May 12, 2010

A European Contract?

Europe is a union nowadays composed of 27 countries. Each of those countries have a specific way of contracting performing the contract, or ending it. There are not only minor differences, but general systemic and historical differences such as civil/common law or more Roman/traditional influences.

Of course the solutions found by jurist are very often similar, in damages, equity or all sorts of remedies. Indeed not only are those countries legal systems subordinated to the European court of Justice in Luxembourg, guarantor for equality amongst citizens but all countries in the union are part of the European Convention on Human Rights who is leading the protection for equality of people.

But even though solutions are often similar the process of reaching to them is very different. It is then perfectly clear that a European Contract is needed for several reasons.

First, in a no border zone the gain of time would be considerable if the same contract was used benefiting the development of European economy in its whole.

Second, the cost would be cheaper for all Europe, if specialised jurists were able to deal with a main general Contract law instead of having in each of the 27 countries specialists dealing with 26 neighbours.

Third, it is already in European principles that the Union should do everything possible to fight “restriction of trade”. If we consider all trade made in the Union going through a contract, the fact of having some impossible or slowest transaction due to a lack of simple contract is a restriction in itself.

And then eventually because we can, so why not start here. Indeed a worldwide contract would benefit the whole world but problem to establish it is the real issue. In the European Union institutions already exist and can impose things to national authorities, moreover a European academic network with universities exchanges is becoming more and more solid. The potential to get a Euro-contract is already settled and is probably the next step to a European integration, fusion and further construction.


Unfair Terms

A contract was a supposed agreement between two parties that on a clear basis gave their consent to a certain transaction. It was perfectly understood that the parties were equal to contract or that at least a certain degree of equity was essential. A contract was then as provided in the French civil code “a law between the parties”

Unfortunately, nowadays it is obvious that with the change of economy, contractors tend to become more and more unequal, especially when an agreement is made between an individual a bigger party such as a bank, an insurance company, or a big multinational business.

Countries are now trying to implement rules where terms of a contract have then to be fair, and if they are not a court may settle the issue.

Even though provisions or at least relics of provisions remains in legal instruments to protect new means are needed all the time to adapt, a big part of legislation was adopted in the late seventies. One of those old provisions was the laesio enormis principle, or lesion beyond moiety present in old Latin Justinian Digest mentioned in Austrian BGB article934 (loss of the half “Verkürzung über die Hälfte”) or in the French code civil article 1674 (the determination of the loss of 7/12 makes it look even more archaic) .

English law is creating statutes to regulate the matter. Indeed, in English law the unfair contract terms act 1977 was adopted seeking to limit or entirely exclude liability, statute concerning all the scope.

And it is surprisingly that the countries with a more civil law approach opt on case law and the power of judges, even if new legislation and statutory instrument is created. For example it is in France a decree78-464 from March 1978 providing terms between professional and non professionals, and in Germany the Standard Contract terms Act AGBG 1977.

But in Germany as well as in France it is the judge who remains the protector of the weaker part of the contract; in Germany, armed with article such as 138, 242 of the BGB good faith and morals, in France after developing theories on obligation to inform, or obligation to achieve for example.


Remedies

In English law damages are the normal and regular form of remedies. Nevertheless a certain number of exceptions can be seen. First a performance order can be issued in equity, then of course if the object is unique i.e. (art, jewellery, family property). The damages due are of different kinds: restitution damages, (for advanced payments for example), reliance (for expenses) and loss of expectation the victim is entitled to be in the same position as if the contract was performed.

This last category of damages is very similar to the French article 1149 of the civil code about potential loss suffered and deprived profit. Indeed French law is very protective of the victim in most the cases the creditor. The way of protecting it is by enforcing the contract, at least where it is generally possible that is to say when it deals with something to be given. As provided in article 1243 Civil Code, the creditor doesn’t have to accept other sorts of payment even if they are greater.

If the obligation concerns action, “to do or not to do something” damages are the only issue, and then the contract won’t be valid. As English law, with damages principle is assuring a kind of certainty for remedies (due as already specified in other blog entries) to commercial reasons), the French approach will be more focus on a, sometimes very abstract or even utopian idea of fairness, considering the “victim of the breach”.

