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International Business International Business LawLaw

The formation of The formation of business contractsbusiness contracts

Avv. A. SaccomandiEuropean School of EconomicsRome, 18 Jan 2010

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What is a contract ? What is a contract ? It is a voluntary agreement entered into It is a voluntary agreement entered into

by the partiesby the parties It allows parties to regulate their It allows parties to regulate their

relationship in a certain wayrelationship in a certain way It provides It provides certainty / securitycertainty / securityNOTE:All contracts are agreements, but not all agreements are contracts !There has to be a distinction between: agreements recognised by law as legally binding not binding agreementsA contract is an agreement with specific characteristics

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1.1. Compliance with any required formalityCompliance with any required formality

2.2. Offer and acceptanceOffer and acceptance

3.3. Capacity of the partiesCapacity of the parties

4.4. In common law jurisdiction, the presence of In common law jurisdiction, the presence of “consideration”“consideration”

5.5. Contractual intentionContractual intention

6.6. Absence of any potential invalidating factors, Absence of any potential invalidating factors, such as mistake, illegality, duress, and so onsuch as mistake, illegality, duress, and so on

Requirements of a contract :Requirements of a contract :

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1. Compliance with any required 1. Compliance with any required formalityformality

Also an Also an oraloral contract can be valid, but contract can be valid, but howhow may the parties may the parties proveprove its conclusion ? its conclusion ?

Common sense suggests that – if the contract is Common sense suggests that – if the contract is

complicated / involves significant sums of money – complicated / involves significant sums of money –

written evidence is essential written evidence is essential

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1. Compliance with any required 1. Compliance with any required formalityformality

For some contracts writing formality is mandatoryFor some contracts writing formality is mandatory::

Example of formal requirement is the Example of formal requirement is the notarial act notarial act ((document drawn up and signed by a document drawn up and signed by a notary): notary): sale/mortgage contracts often require formal sale/mortgage contracts often require formal requirementrequirement

Formal requirementFormal requirement

absence of writingabsence of writing contract VOIDcontract VOID(no effect)(no effect)

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1. Compliance with any required 1. Compliance with any required

formalityformality Evidential requirementEvidential requirementTo prove the transaction, To prove the transaction, written evidencewritten evidence must be must be producedproducedExample of evidential req. may be found in:Example of evidential req. may be found in:French civil codeFrench civil code: if the sum involved is above € 762, : if the sum involved is above € 762, a signed written document must be produced.a signed written document must be produced.Under Under English lawEnglish law, the only contract which must be , the only contract which must be evidenced by writing is the contract of guarantee, evidenced by writing is the contract of guarantee, where a person promises to answer for the debt of where a person promises to answer for the debt of another.another.

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2. Offer and Acceptance2. Offer and AcceptanceOFFEROFFER represents an intention by one of represents an intention by one of

the parties to be legally bound to the parties to be legally bound to some stated conditions in case of some stated conditions in case of acceptance by the otheracceptance by the other

IntentionIntention behind behind words/conduct as words/conduct as

crucial factorcrucial factor

to be to be distinguished distinguished

from preliminary from preliminary negotiations / negotiations / “invitation to “invitation to

treat” treat”

The test is what a reasonable person – considering The test is what a reasonable person – considering the surrounding circumstances – would assume to the surrounding circumstances – would assume to be intention of the party concerned. be intention of the party concerned.

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Example: ADVERTISMENTSExample: ADVERTISMENTSMay an advert placed on a newspaper

be regarded as on offer ?

English Law : the mere placing of an advert is regarded as an invitation to treat and not as an offer. The advertiser has the last word

German Law shares the English view

French Law: the advert constitutes an offer to the public which binds the offeror to the first person who accepted (ex. Cour de Cassation p.54)

EXCEPTION to the English rule : if – from the facts of a particular case – it appears that the advertiser had a SERIOUS INTENTION to be legally bound to potential respondants, then the advert will be regarded as an offer (ex. Carlill v Carbolic Smoke Ball Co p.55)If risks of business promotion can be identified in advance, they may bemore effectively dealt with (ex. putting a time limit on the promotion etc)

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Example: GOODS ON DISPLAY IN A SHOPExample: GOODS ON DISPLAY IN A SHOP

If an item is displayed in a shop, can the customer demand to be sold it

at the advertised price ?

THE CRITICAL ISSUE IS TO DETERMINE WHEN A SALE TOOK PLACE

The English Court of Appeal stated that there is no sale until the offer is accepted (“Pharmaceutical Society of GB v Boots Cash Chemist” p.57).

French Law : a sale in a self-service shop is complete when the customer, having chosen from the shelf an article offered for sale at a posted price, places it in the basket which is provided and which he is bound to use until the goods are checked out at the cash desk. Accordingly, by selling a product which was unsafe, the supermarket was in breach of contract and would have to compensate the customer for the injuries suffered (Paris Court of Appeal p.57)

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Termination of the Offer: Termination of the Offer: LAPSELAPSE

An offer is not valid for the rest of eternity. Most law systems recognise that unaccepted offer will eventually lapse through the passage of time:

AT WHAT POINT DOES IT HAPPEN ?

