Business Law 2 Flashcards
Good faith in civil law:
Means by which the court can impose solidarity in the limitation of party autonomy. A way to take into account additional measures of a contract.
Derogative/corrective function of good faith - you have a certain right and want to impose it; however, the court can deny it.
Supplementing function of a court:
- Duty to inform
- Duty to cooperate and negotiate in case of unforeseen consequences
- Duty to protect the confidentiality of negotiations
The main aim is to correct the harshness or supplementing functions of contracts to come to the correct solution
Under GF, parties have to take the other party’s interests into account:
- duty of care, to act reasonably;
- sense of proportionality (linked to the doctrine “Abuse of rights”)
ChatGPT:
-Means of imposing solidarity in limiting party autonomy:
Simple Explanation: It’s a way for the court to make sure both sides in a contract work together fairly, even if the contract gives them a lot of freedom.
Example: Imagine two friends agree to share a car, but one of them wants to change the rules without asking. The court steps in to make sure they both follow the original agreement and work together.
-Derogative/corrective function of good faith:
Simple Explanation: If you have a right, but using it would be unfair, the court can say you can’t use it.
Example: If you have a right to take all the snacks at a party, but there’s not enough for everyone, the court might say you can only take your fair share.
-Supplementing function of a court:
refers to the role or purpose of filling in gaps or addressing unforeseen situations in legal agreements or contracts. In the context of contract law and good faith, the supplementing function of the court involves stepping in to provide additional guidance or solutions when the original terms of a contract may not cover certain circumstances or when unexpected events occur.
- Duty to inform:
Simple Explanation: The court says you have to tell the other person everything they need to know.
Example: Before selling a used phone, you have to tell the buyer if there’s anything wrong with it.
- Duty to cooperate and negotiate in case of unforeseen consequences:
Simple Explanation: If something unexpected happens, both sides have to work together to find a solution.
Example: If a delivery is delayed because of bad weather, the buyer and seller need to talk and find a fair solution, like extending the delivery time.
- Duty to protect the confidentiality of negotiations:
Simple Explanation: The court says you can’t tell others about private talks during a deal.
Example: If two companies are discussing a partnership, they can’t share details with competitors until the deal is done.
-Aim to correct the harshness or supplementing functions of contracts:
Simple Explanation: The court wants to make sure contracts are fair and that they work, even if something unexpected happens.
Example: If a contract says one person must deliver goods on a certain day, but a flood makes it impossible, the court might adjust the deadline to be fair to both sides.
Under good faith, parties have to take the other party’s interests into account:
- Duty of care, to act reasonably:
Simple Explanation: You have to be careful and fair in what you do.
Example: If you borrowed a friend’s bike, you should ride it safely and not damage it.
- Sense of proportionality (linked to the doctrine “Abuse of rights”):
Simple Explanation: You can’t use your rights in a way that hurts others too much.
Example: If you have the right to play music in your apartment, but it’s very loud late at night, the court might say you’re abusing your right and ask you to turn it down.
Good Faith in Common Law:
Never developed and committed to good faith, only piecemeal solutions in situations of unfairness.
Judges focus on strict terms of agreements.
Why not (case examples and conclusions):
- impossible to know if good faith negotiations would have lead to an agreement (impossible to calculate losses)
- duty to adopt GF in negotiations inherently contradictory to the opposing nature of the parties.
No implied term to conduct the contract in good faith. However, many cases where courts acted on the principle of good faith to provide fairness:
- Promissory estoppel (promise is enforceable by law)
- Implied duty on the part of the invited to conduct a tender process in good faith.
Interpretation: difficulties when reading a contract (interpreting):
1) The meaning of words is unclear
2) Parties cannot predict future occurrences
3) Methods of interpretation differ around the world
4) Use of foreign legal concepts in contracts that are subject to another legal system make interpretation more difficult.
Methods of interpretation:
1) Subjective (“will theory”):
* Answers - what is the true subjective, common meaning of the parties?
