d 417, 34 Ohio L.A. 605) “not an offer made to any specific person but was made to the public generally. Thereby it would be properly designated as a unilateral offer and not being supported by any consideration could be withdrawn at will and without notice.” It is true that such an offer may be withdrawn before acceptance. Since all offers are by their nature unilateral because they are necessarily made by one party or on one side in the negotiation of a contract, the distinction made in that decision between a unilateral offer and a unilateral contract is not clear. On the facts before us we are concerned with whether the advertisement constituted an offer, and, if so, whether the plaintiff’s conduct constituted an acceptance. There are numerous authorities which hold that a particular advertisement in a newspaper or circular letter relating to a sale of articles may be construed by the court as constituting an offer, acceptance of which would complete a contract. J. E. Pinkham Lumber Co. v. C. W. Griffin & Co., 212 Ala. 341, 102 So. 689; Seymour v. Armstrong & Kassebaum, 62 Kan. 720, 64 P. 612; Payne v. Lautz Bros. & Co., City Ct., 166 N.Y.S. 844, affirmed, 168 N.Y.S. 369, affirmed, 185 App.Div. 904, 171 N.Y.S. 1094; Arnold v. Phillips, 1 Ohio Dec. Reprint 195, 3 West.Law J. 448; Oliver v. Henley, Tex.Civ.App., 21 S.W.2d 576; Annotation, 157 A.L.R. 744, 746. The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.” 1 Williston, Contracts (Rev. ed.) § 27. The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. The most recent case on the subject is Johnson v. Capital City Ford Co., La.App., 85 So.2d 75, in which the court pointed out that a newspaper advertisement relating to the purchase and sale of automobiles may constitute an offer, acceptance of which will consummate a contract and create an obligation in the offeror to perform according to the terms of the published offer. Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. Annotation, 157 A.L.R. 744, 751; 77 C.J.S., Sales, § 25b; 17 C.J.S., Contracts, §


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389. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff aving successful managed to be the first one to appear at the seller’s place of business to be served, as requested by the advertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale. 2. The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer. Payne v. Lautz Bros. & Co., City Ct., 166 N.Y.S. 844, 848; Mooney v. Daily News Co., 116 Minn. 212, 133 N.W. 573, 37 L.R.A.,N.S., 183. Affirmed.

Questions arise:

1. Was the advertisement in this case an offer? If so, why?

2. If the advertisement had contained the “house rule” limiting the sale to women, should the court enforce it? 3. How would a tribunal following the Principles of European Contract Law write the opinion in this case?


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6.3 TERMS OF CONTRACTS

6.3.1WEISS v. LA SUISSE

United States Court of Appeals for the Second Circuit 141 Fed. Appx. 31 (2d Cir. 2005) [This statement of facts comes from an opinion of the district court in the case: In 1989 and 1990, defendant La Suisse Life Insurance Company (“La Suisse”), a Swiss insurance company, acting through various agents, sold a number of life insurance policies to plaintiffs, who are members of the Orthodox and Hasidic Jewish communities resident in Rockland County and New York City. The insureds under the policies, which had a face value of either 50,000 or 100,000 Swiss francs (approximately 32,250 or 64,500 U.S. dollars at the current exchange rate), were all minor children at the time of the purchases. The face amount of the policy was payable to the beneficiary (who was, in most cases, the parent of the insured child) in the event the insured either (1) married or died prior to the end of the contract term, which ran for a term of either fifteen or sixteen years from the date of issue, or (2) survived to the end of the policy term. The economics of the policies were structured so that the annual premiums would risk that the child would either marry or die before the termination of the contract. The Court is advised that these unusual life insurance policies were quite popular in Switzerland, where people tend to marry later in life, if they marry at all,1 and the risk of having to make an early payout is quite manageable. However, it appears that the defendant sellers violated an insurer’s equivalent of the “know your customer” rule when they permitted the policies to be marketed among plaintiffs and their neighbors. Customs among many Orthodox Jews, particularly within the Hasidic community, are quite different than those in Switzerland. Marriage is the norm, and marriage at an early age (i.e., in the late teens and sometimes younger) is the rule, not the exception. As a result, the policies were a good investment for American Orthodox Jews. Papers before the Court indicate that as many as 7,000 policies were purchased in this State, of which at least half were sold by a Mr. Elias Horowitz of Bituswiss S.A. from his office in Monroe, New York. The purchasers apparently anticipated that they would work something like burial insurance, except that in most cases, the proceeds would be used to cover the cost of a wedding instead of a funeral. In fact, it is alleged that the agents who peddled them represented that they had been designed especially for the needs of the Orthodox Jewish community. That sales gambit worked, and the policies sold quite well. As a result, the claims began raining down on Lausanne in fairly short order. Therein lies the genesis o this lawsuit. In July 1997, the Court of Commerce in Zurich (Handelsgericht) held the same La Suisse policy at issue in this case invalid under Swiss law, on the ground that the policy violated Swiss public policy by pressuring young children to marry as early as possible. See Gutmann v. La Suisse Lebensversicherungs-Gesellschaft, No. U/O/HG950445 (Jul. 2, 1997). Faced with the voiding of their policies, plaintiffs, members of the Hasidic and Orthodox Jewish communities in New York State, commenced this action here in the United States. . . . 69 F. Supp.2d 449, 453-454 (S.D.N.Y. 1999). A jury held that La Suisse had violated the insurance contracts by refusing to


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pay them. On the issue of damages, La Suisse asked the district court to instruct the jury to subtract from the plaintiffs’ recovery the amount of the premiums that plaintiffs would have paid if the insured had not died or married by the end of the contract term. Although the insurance contracts did not provide expressly for this kind of offset, La Suisse argued that it was an implied term. The district court did not provide this instruction.] SUMMARY ORDER * * * On cross-appeal, defendants assert that the district court erred when it instructed the jury that it “must look to the terms and conditions of the policy” in order to determine whether La Suisse’s offset to benefits for unpaid premiums was permissible, and that if the policy did not provide for offsets, jurors could not “interpolate such a term into the contract.” Defendants argue that this instruction “flatly contradicts” their Swiss law expert’s opinion that La Suisse’s offset was permissible, but as the district court judge noted at trial when defendants objected to the instruction, defendants “cited . . . no Swiss law that suggests that the jury is allowed to interpolate terms where a contract is silent.” Having failed to provide the district court with Swiss law permitting offsets to benefits where a contract is silent on this issue, defendants have no basis for impugning the court’s jury instructions. * * *

Questions Arise:

1. Would it have been enough for the defendants to prove that Swiss law recognizes implied terms? Or would the defendants have to prove something else as well? 2. At least in other contexts, Swiss law may recognize implied contract terms. For example, Swiss bank account agreements reportedly have been held to contain implied terms requiring the banks to maintain certain kinds of secrecy. See John M. Ferguson, Swiss Bank Account “Secrecy” Today: More Holes than Cheese, 12 EMORY INT’L L. REV. 1131, 1134 (1998).


