international contracts – common law and civil law juliet reingold sascha kuhn ariel nachman...

International Contracts – Common Law and Civil Law

Juliet ReingoldSascha KuhnAriel Nachman

Simmons & Simmons Tel Aviv, Israel 16 June 2010

ACC ISRAEL ANNUAL CONFERENCE

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© Simmons & Simmons 2009

International contracts – common law and civil law

Comparison – common law - v - civil law systems

Drafting styles

Concept of good faith

Differences at the pre-contract stage

Substantive differences in contractual terms in common law and civil law contracts

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Comparison: common law versus civil law systemsSystem Feature Common Law Civil Law

Continuity of Legal system Evolutionary Revolutionary

Major Source of Law Custom and Practice Legislative Statutes

Reliance on precedent Yes (Strong) No (Weak)

Judicial role in law-making Active and creative Passive and technical

Role of Legal Scholarship Secondary and peripheral Extensive and influential

Judicial review of Statutes & Executable Actions Yes No

Major Decision Stage Trial Investigation and examination

Trial Format Accusatorial/confrontational Inquisitorial/collaborative

Use of Argument and Debate Extensive and fundamental Modest and restrictive

Style of Legal Reasoning Inductive Deductive

Trial Emphasis on: Procedural correctness Factual certainty

Evidentiary Rules Formal and restrictive (exclusionary rule) None (all evidence considered)

Role of Lawyers during trial Primary Secondary

Function of lawyers Debate and oppose Advise and inform

Judge’s role during trial Referee/umpire Director/examiner

Selection of judges Political appointment from practising lawyers Merit advancement from judicial specialists

Status of judges Political VIPs Mid-level civil servants

Citizen trial participation Juries Members of judicial panels

Appellate review focus Procedural Procedural and substantive

Unity of Court Structure Unified Court structure Diffused Court structures (multiple specialised courts)

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Drafting styles and techniques

The style of negotiating and drafting documents varies from legal system to legal system

Rules of interpretation mean that parties to common law contracts are encouraged to specifically cover every detail, whereas a more all-encompassing ‘spirit of the agreement’ approach is taken in civil jurisdictions

As business becomes increasingly international, there is a trend towards a standardisation of contract terms

BUT…

– it is important to understand the different approaches taken, so as to ensure clarity and avoid ambiguity

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Role of good faith in the two legal systems

One of the fundamental differences between common and civil law contracts

Good faith ‘not recognised’ in English law

– Freedom of contract

But

– Misrepresentation, Mistake, Duress, Illegality, Frustration

– Statute

Civil law jurisdictions often actively impose ‘good faith’ type duties

– Italy: duty to negotiate in good faith

– Germany: contracts interpreted with ‘trust and good faith’ (‘Treu und Glauben’)

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Role of good faith in the two legal systems (continued)

If a Party is required to act in good faith under civil law, there could be increased obligation to:

– inform the other side of all relevant points that it could not discover otherwise during negotiation

– observe reasonable diligence in the performance of pre-contractual and contractual obligations

– exercise caution when varying terms in pre-contractual letters of intent or withdrawing from negotiations without reasonable justification

May need to manage the role of good faith:

– Negotiating specific circumstances in which party will be liable for damages if negotiations breakdown

– Try to avoid references to negotiating or acting in good faith

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Differences at the early stages Pre-contractual obligations

Common Law

No liability if negotiations break down

‘Agreements to agree’ are not legally enforceable

Civil Law

Some jurisdictions allow liability for unfairly breaking off negotiations (for example France or Germany)

Commencement of negotiations can itself lead to contractual relationship between parties (i.e. Germany’s vorvertragliches Schuldverhältnis)

NB: Common and Civil jurisdictions both have remedies for mistake and misrepresentation

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Differences at the early stagesNegotiations

Common Law

Detail needs to be spelled out – hard to get wording changed or rectified at a later stage by the English courts

Entire agreement clauses mean that English courts will not ‘look behind’ contract to negotiations to aid interpretation

Civil Law

Emphasis on the common intention of the parties – even provisions that are clear can be modified if they do not properly reflect the intentions

Discussions and pre-contractual negotiations are used to assist interpretation

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Differences in the substance of a contract drafted under common law as opposed to civil lawDescription of Parties/Recitals

English Law

It is usual to provide a brief description of the Parties, including the full legal name of the contracting entity, its address and place of incorporation

Recitals are considered subordinate to the main body of the contract, and so less emphasis is put on them when a dispute arises

German / Italian Law

More elaborate descriptions of the Parties are often given, including details from the Company register, tax identification codes, and power of attorney information

Recitals are seen as the basis of the contract and are absolutely crucial in any interpretation following a dispute

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Signatories

Both common and civil jurisdictions have individual quirks

Often need to check specific jurisdiction/seek the advice of local counsel

EU legislation provides that an EU Company’s directors have authority to sign, so there is some reassurance

In Germany, need to ensure the Company’s constitutional documents grant those who are acting on behalf of the organisation the power to bind it

Power of Attorneys and signing authorities need to be scrutinised

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Consideration

English Law German Law Italian Law

Cannot enforce voluntary promises

‘Bargains’ – each party must do something for the other

Court will not assess whether the consideration is fair (can be nominal)

No past consideration or consideration where one party is already legally obliged to act

BUT a promise contained in a deed is enforceable, even without consideration

In practice, lack of consideration is rarely an issue

Consideration is not necessary under German law for a binding contract to be entered into, but lack of consideration may change the nature of a contract (i.e. from a sale to a gift)

Under Italian law, contracts can be sinallagmatici, in which case each party has a reciprocal obligation toward the other party (e.g. sale), and contracts containing just one party’s obligations (e.g. gift)