But here the German way of dealing with the issue is the most open and free towards the rigour of the contract. Indeed different options are possible. As article 325 BGB provides “Rücktritt” (rescission) is only an alternative to damages, but for example of delays Article268 BGB states that compensation is needed. In French law pacta sunt servanda principle is illustrated in article1134. The clausula rebus sic stantibus theory (imprevision)has no place, English law allows revision of the contract when complete main and serious changes occur, and still based on the “True und Glauben” principle German law can allow a revision of the contract if circumstances have been frustrated.


Mistake

While contracting parties can make some mistakes and if the contract doesn’t reflect the belief of the parties it is normal that a judge is allowed to look deeply in the agreement, the problem is that once the contract is formed other people may be involved in its effect. Those parties, in absolute good faith are not there to pay for errors made by contractors.

In English law to get a voided contract for a common mistake the mistake has to be sufficiently important (even though in equity it can be ordered to enter into a new contract), in a mutual mistake the contract is not voided, nor it is when a party alone has made it.(unless fraud , or mistake on an essential element of the contract). Indeed a strictly commercial approach of the subject, very dear to the Anglo-Saxon systems, suggest that in sale it is clear than a seller for instance, will try to mistaken the buyer to get a transaction.

German law, in its 119 BGB is very clear, and like English or French law the provision, even if it looks Statutory, and leaving no room for interpretation, gives the judge the right to appreciate if without the mistake the person who made a mistake would have reached the same decision. Of course like English law the value of an element cannot be considered as essential. (Otherwise, for the same reasons as above, business would be absolutely pointless.)

French Contract law is based on the agreement of the will in a quasi-sacred way, the 119 BGB is covered in article1116 of the Code Civil view here as “dol” if not article 1110 expressing an error on the “substance” this substantial quality aspect is so important and wide that... in 2008 a judge voided a wedding on those grounds because a wife lied to her husband about her virginity (essential for him to contract. Even if here the problematic article is 180 of the Code civil the grounds were the same and the legislator and even the executive powers had to show all their creativity to force the judges to limit this decision, and then to recreate statutes to prevent it from happening.

We have to acknowledge that Caveat emptor is considered a general rule in all systems.


Good faith

In a continental Europe considered as a cornerstone of legal justice and equity, the “good faith principles are lighter when considered from a more Anglo-Saxon and especially British point of view.

Indeed the clarity and simple wording of a contract is a huge asset to its future enforcement and performance. The less subjective considerations there is the easier will it be to be understood.

The understanding of “good faith” has actually been a real problem in countries such as Germany or France, causing constant tensions with legislative and judicial institutions.

In France for example “good faith” is a general principle that can be seen in the Code Civil in the “effects of obligation section” as a general provision establishing the importance of the principle.

The article 1134 states that “agreement lawfully made must be performed in good faith” but even if this article is a very important victory for the defenders of justice against the rigour of the law, if we analyse more carefully this success we can see that the initial terms of the article presented in its previous version of the Code Civil stated that they must be “contracted and performed in good faith” (Discours rapports et travaux inedits sur le code civil, Frederic Portalis 1844, grandson of one of the redactor) the legislator smartly removed this extra power of appreciation in the hand of the judges, power those are still struggling to recover.

In the German BGB the principle is as well in a very important position article 242, so at the beginning of the “rights of obligation section”. Nevertheless the conflict legislator judge has been very harsh. Not only the terms “Treu und Gleuben” (almost good faith) are attached to customary practice, but when the jurist start using heavily the article (especially during Weimar’s republic inflation crisis where money value was dropping) legislators were trying to fight for a Nominalism. The 8th of January 1924 Walter Simmons Reichsgericht’s president with other magistrates declared that legislator couldn’t with his authority go against a consequence imposed by “good faith”

We can hope that the specific English way described by Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd in 1989 is going to be a certain guarantee for justice and fairness.”(439) “English law has [...] no such an overriding principle (i.e. good faith), but has developed piecemeal solutions in response to demonstrated problems of unfairness...”.

Maybe European laws, such as directive 93/13 EEC (5/04/1993) will become the theoretical text overruling British law.


Form of contract

If we consider the term “contract” there is nothing more easy to give as an example as a simple sale. It is seen as a common sight of a general concept of contract.