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6.4 INCORRECT INFORMATION OR MISTAKEN ASSUMPTIONS

6.4.1 SWINTON v. WHITINSVILLE SAVINGS BANK

Supreme Judicial Court of Massachusetts 42 N.E.2d 808 (1942) QUA, Justice. The declaration alleges that on or about September 12, 1938, the defendant sold the plaintiff a house in Newton to be occupied by the plaintiff and his family as a dwelling; that at the time of the sale the house “was infested with termites, an insect that is most dangerous and destructive to buildings”; that the defendant knew the house was so infested; that the plaintiff could not readily observe this condition upon inspection; that “knowing the internal destruction that these insects were creating in said house,” the defendant falsely and fraudulently concealed from the plaintiff its true condition; that the plaintiff at the time of his purchase had no knowledge of the termites, exercised due care thereafter, and learned of them about August 30, 1940; and that, because of the destruction that was being done and the dangerous condition that was being created by the termites, the plaintiff was put to great expense for repairs and for the installation of termite control in order to prevent the loss and destruction of said house. There is no allegation of any false statement or representation, or of the uttering of a half truth which may be tantamount to a falsehood. There is no intimation that the defendant by any means prevented the plaintiff from acquiring information as to the condition of the house. There is nothing to show any fiduciary relation between the parties, or that the plaintiff stood in a position of confidence toward or dependence upon the defendant. So far as appears the parties made a business deal at arm’s length. The charge is concealment and nothing more; and it is concealment in the simple sense of mere failure to reveal, with nothing to show any peculiar duty to speak. The characterization of the concealment as false and fraudulent of course adds nothing in the absence of further allegations of fact. Province Securities Corp. v. Maryland Casualty Co., 269 Mass. 75, 92, 168 S.E. 252. If this defendant is liable on this declaration every seller is liable who fails to disclose any non apparent defect known to him in the subject of the sale which materially reduces its value and which the buyer fails to discover. Similarly it would seem that every buyer would be liable who fails to disclose any nonapparent virtue known to him in the subject of the purchase which materially enhances its value and of which the seller is ignorant. See Goodwin v. Agassiz, 283 Mass. 358, 186 N.E. 659. The law has not yet, we believe, reached the point of imposing upon the frailties of human nature a standard so idealistic as this. That the particular case here stated by the plaintiff possesses a certain appeal to the moral sense is scarcely to be denied. Probably the reason is to be found in the facts that the infestation of buildings by termites has not been common in Massachusetts and constitutes a concealed risk against which buyers are off their guard. But the law cannot provide special rules for termites and can hardly attempt to determine liability according to the varying probabilities of


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the existence and discovery of different possible defects in the subjects of trade. The rule of nonliability for bare nondisclosure has been stated and followed by this court in Matthews v. Bliss, 22 Pick. 48, 52, 53; Potts v. Chapin, 133 Mass. 276; Van Houten v. Morse, 162 Mass. 414, 38 N.E. 705, 26 L.R.A. 430, 44 Am.St.Rep. 373; Phinney v. Friedman, 224 Mass. 531, 533, 113 N.E. 285; Windram Mfg. Co. v. Boston Blacking Co., 239 Mass. 123, 126, 131 N.E. 454, 17 A.L.R. 669; Wellington v. Rugg, 243 Mass. 30, 35, 36, 136 N.E. 831, and Brockton Olympia Realty Co. v. Lee, 266 Mass. 550, 561, 165 N.E. 873. It is adopted in the American Law Institute’s Restatement of Torts, § 551. See Williston on Contracts, Rev.Ed., §§ 1497, 1498, 1499. The order sustaining the demurrer is affirmed, and judgment is to be entered for the defendant. Keljikian v. Star Brewing Co., 303 Mass. 53, 55- 63, 20 N.E.2d 465. So ordered. Questions Arise: 1. Did the bank deceive Swinton by telling him something false or by hiding the termite damage? Why did the court say that the bank did not have to disclose the presence of termites? What advice would you give Swinton in buying a house? 2. How would the Swinton case come out under the Principles of European Contract Law? See Article 4:103(1)(a)(ii) quoted above. 3. What policy arguments does the court give in support of the rule that it applies? Can you think of any economic reason that one party should not have to disclose information to another?


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6.5 REMEDIES

6.5.1 ROCKINGHAM COUNTY v. LUTEN BRIDGE CO.

U.S. Court of Appeals for the Fourth Circuit 35 F.2d 301 (4th Cir. 1929) PARKER, Circuit Judge. This was an action at law instituted in the court below by the Luten Bridge Company, as plaintiff, to recover of Rockingham county, North Carolina, an amount alleged to be due under a contract for the construction of a bridge. The county admits the execution and breach of the contract, but contends that notice of cancellation was given the bridge company before the erection of the bridge was commenced, and that it is liable only for the damages which the company would have sustained, if it had abandoned construction at that time. * * * The facts out of which the case arises, as shown by the affidavits and offers of proof appearing in the record, are as follows: On January 7, 1924, the board of commissioners of Rockingham county voted to award to plaintiff a contract for the construction of the bridge in controversy. [On March 3, 1924, the county passed a resolution effectively repudiated the contract.] . . . At the time of the passage of the first resolution, very little work toward the construction of the bridge had been done, it being estimated that the total cost of labor done and material on the ground was around $ 1,900; but, notwithstanding the repudiation of the contract by the county, the bridge company continued with the work of construction. * * * [The court first discussed two unrelated questions.] Coming, then, to the third question—i. e., as to the measure of plaintiff’s recovery—we do not think that, after the county had given notice, while the contract was still executory, that it did not desire the bridge built and would not pay for it, plaintiff could proceed to build it and recover the contract price. It is true that the county had no right to rescind the contract, and the notice given plaintiff amounted to a breach on its part; but, after plaintiff had received notice of the breach, it was its duty to do nothing to increase the damages flowing there from. If A enters into a binding contract to build a house for B, B, of course, has no right to rescind the contract without A’s consent. But if, before the house is built, he decides that he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages. His remedy is to treat the contract as broken when he receives the notice, and sue for the recovery of such damages, as he may have sustained from the breach, including any profit which he would have realized upon performance, as well as any other losses which may have resulted to him. In the case at bar, the county decided not to build the road of which the bridge was to be a part, and did not build it. The bridge, built in the midst of the forest, is of no value to the county because of this change of circumstances. When, therefore, the county gave notice to the plaintiff that it


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would not proceed with the project, plaintiff should have desisted from further work. It had no right thus to pile up damages by proceeding with the erection of a useless bridge. The contrary view was expressed by Lord Cockburn in Frost v. Knight, L. R. 7 Ex. 111, but, as pointed out by Prof. Williston (Williston on Contracts, vol. 3, p. 2347), it is not in harmony with the decisions in this country. The American rule and the reasons supporting it are well stated by Prof. Williston as follows: “There is a line of cases running back to 1845 which holds that, after an absolute repudiation or refusal to perform by one party to a contract, the other party cannot continue to perform and recover damages based on full performance. This rule is only a particular application of the general rule of damages that a plaintiff cannot hold a defendant liable for damages which need not have been incurred; or, as it is often stated, the plaintiff must, so far as he can without loss to himself, mitigate the damages caused by the defendant’s wrongful act. The application of this rule to the matter in question is obvious. If a man engages to have work done, and afterwards repudiates his contract before the work has been begun or when it had been only partially done, it is inflicting damage on the defendant without benefit to the plaintiff to allow the latter to insist on proceeding with the contract. The work may be useless to the defendant, and yet he would be forced to pay the full contract price. On the other hand, the plaintiff is interested only in the profit he will make out of the contract. If he receives this it is equally advantageous for him to use his time otherwise.” * * * Reversed. Questions Arise:

1. In terms of the formula from the Restatement (Second) of the Law of Contracts § 347, how did Luten Bridge want to calculate its damages? On what grounds did the county oppose Luten Bridge’s calculations? Would the result be the same under the Principles of European Contract Law? 2. Toward the end of the opinion, the court quotes a famous treatise by Professor Samuel Williston. Professor Williston says: “If a man engages to have work done, and afterwards repudiates his contract before the work has been begun or when it had been only partially done, it is inflicting damage on the defendant without benefit to the plaintiff to allow the latter to insist on proceeding with the contract.” (Emphasis added.) Why would allowing Luten Bridge to recover the full contract amount inflict damages on Rockingham County but not benefit Luten Bridge?