• English, French and German Law: an offer lapses after a REASONABLE time. What is reasonable depends on all the circumstances of the case, including, for example, the subject matter of the offer (ex “Ramsgate Victoria Hotel Co v Montefiore” p.59).

• If a deadline for acceptance is set, the offer will lapse on the expiration of that deadline

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Termination of the Offer : Termination of the Offer : REVOCATIONREVOCATION

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

Can an offer be revoked ?Can an offer be revoked ?

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Termination of the Offer : Termination of the Offer : REVOCATIONREVOCATION

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

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An offer becomes a contract when it is accepted.An offer becomes a contract when it is accepted.

The AcceptanceThe Acceptance

OFFEROFFER acceptance CONTRACTCONTRACT

There should be some There should be some external evidence external evidence of the of the offeree’s intention to accept.offeree’s intention to accept.

As a general rule, As a general rule, silence is not sufficientsilence is not sufficient..

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In In German LawGerman Law a party can be legally bound as a result of failing a party can be legally bound as a result of failing to respond to a communication from the other. For example, for to respond to a communication from the other. For example, for commercial letters of confirmation, when a business contract is commercial letters of confirmation, when a business contract is concluded orally, one party often sends to the other a written concluded orally, one party often sends to the other a written confirmation of what has been agreed. If the content of the letter confirmation of what has been agreed. If the content of the letter differs from the oral agreement but are accepted by the other differs from the oral agreement but are accepted by the other party without objection, the agreement will be treated as modified party without objection, the agreement will be treated as modified / amplified in accordance with the letter of confirmation./ amplified in accordance with the letter of confirmation.

In this kind of situation, the recipient of a letter of confirmation In this kind of situation, the recipient of a letter of confirmation must OBJECT PROMPTLY, otherwise he risks being legally bound to must OBJECT PROMPTLY, otherwise he risks being legally bound to its content.its content.

The AcceptanceThe Acceptance

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The AcceptanceThe Acceptance

The acceptance has to be ABSOLUTE and UNQUALIFIEDThe acceptance has to be ABSOLUTE and UNQUALIFIED

A response which introduces variations does not amount A response which introduces variations does not amount

to an acceptance but constitutes a to an acceptance but constitutes a counter offercounter offer, that , that

destroys the original offerdestroys the original offer

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The Acceptance: “standard terms”The Acceptance: “standard terms”The parties of a contract will often have their own standard terms of business. In negotiating a contract, the parties will probably focus on the main issues and may not expressely refer to each other’s standard terms.

If a dispute later arises over the contract, the standard terms become an issue: each party will be insisting that their standard terms should prevail over those of the other “battle of the forms”

English Court of Appeal : where documentation is exchanged between the parties containing different terms of business, the terms which are last presented will prevail, if accepted by the other party. Other systems adopt a different approach, by ascertain the parties’ “true intention” of by applying the requirement of “good faith”

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Issue 1Issue 1

The acceptance has to be communicated to the The acceptance has to be communicated to the offeror, before a contract will come to existence. offeror, before a contract will come to existence.

The Acceptance:The Acceptance:COMMUNICATIONCOMMUNICATION

a) The offeror may use any a) The offeror may use any reasonable reasonable means to means to communicate the acceptance, unless the offeror communicate the acceptance, unless the offeror specifies a particular method of replyingspecifies a particular method of replying

In WHAT WAY should the offeree In WHAT WAY should the offeree communicate his/her acceptance ?communicate his/her acceptance ?

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Issue 2Issue 2At WHAT POINT in time does it take effect ? At WHAT POINT in time does it take effect ?

The AcceptanceThe AcceptanceCOMMUNICATIONCOMMUNICATION

b) English Law b) English Law distinguishes distinguishes betweenbetween

instantaneous communicationinstantaneous communication (e.g. (e.g. telephone conversation): the telephone conversation): the communication is not deemed to be communication is not deemed to be effective until it’s actually received by effective until it’s actually received by the offerorthe offeror

non-instantaneous communicationnon-instantaneous communication (e.g. (e.g. post office): the rule favours the post office): the rule favours the offeree: by approving use of the post, offeree: by approving use of the post, the offeror is agreeing to take risk of the offeror is agreeing to take risk of things going wrongthings going wrong

Italian civil codeItalian civil code: presumption of knowledge when the letter : presumption of knowledge when the letter ARRIVES at the offeror’s residential addressARRIVES at the offeror’s residential address

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3. Capacity of the parties3. Capacity of the parties

To conclude a binding contract, the parties must have the legal capacity to incur contractual obligations

Individuals who have not reached the age of majority will generally have restricted contractual capacityContracts entered into with minors may be unenforceable against them:• contracts advantageous / beneficial to the minor may be enforceable• contracts which are manifestly disadvantegeous to the minor are, under most systems, likely to be void.

Italian Law: there is distinction between “capacità giuridica” (legal capacity) that is the suitability to be entitled to duties and rights and that a person acquires by birth and the “capacità di agire” (action capacity) that is the ability to perform legal acts, and that a person reaches when he/she’s 18 years old.