Nevertheless in continental Europe and France in particular, the “contrat de vente” sale contract is seen as a “special contract”. It is clear that this way of perceiving contract is due to the old Roman law tradition of “legis actions” where a specific “formula” was prewritten and if an action taken by any civilians was to be legal it had to fit in the “formula”. If in British law the only thing remaining from those traditions are “writs” in continental law it sharpened the whole concept of law.

In French law, employment, wedding, sale, rent, lending, is regulated by special contract law

English law is very clear on a contract due to a will of implementing freedom; everything is to be negotiable in a contract, there is then a general rule of contract with some exceptions (and not a succession of exceptions enclosed in a general theory.)The contracts are to be formed in the same way and if there is a breach the remedies are the same. Of course in certain categories something extra is needed but it will be only some specific case mentioned in statutes (for example a written part in case of land sale, or a cancellation right notice for some credit issuers)

The real issue is the future of the contracts in international law, in a globalised world. If international society is as weakly regulated as it is now, with a “private” way of solving problems such as arbitration, it is clear that contacts will tend to look like English contracts, i.e. very long, as everything has to be specified in them .The intervention of the Will of an external judge has to be as restricted as possible. If on the other hand International relations build some strong and institutionalised ties, the role of the Courts will be more wide looking deeply in the Contracts problems, contract would then become simple statement as all the rest of the provisions will be considered as already understood and merged in specific special contracts.


Cause and Consideration

The Section 4 of Chapter2 of Title 3 about obligations of the French Code Civil provides that an agreement has to have a real “cause”. The legislator her is the most moral of amongst the three here compared countries, France, Germany, United Kingdom. Indeed in France a contract must have a goal, an aim must be creative. A cause is needed for the obligation but for the contract to exist this cause has to be licit, i.e. allowed by laws and regulations. Nevertheless the courts analyse only if there was an objective and serious cause that can be seen from outside the parties, not if the parties are satisfied.

In German law half of this involvement can be seen. Even if a real goal is not needed for a valid agreement, if we add the concerns of article 138 BGB mentioning “good morals” and article 242 BGB mentioning “good faith” we are very close to the provision on article 1133 i.e. the third article of the section mentioned above, about illicit cause. Indeed in German law the only prohibited scenario is the unjust enrichment as also mentioned in 818 BGB in paragraph 3: “The liability to undertake restitution or to reimburse the value is excluded to the extent that the receiver is no longer enriched.”

Again here English law is very pragmatic. No matter what, how much, when, and how long; as long as something generally valuable is agreed for something else there is a contract, as there is consideration.

Due to this consideration doctrine a simple agreement is needed for a full discharge of the contract in French or German law. In English law on the other hand, another consideration must be given to release one party (for example unpaid rent cancellation).

In these cases we can consider that French or German law, with its tiny part of morality is perhaps more accurately armed to fight on a juridical basis the speculation excesses of our economy.


January 27, 2010

Freedom of contract

In " th New lex mercatoria and the harmonisation of the Laws of  the International Commercial Transactions" Cremades and Plehn explain how contractual freedom is the "cornerstone  of the non national new lex mercatoria".

This freedom is more obviously defended in British law as it may be in the continental one as the "real agreement" being more pragmatic, and objectively seen by the others is probably more protected than the "real will".

The "will" is a more subjective concept to not to define but to perceive i.e. a contract made with no "will" is not a contract if we are sure of the "will" in all cases; but the British trend will be to focus on the fact that the objective "agreement" was made clear whereas the expression of the will may be confuse...

It may seems clear that on an international level this freedom is essential when it is a matter of peer to peer companies or "aware" professionals... the many restriction to it have been made nationally to protect citizens from agreements where the to contractual parts are unequal and individuals will be naturally losing in this game.

A "United Nations Convention on Contracts for the International Sale of Goods" appears in a newly globalized world and has newly been ratified by many countries, convention where this "freedom of contract" is not explicitly mentioned and differs from some well established Anglo-Saxon rules for example the "mail box" principle in the field of the formation of the contract is put aside and the Convention seems to be more in favor of the reception theory. The convention even if a step forward can be not applied by contractants that do not want to aplly it.


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