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Chapter 7

Annexures

1. Sources of Contract Law a. Common Law, Judicial opinions: Contracts usually fall under common law, but

see Contracts for the sale of good, UCC i. The Restatements

b. Statutory Law i. UCC

c. Legal Commentary 2. An overview: Rollins v. Foster: A federal court may hear only claims involving fraud in

the inducement or the arbitration clause itself and not hear claims of fraud in the inducement of the contract as a whole or generally, and will decide in favor of enforcing an arbitration clause unless circumstances of unconscionability preclude a claimant from accessing a proper forum in which to adjudicate her claims.

a. See questions: 2,5,6,7,8 and 10 3. Types of Contract Formation

a. Express: formed orally or in writing i. In deciding whether a contract was formed the law uses objective intent. ii. Although parties must voluntarily contract, it does not mean that they must

be free of pressure. iii. Although a contract may be written or oral, the statute of fraud may dictate

that a contract be in writing. b. Implied: created by the conduct of one or both of the parties

i. Implied in law ii. Quasi-Contract

1. Promissory Estoppel 2. Restitution

c. A contract must include a promise: i. An undertaking to act or refrain from acting in a specified way at some

future time. The promise may be clear and express or implied. 4. Assent: no one may be bound in contract in the absence of that person’s assent.

a. A party must intend to manifest their intent to make a contract binding. The individual’s subjective intent is irrelevant.

i. The freedom to contract is limited by corresponding rights of other parties, the state’s legitimate interest, and regulations.

ii. There is an emphasis on objective appearance because a person should be held accountable for words or acts reasonably manifesting intent to contract.

b. Knowingly and willfully assented 5. The UCC

a. Sales of goods are governed by Article 2. b. The restatements supplement the provisions of the code unless displaced by

particular code provisions. c. The UCC is influential on the common law


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6. Elements of a contract a. Was there mutual assent – Offer and Acceptance? b. Was there Consideration? c. Are there any Defenses?

7. Mutual Assent: a contractual obligation should not be imposed upon a person who did not agree to be bound.

a. Courts use an objective test to determine if the parties manifested an intent to be bound.

b. Ray v. Eurice: Absent fraud or mutual mistake, one who has the capacity to read, reads the contract or has it read to him, and signs it, is bound.

i. Rstmt §20: The true test of offer and acceptance is what a reasonable person in the position of the parties would have thought it meant.

1. mutual assent 2. intent & manifestation

c. Park 100 Inv. v. Kartes: A person must use ordinary care and diligence to guard against fraud. However, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore intentional fraud practiced on the unwary.

d. Jokes: depends on whether is was reasonable for the non-joking party to believe that the other party was serious

i. Lucy v. Zehmer: a land-purchase contract was enforced over the seller’s contention that he had only been joking. Past dealings of the parties made it reasonable for the buyer to believe that the seller was serious.

e. See Questions: 3,4 (pg 51-2) and 1,2,3 (pg 57-8)

Classical System of Contract Law

8. Offer: a. Rstmt §24: An offer is the manifestation of willingness to enter into a bargain, so

made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

b. Ask i. Was there an expression of a promise, undertaking, or commitment to

enter into a contract? 1. Language 2. Relationship of the parties 3. Method of communication 4. Industry custom

ii. Was there certainty and definiteness in the essential terms? 1. Identity of the offeree 2. Price 3. Time of payment, delivery, performance 4. Quantity

a. See Requirements and Output contracts 5. Nature of the work 6. Duration 7. Subject matter

iii. Was there communication of the above to the offeree?


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c. Terminating an offer i. An offer is terminated:

1. Death 2. Destruction 3. Intervening illegality 4. Rejection 5. Time lapse 6. Revocation of the offer takes effect when it is communicated to the

offeree. a. Rstmt §43: The offeree’s power of acceptance can be

terminated anytime before it has been accepted when: i. The offeror takes action inconsistent with the

intention to enter into the proposed contract, and ii. The offeree acquires reliable information to that

effect ii. Limitations on the power to revoke, Option Contracts.

9. Acceptance: Only the offeree may accept the offer, must show a manifestation of intent. a. Mirror-Image Rule: Classical contract law, acceptance must be absolute and

unequivocal of each and every term of the offer. i. Poel v. Brunswick: If an acceptance varies any term of the offer, it is

deemed a rejection and a counter-offer. 1. Minority view: Last Shot Rule: under common law, where the

offer and acceptance had different terms, the party who gets their terms in last wins!

b. Under UCC 2-606: Acceptance of goods occurs when the buyer: i. signifies to the seller that the goods are conforming or that he will retain

them in spite of their non-conformity, after a reasonable opportunity to inspect them.

ii. fails to make an effective rejection – but does not occur until buyer had a reasonable opportunity to reject them.

iii. does any act inconsistent with the seller’s ownership; if such an act is wrongful, acceptance is ratified by the seller

iv. Note: acceptance of any part of a commercial unit is acceptance of the entire unit.

1. Also see: UCC 2-206, pg.29 c. Mailbox Rule: Acceptance is effective when it is sent, Rstmt §63; or when it is

put out of the offeree’s possession; i. however a rejection is effective when received.

d. Performance: a contract may be accepted by performing the act or a timely promise to do so.

i. Rstmt §32 ii. UCC 2-206

10. Counter-offers: any additional or different terms in the acceptance is a rejection of the offer and a counter-offer.

i. Counter-offers:§39 –


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1. (1) A counter-offer is made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

2. (2) An offeree’s power of acceptance is terminated by his making of a counter offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

a. The counter-offer is designed to protect parties against being bound to a contract they didn’t agree to.

ii. But see, UCC §2-207 for additional or different terms in contracts for the sale of goods.

1. A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless:

a. acceptance is expressly made conditional on assent to the additional or different terms

b. The additional terms are to be construed as proposals for addition to the contract. Between merchants, such terms become part of the contract unless:

i. the offer expressly limits acceptance to the terms of the offer;

ii. they materially alter it; or iii. notification of objection to them has already been

given or is given within a reasonable time after notice of them is received.

1. If additional terms fail the above test they can still be incorporated if there is an express waiver of limitation.

c. The parties will only be held to the terms to which they agreed.

2. Non-Merchants: Brown Machine v. Hercules: Any additional material terms not included in the original offer were not incorporated into the contract because the original offeror did not expressly assent to the additional terms.

3. Merchants: Dale Horning v. Falconer Glass: Were both parties are merchants, additional or different terms added by one of the parties becomes part of the contract unless they materially alter the prior agreement.

iii. 11. Contract Formation

a. Unilateral v. Bilateral: the offer is probably bilateral if there is some doubt that an offeree can do it.

b. Bilateral contracts:


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i. Lonergan v. Scolnick: Rstmt §25; Before a contract can be formed there must be a meeting of the minds of the parties as to a definite offer and acceptance.

ii. Normile v. Miller: A qualified acceptance is a counter offer. An offer or counter-offer can be revoked any time before acceptance. Furthermore, terms that indicate that an acceptance must be received by a certain date/time do not create an option contract but are conditions of the offer.

iii. See Questions: 1,2,3(pg 62-4) and 1,3 (pg 71-2) c. Unilateral Contracts:

i. Peterson v. Pattberg: An offer to enter into a unilateral contract may be withdrawn at any time before performance is completed.

1. Classical unilateral contract: Brooklyn Bridge example required completed performance to accept the offer.

ii. Cook v. Coldwell Banker: Introduced the concept of substantial performance. The offeror cannot revoke after substantial performance but the offeree must complete or attempt to complete the act.

1. Classical contract v. Modern contract: a. Asks: did the offeror receive any benefit from the offeree’s

actions that were made in an attempt to accept the offer. Cook says it matters, Pattberg says it doesn’t.