Contracts can also be commutativi, in which case each party is certain that he will have to perform an obligation (e.g. lease), or aleatori, in which case a party could or could not be asked to perform his obligations according to some unforeseeable future events (e.g. insurance)

According to the category of each contract, different sets of rule (e.g. those concerning the fairness of the consideration) apply

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Price and other terms


Freedom of contract – Parties can agree whatever price they want, even if it may appear unfair to an outsider

In Germany, the agreement of a price which is too low could constitute usury (Wucher) or could otherwise offend public morals (sittenwidrig)

Under Italian law, the Judge can terminate the contract if the price is disproportionate because one of the parties entered into such contract in a dangerous situation or in a situation of need

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Gap-filling


Freedom of contract – Courts will rarely complete bargains for the Parties by gap-filling

Equally courts are reluctant to fill in the gaps – if the Parties mean something it should be included

Terms can be implied if the Parties meant to include them or unanimously assumed that they were a given

The contract must specify the essential elements of the agreement. If any elements are missing (for instance if no consideration is mentioned) the ‘fall back’ rules are provided by the rules of interpretation (written statutes, jurisprudence, and spirit of agreement)

Where ‘fall back’ rules do not lead to a result, the courts will look to the hypothetical will of the Parties to determine what provisions should have been included

The essential elements of the contract (i.e. the will of the parties, the object and the purpose or causa) must be specified

Typical contracts (i.e. those regulated by the law) enjoy specific default rules provided by the law

The courts can fill gaps by interpreting the will of the parties

Most legal systems will void a contract if not sufficiently certain, but there are usually legal provisions for ‘filling in the gaps’

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Penalty Clauses/Liquidated Damages


Penalty clauses are not enforceable. This is distinct from liquidated damages clauses, where Parties may recover only their reasonable pre-estimate of expected actual loss

Penalty clauses can be permissible, but are not allowed in standard terms of business in a consumer to business relationship. If the penalty is unreasonably high (even in a business to business relationship), it can be reduced by the court

Penalty clauses are permitted, but the court can reduce the amount of the penalty in case it is disproportionate in relation to the value for the creditor of the performance by the debtor

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Exclusion of liability


Under English law you can sue for the ‘loss of a bargain’ and recover reasonably foreseeable losses caused by a breach of contract

Often Parties exclude liability for reasonably foreseeable losses that are potentially very large

German position is similar to that in England. However, liability for intentional harm or grossly negligent behaviour can never be excluded in advance

It is harder to limit liability in consumer contracts

Liability for intentional harm, for gross negligence and for the breach of statutory law provisions cannot be limited

Special provisions apply to weak counterparts (e.g. consumers)

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Force majeure


No specific doctrine

In extreme cases, the doctrine of frustration/impossibility might apply

Provisions for force majeure are drafted in contracts accordingly

Generally applicable doctrine of force majeure

In practice, the concepts of disappearance of the basis of the transaction (Wegfall der Geschaftsgrundlage) and impossibility (Unmoglichkeit) may relieve a party of its obligations

A party is not liable for the breach of a contract if such breach is due to an external factor which made the performance impossible (Impossibilità sopravvenuta)

The concept is slightly wider than the concept of force majeure: it also includes all the cases in which the performance becomes extremely difficult or expensive

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Unilateral changes to the contract


Unilateral provisions are common, i.e. reference to a Party’s standard terms ‘as amended from time to time’

Unilateral provisions about performance are allowed in very few cases only

In the absence of clear wording, the courts will be slow to interpret a contract as containing unilateral provisions

Unilateral changes to the contract may be allowed

Some regulated subjects (e.g. banks, telecommunication providers, highways) can unilaterally modify the terms of their contracts with a general notice

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Third party rights


Third parties cannot acquire rights under a contract unless they are a party to it, subject to some exceptions instigated by statute

Most commercial contracts specifically exclude the Contract (Rights of Third Parties) Act 1999, so third parties do not usually have rights

Provisions for third parties need to be considered and drafted explicitly (obligations for third parties cannot be established)

If there are no specific third party provisions in a contract, the courts may infer third party rights from the circumstances

It is possible to add in a contract provisions in favour of third parties

However, such provisions can be modified or eliminated before the acceptance by such third party

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Special contract counterparties – i.e. government


Contracts with government come under normal contract law, although remedies like specific performance are unlikely

Care needs to be taken when dealing with local authorities- they can be acting ultra vires and therefore agreements might not be valid

Contracts with government entities are not always governed by German private law

Although it is not an explicit concept, the German courts recognise a doctrine similar to the common law ultra vires

Contracts with public entities are generally governed by private law

The case law recognizes the power of any public administration to enter into any contract which could be useful in the pursuit of such public administration purpose

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Avoiding the pitfalls

‘False Friends’ – words look the same but have different meanings (i.e. execution of a contract – signature or performance?)

Even similar legal concepts may differ a lot in detail – quote the exact term; provide a good translation of the legal concept

Be aware of ‘Euro English’

Keep things short and simple

In negotiations, be sure to explain exactly what you mean if wording is in two different languages

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Conclusion

As transactions become increasingly complex, we are more likely to operate in unfamiliar jurisdictions

It is crucial to be aware of the areas where there may be significant differences between the law we are used to and the law we are working with

We have examined a few areas today, but there are others so vigilance is needed

It is necessary to inform our commercial colleagues of areas where their normal expectations may not apply and to alert them to areas where extra care is needed

It is also important to understand how factors inherent in different legal systems influence the way contracts get negotiated and drafted so as to make the contracting process as effective as possible

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Any questions please contact:[email protected]@[email protected]

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