* Elements - negotiation process, draft agreements, correspondence (emails, stocky notes, internal affairs between parties), and parties conduct ex-post & ex-ante.
Courts do not like to apply after contract knowledge of parties because of hindsight bias.
ChatGPT:
Answers - what is the true subjective, common meaning of the parties:
Simple Explanation: It’s about figuring out what the parties really meant and agreed upon when making a deal.
Example: If two people agree to trade their bikes, the court wants to understand what each person thought they were getting in the exchange.
Elements - negotiation process, draft agreements, correspondence (emails, stocky notes, internal affairs between parties), and parties conduct ex-post & ex-ante:
- Negotiation process:
Simple Explanation: How the parties talked and discussed the deal before making it official.
Example: If you and a friend discuss buying a car and agree on a price during your conversation, that’s part of the negotiation process.
- Draft agreements:
Simple Explanation: The written plans or outlines of what the deal will include.
Example: If you and a business partner write down the terms of your partnership on paper before starting the business, that’s a draft agreement.
- Correspondence (emails, stocky notes, internal affairs between parties):
Simple Explanation: Any written communication or notes between the parties.
Example: If you and a colleague exchange emails about a project and agree on specific tasks, those emails are part of the correspondence.
- Parties conduct ex-post & ex-ante:
Simple Explanation: What the parties did and how they behaved both before and after making the deal.
Example: If you promised to finish a project by a certain date and did so, that’s your conduct ex-post. If you agree to finish a project by a certain date, that’s your conduct ex-ante.
Courts do not like to apply after contract knowledge of parties because of hindsight bias:
Simple Explanation: Courts don’t want to use information the parties learned after making the deal because it might make things unfair (ex-post).
Example: If you sell a car and later find out it’s worth more than you thought, the court won’t change the deal based on what you know now.
Ex post and ex ante:
- Ex post:
Simple Explanation: Looking at things after they happened.
Example: After a sports event, analyzing the players’ performance and decisions is an ex post evaluation.
- Ex ante:
Simple Explanation: Looking at things before they happen.
Example: Planning a vacation and deciding on an itinerary is an ex ante process because it happens before you actually go on the trip.
2) Objective (“declaration theory”):
Answers - what is the objective meaning of a contract based on the relevant information available to an objective third party?
*One must consider meaning of words used, not what one may guess to be the intention of the party
*The relevant elements to this theory include - textual interpretation, preamble (statement explaining document purpose), and plausible legal consequences.
ChatGPT:
Answers - what is the objective meaning of a contract based on the relevant information available to an objective third party?
Simple Explanation: It focuses on what an outside observer would understand from the words used in the contract.
Example: If two companies sign a contract to supply goods, the court looks at the written agreement to decide what they both should do, regardless of what they personally meant.
The relevant elements to this theory include - textual interpretation, preamble (statement explaining document purpose), and plausible legal consequences.
Simple Explanation: It looks at the words used, the document’s purpose, and what would logically happen if certain actions were taken.
Example: In a rental agreement, if the document mentions the purpose is to provide a residence and the renter damages the property, the court might conclude the renter broke the agreement.
Subjective (“Will Theory”):
Scenario: Two business partners verbally agree to “split profits fairly.” Later, a dispute arises about what “fairly” means. The court may use the subjective theory to explore the actual understanding of both partners during their negotiations and subsequent actions.
Objective (“Declaration Theory”):
Scenario: A company signs a detailed contract to purchase a specific quantity of raw materials at an agreed-upon price. If a disagreement arises about the terms, the court would likely use the objective theory to interpret the contract based on the written agreement’s explicit language.
If there is still doubt about a clause:
Contra proferentem - interpretation against the party that supplied it is preferred. Protects the parties that did not write the clause.
- not individually negotiated (“Not individually negotiated” means that specific terms or clauses in a contract were not discussed, modified, or tailored during the negotiation process between the parties.)