2. Rstmt §45: An option contract is created when the offeree tenders or begins the invited performance.

a. Tender can be the first in a series of payments iii. Duldulao v. St. Mary Nazareth: An employee handbook or other policy

statement creates enforceable contractual rights if the traditional requirements for contract formation are present.

1. Per Pine River, the language must include: a. A clear enough statement that an employee would

reasonably believe that an offer has been made. b. The statement is disseminated to the employee in such a

manner that the employee is aware of its contents and reasonably believes it to be an offer

c. The employee accepts the offer by commencing or continuing to working after learning of the policy statement.

2. Efforts to decrease employee rights have been resisted on the grounds of lack of consideration.

a. Torosyan v. Boehringer: If an employee handbook reduces an employee’s benefits, continued employment does not indicate acceptance of those new terms. Torosyan argues that the employee is offered a “false choice.”

iv. See problem 2-1 v. Very few offers today are unilateral, with 2 exceptions

1. the contract states that the only appropriate form of acceptance is completion of performance


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2. offers to the public, such as rewards, in which a bilateral contract is inappropriate

d. Conditional v. Illusory Promises i. Conditional promises: the promissor’s commitment is triggered by an

event or happening that is outside the promissor’s control. ii. Illusory promise: promise is cloaked in language of commitment but it is

so qualified that the promisor makes no binding commitment at all. 12. Consideration:

a. Classical test of CONSIDERATION = i. Bargained for exchange ( + ) ii. Provides a benefit to the promisor or a detriment to the promisee. (court

mostly cares about a detriment to the promisee) 1. Bargained for exchange test (Baehr) – need reciprocal inducement. 2. Pre-existing duty – if a duty is created between two parties, new

consideration is required to change the agreement. a. Beware of: gifts, unsolicited actions by the promissee, and

past consideration. iii. Consideration can be

1. Tangible 2. Legal Entitlement 3. Anxiety

a. Conscience and morals are not consideration. iv. A benefit to the promisee is irrelevant

1. Hamer v. Sidway: a waiver of any legal right at the request of anther party is sufficient consideration.

2. Baehr v. Penn-o-Tex: Forbearance to bring a lawsuit is consideration if the forbearance was bargained for and not merely for convenience sake on the unilateral part of one party.

b. Gifts are not bargained for and cannot meet the consideration requirement: i. Look to see whether the act or forbearance by the promisee benefited the

promisor although the benefit does not need to be financial. ii. Dougherty v. Salt: Cardozo says a note not supported by consideration is

unenforceable. Using the language “value received” is not sufficient. 1. Gifts:

a. Executed gift: the surest way to guarantee that a gift is completed is to simply give it

b. Testamentary gift: A party can also create a will, a “last testament” to make sure that a gift is executed.

c. Gift in trust: The giftor could also make a gift in trust. iii. Tramp Hypo: “if you walk around the corner to the clothing shop you may

purchase an overcoat on my credit.” c. Past consideration is insufficient

i. Plowman v. Indian Refining Co.: past services are not consideration to support the enforceability of a contract to provide continuing payments to former employees.


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1. Motives of love, respect, or affection cannot support a promise without consideration.

ii. Exceptions: 1. Promise to pay for a legally discharged debt 2. Promise to pay for a requested past act

d. Adequacy of consideration: i. Courts are not concerned with the adequacy of consideration. Batsakis v.

Damotsis ii. Rstmt §79 – gross inadequacy of consideration is evidence of fraud,

duress, mistake, lack of capacity, or undue influence. iii. Illusory promises – will not serve as consideration because it makes no

binding commitment on the promisor. 1. Elvis Hypo: “I’ll sell you my bike if Elvis returns.”

iv. Sham consideration – is a contract recites that consideration was given, and it never was, a court will find no consideration.

1. Peppercorn Hypo: “I’ll sell you my bike for a peppercorn.” v. Policy issue: A has a debt of $1M and at the same time promises B $1M.

The court may allow A to rescind gift to B because markets prefer that debtors are paid before gifts are given.

vi. See Problem 2-2 13. Promissory Estoppel and Restitution

a. Promissory Estoppel - Rstmt§90: (a minority of courts don’t accept reliance, only fraud gets estoppel.)

i. (1) A promise is binding if: 1. The promisor should reasonably expect to induce action or

forbearance on the part of the promisee or 3rd party, and 2. Does induce such action or forbearance, and 3. Injustice can be avoided only by enforcement of the promise.

ii. (2) A charitable subscription is binding without proof of detrimental reliance.

iii. Promises within the family 1. Kirksey v. Kirksey: To be legally enforceable, an executory

promise must be supported by sufficient, bargain-for consideration. a. Benefit-Detriment Test: In this 1845 case the court uses the

“benefit-detriment test” – did the promisor receive a benefit from the promisee, and did the promisee receive a detriment because of those actions.

2. Greiner v. Greiner: Promises reasonably inducing definite substantial actions are binding if injustice can be avoided only by enforcement of the promise.

3. Wright v. Newman: A promise enforceable under promissory estoppel is that a promise can be implied, it is not necessary that it is express.

a. A promise based on reliance on a mistake in fact is not enforceable. Smith v. Dept of Human Resources. pg. 154

iv. Charitable Subscriptions


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1. Allegheny College v. Nat. Chautauqua Bank: When the promisor requires that the promisee do anything for the promise, there is adequate consideration present, if the promisee is a charitable organization.

2. King v. Boston U.: Where donative intent is sufficiently clear, the court will give effect to that intent to the extent possible without abandoning basic contract principles, such as reliance.

v. Promises in a Commercial Context 1. Katz v. Danny Dare: The application of the doctrine of promissory

estoppel does not require the relinquishment of a legal interest (consideration), but reliance on a promise.

a. c.f. Hayes v. Plantation Steel: The mere existence of a promise and anticipation of its benefit is not sufficient for promissory estoppel; there must be reliance on the promise.

2. Shoemaker v. Commonwealth Bank: To establish a promissory estoppel cause of action, a party must prove that the promisor made a promise that he should have reasonably expected would induce action or forbearance on the part of the promisee, the promisee actually took action or refrained from taking action in reliance on the promise, and injustice can be avoided only by enforcing the promise.

a. Rstmt §69: Acceptance by silence or dominion, pg. 151. b. Restitution: Unjust Enrichment

i. Generally applies in the case of an emergency or if the actor acted expecting payment.

ii. Quasi-Contract: 1. The plaintiff has conferred a benefit on the defendant; 2. The defendant had knowledge of the benefit; 3. The defendant accepted the benefit conferred; and 4. The circumstances are such that it would be unjust for the

defendant to retain the benefit without paying fair value for it. a. You need a specific claim for injustice b. Under traditional contract theory, injustice only occurs if

you are induced into a contract through fraud. iii. Health & Safety:

1. Acted with intent to charge 2. Things or services were necessary to prevent harm 3. Person supplying them had no reason to know the other would not

consent. 4. Impossible for the other to give consent

iv. Preservation of Property: 1. In lawful possession or lawfully took possession 2. Services were not necessary because of person’s own breach. 3. No reason to believe that the owner would not want services 4. Intended to charge or retain as his own 5. The owner has accepted the property


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v. Restrictions on unjust enrichment: 1. Wade Test – One is entitled to restitution if . . .

a. acted without intent to act gratuitously b. confers a measurable benefit c. if affords the other an opportunity to decline, or d. if there is a reasonable excuse for failing to do so e. Restitution is not required if one performs a duty imposed

by law. 2. Exceptions: Enforceable instances of past consideration

a. a promise to pay a debt no longer enforceable by the statute of limitations, Rstmt §82

b. promise made by an adult to perform a duty imposed by a promise made as an infant

c. promise to pay a debt discharged in bankruptcy, Rstmt §83 vi. In the Absence of a Promise

1. Glenn v. Savage: A gratuitous act for the benefit of another does not five rise to a duty to pay therefore.

2. Subcontractors: Commercial Partnership v. Equity Contracting: Where an owner has given consideration for the subcontractor’s work by paying out the contract for the work, the unpaid subcontractor’s claim must fail.

a. The reasoning is that the subcontractor entered into the contract with the general contractor and should suffer the breach, instead of the owner paying twice for the work.