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4. Consideration4. ConsiderationIn the common law tradition, contract law is not concerned with gifts or merely gratuitous promises : the benefit of one party must correspond to the detriment / benefit of the other (transaction element in a contract).

a) Executory consideration

b) Executed consideration

involves the exchange of promises, that involves the exchange of promises, that have yet to be carried out : the have yet to be carried out : the consideration is the promise consideration is the promise itself, itself, not not the performance of the actthe performance of the act

one party’s promise is made in return forone party’s promise is made in return forthe perfomance of act by the other : the the perfomance of act by the other : the promise will only be enforceable when promise will only be enforceable when the required act has been completed. the required act has been completed. E.g. rewardsE.g. rewards

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Must Must not be pastnot be past : : a subsequent promise to pay for services previously requested will only be enforceable if, at the time the original request was made, there was an understanding that the services would be paid for (the request was made “in a business sense”). In this situation, the subsequent promise can be viewed as a confirmation of something which was implicit.

Must Must be realbe real :: it has to have some economic value (it has not to be illusory) Must Must be sufficientbe sufficient : : the substance of a promise has to be capable of

forming consideration in the eyes of the law. E.g. a party of a contract can prove consideration by suffering a detriment in response to the other’s promise. The level of “sufficiency” depends on the particular situation and also on the fact that one party is under the duty to perform an action (p.76).

4. Consideration 4. Consideration

Consideration is a peculiarity of common law systems: it has no direct counterpart in civil law:- German law: a promise made with serious intent is binding without the need for any counter-promise from the recipient;- French code: a contractual obligation is only valid if it has cause (the goal pursued by a party who enters into an obligation)

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The answer depends on their INTENTION as ascertained from the facts of the particular case. As a general rule, the parties are entitled to act in their own interest and this may involve them walking away from the negotiation.

5. Contractual Intention5. Contractual IntentionDuring negotiation, the parties may reach some “staging posts” :

- Are they legally bound to each other at any of these points in time ?

- What happens if one of the parties breaks off negotiation before an agreement is reached ?

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5. Contractual Intention5. Contractual Intention English law : no general duty to negotiate in good faith a party breaking off negotiation will not incur liability to the other

American courts : doctrine of “promissory estoppel”. If one party raises in the other a reasonable expectation that a deal will be reached, then if it fails to happen the disappointed party may recover expenditure incurred for this expectation (sometimes he/she may be entitled to damages for losses)

Civil Law systems : duty to conduct negotiation according to the requirement of “good faith”

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6. Factors which may undermine the 6. Factors which may undermine the contract’s validity:contract’s validity:

- When both parties are mistaken, this can prevent them reaching a consensus in the first place.

- If only one of the parties is mistaken, on discovering the true situation, such party may escape the contract.

The point is whether the party’s mistake was induced by something said / done by the other.

MISTAKE and MISREPRESENTATIONMISTAKE and MISREPRESENTATION

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6. Factors which may undermine the contract’s 6. Factors which may undermine the contract’s validity: MISTAKE and MISREPRESENTATIONvalidity: MISTAKE and MISREPRESENTATION

Although a party is not generally obliged to volunteer information, sometimes a duty of disclosure exists and, by remaining silent, that party will be regarded as misrepresenting the truth (French law case p. 83).

English law imposes duties of disclosure in the case of insurance contracts, where there is an obligation on the assured to disclose to the insurer all the material facts which would influence the insurer in deciding whether to accept the risk. Failure to disclose such facts will entitle the insurance company to avoid payment on the policy.

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What happens if the mistake has not been induced by the What happens if the mistake has not been induced by the actions / words of the other party ?actions / words of the other party ?- Civil lawCivil law : mistake may invalidate the contract, if it is : mistake may invalidate the contract, if it is related to an related to an essential essential quality of the thing contracted for. The quality of the thing contracted for. The damaged party is entitled to act for damaged party is entitled to act for rescission rescission of the of the contract. contract. - English lawEnglish law : if the mistaken party wishes to avoid the : if the mistaken party wishes to avoid the contract, he/she must prove that the other party is guilty of contract, he/she must prove that the other party is guilty of misrepresentation. misrepresentation. A A misrepresentationmisrepresentation occurs when a occurs when a party is induced to enter a contract having relied on party is induced to enter a contract having relied on statements made by the other that turn out to be falsestatements made by the other that turn out to be false Example : Picasso painting p. 85Example : Picasso painting p. 85• Mistake on theMistake on the identity identity of the other contracting party of the other contracting party

6. Factors which may undermine the contract’s 6. Factors which may undermine the contract’s validity: MISTAKE and MISREPRESENTATIONvalidity: MISTAKE and MISREPRESENTATION

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DURESS and ILLEGALITYDURESS and ILLEGALITYA contract represents a voluntary meeting of minds the law helps the party who entered into one only as a result of unlawful threats / duress (compulsion, threats or violence to force a person to act against his will).The threat must be unlawful

A contract made for an illegal purpose is VOID.Examples:- a contract involving the commission of a criminal offence- a contract which offends against public policy (immoral contracts as prostitution)- contract against public policy, but not immoral : 2 businesses conclude a contract to reduce /eliminate competition between them