In simpler terms, imagine you and a friend make an agreement, and there’s a sentence in the agreement that can be understood in different ways. If the court applies the principle of “Contra Proferentem,” it will interpret that sentence in a way that is not in favor of the person who wrote it. This encourages people to be clear and careful when putting together contracts because if there’s any uncertainty, the party responsible for the unclear language may not benefit from it in a legal dispute.
Other rules in contractual interpretation:
1) Preference to negotiated terms- If you and the other party talked about specific terms during negotiations, those terms are given more importance than generic or standard terms.
2) In light of the contract as a whole - The court looks at the entire contract to understand the overall agreement instead of focusing on just one part.
3) favor the terms that give the contract legal effect -
4) in case of language difficulties, preference to the version in which the original contract is drafted.
Unexpected circumstances (force majeure):
If an unforeseeable situation occurs where the performance of one party becomes absolutely impossible, the affected party is excused in the event of non-performance.
But if the affected party performs or even starts to perform, knowing impossibility, they lose their relief.
Conditions:
1) There was an (proven) impediment (obstruction to something) beyond the control;
2) The affected has to give notice;
3) There were unforeseen circumstances at the moment of the conclusion;
4) The risk was not allocated in the contract
Consequences:
Definite - excused for non-performance - full relief
Temporary - only suspends the obligation of the affected party for that time. Only effect for a reasonable time considering the effect of the impediment on the performance.
Unexpected circumstances (hardship):
Describes a situation when is not impossible but becomes extremely difficult.
Two steps can taken:
1) Holding the affected to original terms
2) granting relief to the affected party (court has the power to adjust the provisions of the contract to the new situation)
Performing is more difficult - the debtor of the obligation does not gain profits or obtains less than expected.
In the case of generic goods, delivery can only become more difficult/onerous - force majeure is not accepted.
Non-performance:
if a party or person to whom an obligation was entrusted does not perform, the other party must initiate a (judicial) action to obtain a forced performance of this duty.
Non-performance can only be excused when:
1) Hardship
2) Force Majeure
3) Creditors’ fault
Can also lead to termination in case of a fundamental breach.
When non-performance is fundamental:
When strict compliance with the obligation is essential;
Also if it substantially deprives the aggrieved party of what it expected to receive, unless the result was no reasonably foreseeable;
If it is intentional and gives aggrieved party reason it can’t trust the other party
Remedies for non-performance:
1) demanding specific performance - most preferred remedy, in which the aggrieved party can seek a court order demanding the defaulting party to fulfill their obligations.
2) Suspension of one’s own obligation - can be done in reciprocal agreement. It provides a mechanism for the aggrieved party to withhold their own performance until the other party fulfills their obligations. Assurance for the aggrieved party;
3) Termination of a contract - a contract can be terminated only in case the non-performance causes a fundamental breach and the aggrieved party gives notice within a reasonable time after knowing about the breach.
For the future, but also the past?
Common law - only for the performance of future events.
Civil law - retroactive effect, need for instituting everything that has been exchanged
4) Price reduction - a party who accepts an offer of performance that does not conform to the contract, may reduce the price. Reduction must be proportional to the decrease in value, at the time it was offered compared to the value of a conforming object at the time the contract was concluded.
5) Repair or replace - in case of defective performance, there exists possibility to petition for repair or replacement of defective goods/services.
6) damages - the aggrieved party is entitled to damages for loss caused by the other party’s non-performance (not excused). This could be added to claiming specific performance or termination of the contract. These losses can be non-pecuniary losses or future losses which are likely to occur.
Cumulation of remedies:
Remedies can be cumulated if they are not incompatible. For example, a late payment interest and a damages clause can be accumulated.
Restrictions/limitation of remedies:
Contractual clauses that restrict or limit the right to invoke remedies (within limits of good faith and fair dealing or within the limits of unfair contract terms (if
applicable, by law))
Contractual clauses to restrict damages are also valid, within the limits of GF and fair dealing and foreseeable at the time of conclusion.
Harm mitigation:
The aggrieved party aims to mitigate harm and, thus, is not entitled to damages for losses suffered to the extent that harm could have been diminished if said party had taken reasonable steps to reduce the harm.