3. Cohabitants: Watts v. Watts: Unmarried cohabitants may raise claims based upon unjust enrichment following the termination of their relationships when one party attempts to retain an unreasonable amount of the property acquired through the efforts of both.

vii. Promissory Restitution – Moral Obligation 1. Mills v. Wyman: A moral obligation is insufficient consideration

for a promise a. Moral consideration is not enforceable, Rstmt §82

2. Webb v. McGowin: A moral obligation is sufficient consideration to support a subsequent promise to pay when the promisor has received a material benefit. One the presumption that a request would have been made for the services, if possible.

a. Material Benefit Rule: Rstmt: §86 – a promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

i. Promises made in the heat of passion: in Harrington v. Taylor, a neighbor was injured when she prevented the neighbor from stabbing the neighbor’s husband. The court found that a subsequent promise to pay was not enforceable.


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14. Obligation in the Absence of Complete Agreement: a. Pre-Acceptance Reliance:

i. An offeree’s detrimental reliance may transform a revocable offer into an irrevocable one, R§87(2).

ii. James Baird v. Gimbel Bros: Promissory estoppel will not be applied in cases where there is an offer for exchange, as the offer is not intended to become a promise until consideration is received.

iii. Drennan v. Star Paving: A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of a promisee and which does induce such action of forbearance is binding if injustice can be avoided only by enforcement of the promise.

1. The effect of this decision puts the burden of accuracy on the subcontractor, the sub has the best control over the bid.

iv. Compare Baird and Drennan: 1. Language:

a. Baird: contract said that express acceptance is required b. Drennan: did not request express acceptance

2. Timing a. Baird: subcontractor revoked before offer was accepted by

state. b. Drennan: subcontractor revoked after offer was accepted by

state. b. Business Practices

i. Berryman v. Kmoch: Limits the Drennan rule by requiring detrimental reliance and enforcement of consideration.

1. Also, the promisor was not bound to do anything although he claimed the promisee was bound to hold the option open without consideration.

ii. Pop’s Cones v. Resorts Int’l: A promise is enforceable if it is intended to or it is reasonably foreseeable that it will induce detriment to the promisee.

15. Option Contracts & Firm Offers a. Promise to keep an offer open for a period of time is revocable unless there is

consideration. i. Once the offeror is given consideration for keeping the option open the

promise is binding. b. Reliance on an option without consideration.

i. Rstmt §87(2) A promise if enforceable to avoid injustice. The offeree must prove that the promise was deliberately made with the reasonable expectation of inducing her to rely on it, and

1. She did rely on it, and 2. She suffered some detriment as a result

c. Irrevocability Statute: Firm Offers under UCC 2-205 i. The offer must be made by a merchant ii. The offer must be in writing iii. It must assure the offeree that it will be held open


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iv. If the assurance is on a form supplied by the offeree, the offeror must sign the assurance separately.

v. If these requirements are met, the offer is irrevocable for the time stated or a maximum of 3 months.

1. If the option is to last longer than 3 months, the promise requires consideration.

2. Mid-South Packers v. Shoney’s: In the absence of a requirements contract, each sale of a product to a purchaser carries its own contractual terms.

vi. An offer can be accepted several times. 16. Postponed Bargaining: Agreement to Agree:

a. UCC 2-204: A contract with one or more open terms does not automatically fail if:

i. the parties intended to make a contract, and ii. there is a reasonably certain basis for determining a breach .

b. R§27: A contract does not fail if the parties intended to adopt a writing; but the failure to adopt a writing may suggest preliminary negotiations.

c. UCC 2-305: an “open price” term does not necessarily invalidate a contract if the parties intend to be bound.

i. Exception: Walker v. Keith Where essential terms, such as price, are not contained in an option contract and no standards are included whereby it may be judicially determined, no contract exists.

ii. To be enforceable and valid, a contract to enter into a future covenant must specify all material and essential terms and leave nothing to be agreed upon as a result of future negotiations.

d. Quake Construction v. AA: Although letters of intent may be enforceable, such letters are not necessarily enforceable unless the parties intend them to be contractually binding.

e. Agreements to agree must be executed in good faith.

Principles of Interpretation & Parol Evidence

17. Contract Interpretation: General Rules of Instruction a. Contracts are construed as a whole b. Words are construed according to their ordinary meanings, unless it is clear they

were meant to be used otherwise. c. For inconsistent provisions, types or hand-written provisions will prevail over

boiler-plate type provisions d. Courts will look for custom and usage

i. Past dealings ii. Course of performance iii. Course of dealing/trade usage

1. Trade usage: did the other party have reason to know of the other party’s interpretation.

e. Courts prefer to interpret contracts as valid and enforceable f. Ambiguities are construed against the drafting party, Rstmt §206

i. In ambiguous contracts, consider: 1. Language


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2. Preliminary negotiations 3. Trade usage

a. Rstmt §222: Usage of trade b. Rstmt §223: Course of dealing c. UCC §2-105: Course of dealing & usage of trade

4. Course of performance a. UCC §2-208: Course of performance

5. Legal standards 6. Interpretive maxims

ii. Joyner v. Adams: The determination of whether a party to a contract had knowledge of the other party’s interpretation is essential to properly enforce a disputed provision of an agreement.

iii. Frigaliment v. B.N.S. Importing: The party who seeks to interpret the terms of the contract in a sense narrower than their everyday use bears the burden of persuasion to so show, and if that party fails to support its burden, it faces dismissal of its complaint.

18. Doctrine of reasonable expectation: (applies to adhesion contracts) a. Contract should be interpreted in light of the objective reasonable expectations of

the insured b. The objective reasonable expectations of the average insured will be applied

where the party did not receive full and adequate notice of the provision. and i. the policy provision is question is unusual or unexpected, or ii. the policy provision effectively emasculates the apparent coverage; iii. Some activity, prior to contracting, created an objective impression of

coverage as to a reasonable insured; iv. Some act by the insurer, prior to contracting, caused this particular insured

to reasonably believe that he has coverage, although such coverage is denied by the policy

c. Ask: i. Is this a standard form? ii. Is it an adhesion contract? iii. Is there a serious imbalance of bargaining power? iv. Can we apply the reasonable expectation doctrine?

1. Is the term bizarre? or 2. Is it oppressive? or 3. Does it eviscerate:

a. non-standard terms that were explicitly agreed to? or b. the dominant purpose of the contract?

i. C&J Fertilizer v. Allied Mutual Ins.: A provision of an insurance contract may not contravene the reasonable expectations of the insured.

Parol Evidence

19. Parol Evidence Rule -- Rstmt §213 a. Peerless case: where two ships were named peerless, the court found no mutual

assent and therefore no contract.


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b. The rule is based on the assumption that the final draft of a contract is intended to supersede earlier negotiations.

i. Includes all evidence, both oral and written, of alleged terms not incorporated into the written contract.

ii. Purpose of the rule is to shield the jury from irrelevant or unreliable information. the efficient use of the court’s time by excluding dubious information, and encourages efficient transacting by making people put their entire agreement in writing.

iii. Evidence of terms incorporated after the writing is a modification and is not affected by the Parol Evidence Rule.

20. Williston: 4-Corners Rule: the question of integration should be determined from the 4-corners of the writing, without resorting to other evidence of the actual intent of the parties.

21. Arizona view: 2 part test: (This test arose from the Corbin view that is now reflected in the restatements)

a. Court considers evidence that is alleged to determine the extent of integration, illuminate meaning, demonstrate intent

b. Parol evidence rule exclude admission of anything that would vary or contradict the meaning of the writing.

i. Taylor v. State Farm: A judge must first consider the offered evidence and, if they find that the contract language is “reasonably susceptible” to the interpretation asserted by its proponent, admit the evidence to determine the meaning intended by the parties.

22. Corbin: Intention of the parties: “The parties must have intended to have the terms of their complete agreement embraced in the writing.”

a. Application: Parol Evidence Rule applies when: i. A written agreement has been executed, ii. It was adopted by both parties, iii. It is primarily concerned with oral or written communications made prior

to or contemporaneous with the writing. iv. The rule does not bar all parol evidence

1. If a writing is vague or ambiguous, parol evidence is necessary to resolve the ambiguity.

v. A two-stage process: the judge determines admissibility and the jury determines credibility.

b. UCC: §2-202: Parol evidence cannot contradict the writing, but it may add consistent additional terms, unless:

i. There is a merger clause ii. The court determines that based on the circumstances, that the writing was

intended as a complete statement of the terms c. Under 2-202: Terms may also be supplemented by:

i. The course of dealing or trade usage, §1-205 ii. The course of performance or practical construction, §2-208

23. Is the writing integrated? a. Is it intended as a final expression? b. Is it a complete or partial integration?


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i. A merger clause strengthens the presumption that all negotiations were merged in the written document.

ii. If the writing is not a complete and final record, it is said to be partially integrated or unintegrated.

c. Thompson v. Libby: Where a contract is complete on its fact, parol testimony is inadmissible to vary its terms.

d. Sherrod v. Morrison-Knudson: A written contract may be altered only by a subsequent contract in writing or by an executed oral agreement.

i. The fraud exception of the rule applies only when the alleged oral promise does not directly contradict the terms of the express written contract, Continental Oil.

e. Nanakuli v. Shell Oil: Trade usage and past course of dealings between contracting parties may establish terms not specifically enumerated in the contract, so long as no conflict is created with the written terms.

The Obligation of Good Faith and Other Implied Terms

24. Rationale for Implied Terms a. Good-Faith: Wood v. Lady Duff-Gordon: While an express promise may be

lacking, the whole writing may be instinct with an obligation – an implied promise – imperfectly expressed.

b. Notice of Termination: Leibel v. Raynor: Reasonable notification is required in order to terminate an ongoing oral agreement creating a manufacturer-distributor relationship.

i. §2-309 requires reasonable notice. 25. Implied Warranties

a. UCC §2-214: Implied Warranty of Merchantability; Usage of Trade, pg. 49 b. UCC §2-315: Implied Warranty of Fitness for a Particular Purpose, pg. 53

i. Caceci v. Di Canio: The “Housing Merchant” warranty imposes by legal implication a contractual liability on a homebuilder for skillful performance and quality of a newly constructed home.

26. Implied Obligation of Good Faith a. UCC §2-306: Output, Requirements, and Exclusive Dealings

i. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a state estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

ii. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed, an obligation by the seller to use best efforts to supply the goods and by the buyer to use the best efforts to promote their sale.

1. Empire Gas v. American Bakeries: A buyer in a requirements contract may decide to buy less than the contract estimate, or even buy nothing, so long as the buyer acts in good faith, but good faith requires more than mere second thoughts about the terms of the contract.


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b. Rstmt §205: Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

i. Locke v. Warner Bros: Where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.

ii. E.I DuPont v. Pressman: A franchise agreement that can be cancelled at the will of the franchisee lacks mutuality and, therefore, cannot be enforced by the franchisee.

Defenses to Enforcement

The Statute of Frauds – noncompliant contracts are unenforceable; however a party may be

able to recover under the unjust enrichment doctrine or promissory estoppel.

27. Rstmt: General Principles a. Rstmt §110 lists the types of agreements that must be in writing. Some examples

are: i. a contract that is not to be performed within 1 year from the making ii. a contract for the sale of goods priced at $500 or more – UCC §2-201 iii. contract to answer for the duty of another, generally not enforceable unless

it was made to a creditor to whom the debt is owed. Rstmt §112. iv. a contract to create an interest in land

1. includes: leases for more than 1 year; easements of more than 1 year; fixtures; minerals or structures (also see UCC §2-107); and mortgages.

v. a contract in consideration of marriage b. Rstmt: §132: Several Writings, pg.157 c. Rstmt: §133: Memorandum not made as such d. Crabtree v. Elizabeth Arden: (Rstmt §131 & §132) The Statute of Frauds does not

require the memo. expressing the contract be in one document. It may be pieced together out of separate writings, connected with one another either expressly or by the internal evidence of subject matter and occasion.

e. Winternitz v. Summit Hills JV: A leasehold interest in land for a term of one year or more that is not in writing and signed by the party creating it, has the force and effect of an estate or interest at will only.

i. If the court determines that a contract exists, even though it is not in writing, it can enforce it under tort law.

f. Alaska Democratice Party v. Rice: A promise which the promisor should reasonably expect to induce action or forbearance is enforceable notwithstanding the Statute of Frauds, if injustice can be avoided only be enforcement of the promise.

g. A non-compliant contract may be enforced to prevent injustice and if: i. the party has not other available remedies, and ii. the party definitely and reasonably relied on the contract, and iii. the actual reliance corroborates the evidence of a contract, and iv. the reliance was foreseeable by the promisor v. one party maliciously interfered with a contractual relationship, Winternitz

28. UCC: Statute of Frauds: §2-201


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a. A contract for the sale of goods for $500 or more must (1) i. be in a writing sufficient to indicate that a contract exists, ii. signed by the party against whom enforcement is sought iii. indicates the quantity of goods considered.

1. If quantity is misstated the quantity is only enforceable to the quantity stated. However, other misstated terms may be corrected.

b. A contract between merchants, satisfies the requirements above, if within a reasonable time (2)

i. the writing must be sufficient against the sender ii. received by the party against whom enforcement is sought

1. the receiving party has reason to know of its contents iii. any objection to its contents must be given within 10 days of receipt.

c. If a contract does not satisfy the requirements above, but is otherwise valid, is enforceable if:

i. the goods are specially manufactured for the buyer ii. party against whom enforcement is sought admits in court that a contract

for sale was made iii. payment has been made and good delivered and accepted.

1. Buffaloe v. Hart: A contract is taken out of the Statute of Frauds if there is sufficient evidence of part performance; that is, if the seller delivered goods and the buyer accepted them.

d. Bazak v. Mast Industries: Annotated purchase order forms, signed by the buyer, sent to the seller, and retained without objection, fall within the merchant’s exception, and satisfy the requirement of a writing without the seller’s signature.

i. Under common law the buyer was bound by issuing a purchase order but the seller was not bound to perform, §2-201 changes this.

Incapacity

29. Minority a. Contracts by minors are voidable at their option, but not all of them.

i. Binding contracts include: 1. public policy issues, ie. bail bonds 2. statutory, ie. student loans 3. where the law requires performance without a contract, ie.

supporting a child) ii. *Necessities – minors can disaffirms contracts for necessities but they are

liable for a the value of any benefit furnished to them. b. If a minor disaffirms a contract and they still have the consideration in their

possession, they must return it or make restitution. If they don’t have it anymore, they are not liable for its value.

i. Dodon v. Shrader: If a minor’s contract is rescinded, the merchant may keep an amount equal to the decrease in value of the items returned rather than refund the full purchase price. (infant auto buyer v. seller of truck)

c. Restrictions: i. The infant can only disaffirm the contract during infancy or within a

reasonable time thereafter.


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d. The Sale of Goods: UCC §2-403 – A purchaser of good acquires all title which his transferor had or had power to transfer. pg. 63

i. If a minor sells goods, the purchaser acquires good title. e. Also see, Rstmt §14, pg. 145

30. Mental Incompetence a. Contracts entered into by incapacitated people are voidable, except when a person

is adjudged incompetent, those contracts are void. i. Contracts are voidable when the incapacity would be obvious to a

reasonable person – the infirm has no obligation to make restitution if consideration is consumed or dissipated.

1. such contracts are voidable if the other side hasn’t performed yet. ii. If the other side did not take advantage of the infirm person and had no

reason to know of the infirmity – the contract is only voidable if the infirm can make restituition.

1. Hauter v. Union State Bank of Wautoma: A contracting party exposes itself to a voidable contract where it is put on notice or given a reason to suspect the other party’s incompetence such as would indicate to a reasonably prudent person that inquiry should be made of the party’s mental condition.

b. Includes those who are insane, mentally retarded, senile, intoxicated, in shock, etc.

i. Consider the individuals particular infirmity and how complex the transaction is to determine incapacity.

c. If a party regains competence, they can uphold or disaffirm the contract. d. Where incompetents are concerned, there is a heightened possibility of fraud,

duress, or the like. e. The Sale of Goods: UCC §2-403 – A purchaser of good acquires all title which

his transferor had or had power to transfer. pg. 63 f. Also see, Rstmt §15 & §16, pg. 146

Duress, Misrepresentation & Undue Influence

31. Duress – one party’s assent is induced by any wrongful act or threat. a. Two Prong Test:

i. A wrongful threat and circumstances permitted no other alternative, and ii. Such circumstances were the result of coercive acts of the other party.

1. Economic duress requires a showing that the defendant’s intentional acts caused plaintiff to enter into transaction. Totem.

a. A desperate need for cash is insufficient for duress, must be caused by defendant. Selmer

b. Four classes of duress i. Violence (or threats of it); ii. Imprisonment (or threats of it); iii. Wrongful seizing or holding the plaintiff’s goods or land (or threats to do

so); iv. Anything else (blackmail, civil suit, etc.)

1. Threat of a legitimate lawsuit is not duress. c. Duress renders the contract voidable at the option of the innocent.


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i. If they haven’t performed yet they can void it; if they have performed, they can get back the excess over what they fairly paid or the market value.

d. Generally courts look to see whether the duress was caused by the other party. i. Totem Marine v. Alyeska Pipeline: A contract can be voided by the

innocent if it was entered into as a result of economic duress caused by the other party.

32. Undue Influence a. 7 Factor of Undue Influence: (not all need to be present)

* the parties have a special relationship of trust and/or confidence

i. unusual or inappropriate time ii. unusual place iii. demand to finish at once iv. emphasis on consequences of delay v. multiple persuaders vi. no 3rd party advisors vii. not allowed to talk to attorneys or advisors

1. In Keithley, the court found Undue Influence with only 5 of the 7 factors.

b. Odorizzi v. Bloomfield SD: When a party’s will has been overborne, so that in effect his actions are not his own, a charge of undue influence may be sustained.

33. Unconscionability – courts use this doctrine sparingly! **used to prevent oppression and/or unfair surprise**

a. Two part test: (note if strong factors on one side, need less on the other) b. Procedural: an unfair bargaining process c. Substantive: terms of the contract “shock the conscience”

i. Terms that depart from expectations created by the customs of the relevant marketplace and which are not clearly disclosed in an understandable manner to the other party at the formation stage.

1. Williams v. Walker-Thomas: The defense of unconscionability is judicially recognized.

2. Rollins v. Foster: If a party is in an unfair bargaining position and is compelled to arbitrate and the cost of arbitration is prohibitive so that the party unable to bring her claim – the arbitration clause is oppressive and one-sided: unconscionable.

d. Evidence of Unconscionability 1. Rstmt & UCC: 2-302: terms are generally harsh, unfair, or unduly

favor one of the parties, or a gross imbalance of bargaining power. ii. Unfair surprise

1. Adhesion contracts – where one party is an inferior bargaining position and is forced to adhere to the terms dictated by the other party. Ie. life insurance policies, loan agreements, etc.

a. Elements of an adhesion contract: i. Form is printed and contains many terms and

clearly purports to be a contract. ii. Form was drafted by or on behalf of one party


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iii. The drafting party participates in numerous transactions and routinely enters into transactions of the same type.

iv. The form is presented to the adhering party with the representation that the terms are non-negotiable. The condition may be explicit or implicit.

v. After dickering over open terms, the document is signed by the adherent.

vi. The adhering party enters into few transactions of the type.

vii. Principle obligation of adhering party is the payment of money.

2. Piantes v. Pepperidge Farm: Unconscionability must be determined on a case-by-case basis, with particular attention to whether the challenged provision could result in oppression and unfair surprise to the disadvantaged party.

e. Unequal bargaining power i. The bargaining power is very one-sided

1. American Software v. Ali: The test for unconscionability is whether the bargain is so one-sided as to “shock the conscience” and whether there was some bargaining impropriety resulting from surprise or oppression.

ii. Other factors: 1. no alternative 2. lack of education 3. end result is extremely unfair, Williams v. Walker-Thomas

Fraud

34. Fraud a. Occurs where one party obtains the other party’s assent to a contract by

misrepresenting a material term. b. Renders the contract voidable at the option of the defrauded party. c. 4 elements of fraud are: [from Park 100]

i. a material misrepresentation of past or existing fact by the party to be charged, which

ii. was false, iii. was made with knowledge or in reckless ignorance of the falsity, iv. was reasonably relied upon by the complaining party, and v. proximately caused the complaining party injury.

35. Misrepresentation – Occurs when one party misrepresented a material facts and motives and if the recipient was justified in relying on these facts.

a. Requires actual, reasonable reliance b. Syester v. Banta: If fair to do so, equity may relieve a party from the

consequences of a release executed through a mistaken belief of fact. c. Damages:

i. Out-of-pocket rule: plaintiff receives the difference between what she paid and the fair value of what she received, plus consequential damages.


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ii. Benefit of the bargain rule: plaintiff is returned to the position that she would have been in if the defendant had spoken truthfully.

36. Nondisclosure – occurs when a seller knows of facts materially affecting the value of property, which are not readily observable and are not known to the buyer, the seller has a duty to disclose them. Hill v. Jones.

a. Nondisclosure: Rstmt §161(b): When non-disclosure is equivalent to an assertion, pg. 160.

b. Laidlaw v. Organ: a buyer does not have the same duty to disclose as a seller. Especially when the facts are publicly disclosed.

i. Courts will give less protections to the seller because sellers are in better positions to identify defects and inspect products.

c. Exceptions: i. Public Information ii. Statements of Opinion

1. Generally cannot reasonably be relied upon, unless the party misrepresented their state of mind. Rstmt §169, pg. 161

iii. Some courts have held that parties do not need to disclose information that is outside the property/home.

1. Landfills, except for NJ 2. Sex offenders as neighbors

d. Law & Economics Analysis i. Parties should not have a duty to disclose information that is casually

acquired and which requires a costly and deliberate investigation – because it is socially desirable to give parties an incentive to acquire information.

37. Public Policy a. Blue-Pencil rule: the court can “shrink” clauses to make them enforceable b. Contracts between married couples in contemplation of services like nursing care,

are unenforceable as a matter of public policy. Marriage duties are owed to spouses personally, and cannot be contracted for. Marriage contemplates love, affection, consortium, etc. Borelli v. Brusseau.

i. Borelli dissent: people should be able to contract for things like on-going care.

c. Contracts that conflict with statutes i. Generally a distinction is drawn between regulatory statutes that are

designed to protect the public and revenue-raising measures. A violation of a revenue-raising statute will not generally prevent enforcement of the contract. See, Rstmt §181, pg. 164.

d. Rstmt §178: When a contract is unenforceable on public policy grounds, pg. 163 e. Non-compete covenants must be reasonable.

i. Reasonableness is measured by a limit on time and location. ii. Solari test: they must protect a legitimate interest, impose no undue

hardship, and cause no injury to the public. Karlin v. Weinberg. 1. Ask:

a. Is it ancillary?


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i. Rstmt §188: Ancillary restraints on competition, pg. 164.

b. Is it reasonable? c. Is there undue hardship? d. What is the public interest?

f. R.R. v. M.H.: contracts that allow a biological parent to “sell” their parental rights are against public policy.

No contract

Mutual Mistake?

Parol Evidence

Yes – mutual assent is present

Illiterate – bound, Rollins

Unilateral mistake – bound

Side agreement – not bound

Objective Manifestation

Not to enter contract To enter contract

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OVERVIEW

1. UCC or Restatments? 2. Is there a contract?

a. If no: i. Is promissory estoppel an appropriate remedy?

1. Promise? 2. Promissor should reasonably expect reliance? 3. Actual reliance? 4. Can injustice be avoided?

ii. If promissory estoppel is not a remedy, is unjust enrichment available as a remedy?

1. Plaintiff confer benefit on the defendant? 2. Did defendant have knowledge of the benefit? 3. Did defendant accept the benefit?

a. Exception is health and safety, rstmt of restitution 116 4. Is it unjust? Intent to charge; not gratuitous.

iii. Does the party have a cause of action in promissory restitution? 3. If yes, a contract was formed. 4. Is there a writing? Includes any intentional reduction to tangible form

a. If yes, did the parties intend the writing as a final expression of their agreement? i.e. is there a merger clause?

i. Yes, the writing is completely integrated. 1. Apply the parol evidence rule to evidence of agreements or

negotiations prior to or contemporaneous with the writing. 2. Does the evidence fall within one of the 6 exceptions?

a. Is it an oral or written agreement made after the writing? b. Is it a collateral agreement, with separate consideration or

would naturally be omitted from the writing? c. Was an important term was accidentally omitted from the

writing? d. Is the contract subject to an oral condition precedent? e. Is there evidence of fraud, duress, undue influence,

incapacity, mistake or illegality? i. Conservative view: Any evidence of fraud cannot

contradict the express terms of the contract, Continental Oil

f. If the writing is not completely integrated, is there evidence offered to explain the meaning of the contract.

g. UCC exceptions: evidence of a prior or contemporaneous agreement may be supplemented or explained by evidence of course of performance, course of dealing, or usage of trade. Nanakuli; Frigaliment, “What is chicken?”

3. If no, the evidence is not admissible for the following policy reasons:

a. to exclude dubious evidence, b. avoid confusing juries with unreliable information,


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c. slippery memory, d. encourage efficient transacting,

i. Sherrod (duty to read) e. But, may exclude truthful evidence

4. If yes, the evidence is admissible, but cannot contradict the express terms of the agreement.

b. No, the parol evidence does not apply to evidence that does not contradict the meaning of express terms.

5. What are its implied terms? Does the contract fall under the UCC? a. If yes, the following terms are implied under the UCC unless disclaimed or

excluded. i. Good Faith Obligation, UCC 1-201 (19)

1. honesty in fact in the conduct or transaction concerned. 2. If a Requirements or Output contract, implied obligation of good

faith is held to an objective standard, UCC 2-306 ii. Warranty of Merchantability, UCC 2-314, p49 iii. Warranty of Fitness for a Particular Purpose, UCC 2-315, p50 iv. See UCC 2-316 for Exclusion or Modification of Implied Warranties v. See UCC 2-209 for Modification, Recission, or Waiver

b. If no, the following terms are implied in the common law i. Good Faith, Rstmt 205

6. What defenses are available to the breaching party? a. Incapacity

i. Minority ii. Mental Incompetence iii. Intoxication

b. Duress i. An Improper Threat – look for a threat to breach

1. Economic Duress, Totem Marine ii. No Reasonable Alternative

c. Fraud i. Misrepresentation

1. State of mind: Intentional, Negligent, Innocent 2. Justifiable Reliance 3. Misstatement of Fact

ii. Nondisclosure d. Undue Influence, 7 factors + special relationship e. Unconscionability

i. Weigh procedural and substantial f. Statute of Frauds g. Public Policy


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Chapter 8

BIBLIOGRAPHY

Ansay, Tugrul, and Wallace, Don, Introduction to Turkish Law, (Turkey, Society of Comparative Law, 1978)

Clarke, A., Malcolm, The Law of Insurance Contracts, (London, Insurance Law Library- Informa, 2006)

Gooley, J.V., and Carvan, J.C., The Principles of Contract Law, (Australia, Legal Practices Update Pty Ltd, 1992)

Jaske, P., Ernest, The Law and Principles of Insurance In Australasia, (Australia, The Law Book Company of Australasia Pty Ltd, 1948)

Lowry, John, and Rawlings, Philip, Insurance Law: Doctrines and Principles, (North America, Hart Publishing, 2005)

Pynt, Greg, Australian Insurance Law: A First Reference, (Australia, LexisNexis Butterworths, 2008)

Sutton, Kenneth, Insurance Law in Australia, (NSW, The Law Book Company Limited, 1991)

Insurance Contracts Act 1984 (Cth)

The Guideline Reference to Inform Concerning Insurance Contracts 2007 (Law no: 26360)

Turkish Insurance Law 2007 (Law no: 5684)

Turkish Code of Obligations 1926 (Law no: 818)

Turkish Commercial Code 1956 (Law no: 6762)

American Law Institute, Restatement of the Law, Second, Contracts 2d (E. Allan Farnsworth, rptr. 1981) (American Law Institute Publishers) (three volumes) Commission on European Contract Law, Principles of European Contract Law, Parts I & II (Ole Lando & Hugh Beale, eds. 2000) (Kluwer Law International, ISBN 90-411-1305-3) Commission on European Contract Law, Principles of European Contract Law, Part III (Ole Lando et al., eds. 2003) (Kluwer Law International, ISBN 90-411-1961-2)


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Farnsworth, E. Allan, Contracts (4th ed. 2000) (Aspen Publishers) (ISBN 0735545405) Foster, Nigel G., German Law & Legal System (1993) (Blackstone Press Ltd., ISBN 1-85431-248-0)

: Nicole Kornet, Contracting in China: Comparative Observations on Freedom of Contract, Contract Formation, Battle of Forms and Standard Form Contracts, vol. 14.1 ELECTRONIC JOURNAL OF COMPARATIVE LAW, (May 2010), <http://www.ejcl.org/141/art141-1.pdf>.

Wang KuiHua, Chinese Commercial Law (Oxford New York Melbourne: Oxford University Press, 2000), p. 62. Zhang, Chinese Contract Law. Theory and Practice, supra note 2, p. 139.

The Internet Legal Resource Guide http://www.ilrg.com

ILRG Law School Course Outlines Archive http://outlines.ilrg.com

LawRunner: A Legal Research Tool http://www.lawrunner.com

American Contract Law http://docs.law.gwu.edu/facweb/gmaggs/maggs-augsburg.pdf

Prenuptial and Postnuptial Contract Law in the USA - Dr. R. Standl

Ling, Contract Law in China, supra note 2, p. 113.