If you don’t try to fix or minimize the harm when you can, you might not get full compensation for your losses.
Can recover costs reasonably suffered when reducing harm.
CISG and uniform law:
CISG - international sale of goods convention.
Long-term contracts because of repeated transactions. We must have common rules to rely on so that we don’t have transaction costs each time we renegotiate
Characteristics - long distances, not in the same countries; Large time and transaction costs; uniform rules to facilitate international trade
Can only be applied on sale of goods (not services). This implies an obligation to pay the purchase price for something and get ownership of it, limited to tangible movable goods, including gas.
It requires an obligation to transfer property;
An obligation to pay the purchase price (monetary consideration)
CISG does not apply to:
1) Goods purchased for an individual, a family, or a household use, unless the seller neither knew or should have known that the purchase was being made for such purpose before or after the conclusion of a contract (CISG only encompasses B2B, B2c is by domestic law); Burden of proof is placed on the party claiming the
applicability of the CISG;
2) Goods bought at action;
3) Sales authorized by law (enforced sale of a house)
4) Negotiable instruments, money, stocks, shares (typically intangible, but also in case of doubts)
5) Ships, vessels, hovercraft, or aircraft
6) Electricity
Mixed agreements:
1) Manufacturing goods - sale, unless the party ordering the goods agrees to contribute a substantial portion of the materials required for such manufacturing or production.
Why mixed: part of it needs to be manufactured (service) and other sold.
Substantial portion - based on economic value (comparing manufacturing price and price of final product sold)
Plans and know-how are not considered materials.
2) Labour/service agreements:
If the predominant (main) part of a contract is service or supply of labour, then the contract is not a sales agreement. For example, if one has a contract for buying villa, but also constructing, the main part is that the villa has to be built - thus, a service contract.
The criterion is economic value for the predominant part is compared: value of a good to the economic value of the service.
Territorial scope (CISG):
Direct application - applies if contracting parties are in two different states; and have ratified CISG.
No other requirements.
Place of Business definition:
The definition - is a place where one has a stable business organization. For example, if someone is a motorcycle manufacturer and wants to present at a convention, this convention will not be his place of business as it is temporary. A stable organization implies that you either manufacture or have a business seat in that country.
In order to into an agreement, party has to have autonomous power at that place - having an exhibition, agent, or liaison office in a place other than the business would lead to no international sale.
More than one place: the place of business is the one that is closest relationship with the contract and its performance
No place of business: only if someone is a person acting for commercial reasons, with reference to the habitual residence.
Items covered and not covered by CISG:
Not covered:
- prescriptions
- plurality of debtors
- assignment of rights
- subrogation
- liability of the seller for death or personal injury caused by the goods to any person
- property law
- procedural law
Covered:
- Formation of a contract
- performance - what one can expect from other party
- non-performance and related questions
Rules relating to validity of contracts are not covered by CISG, except for:
- no specific writing requirements
- validity for open price contracts
Formation of a contract (CISG and Mirror approach):
According to the CISG, a contract is formed when there is an offer and acceptance.
The offer must state the offeror’s intention to be bound in the event that it is accepted, thus, implying the use of mirror approach, which is a concept in contract law stating that saying “yes” to an offer means acceptance.
It must also specify the good and include a way to determine the price and quantity.
An offer is no longer active according to CISG:
When the offeree rejects (even if irrevocable);
When there is a late acceptance;
Once the refusal has reached the offeror.
Acceptance of an offer:
Either explicitly saying yes or the conduct of the offeree indicating consent. An acceptance is effective when it reaches the offeror and can be withdrawn before it becomes effective (before reaching offeror).
Silenence not acceptance.
Counter-offer:
Any modifications it would be both a rejection and a counter-offer. The modification can only be regarded as acceptance if it does not materially alter the offer:
Unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect
If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance (last-shot rule)
Performance of a contract under CISG:
Seller’s obligation: has to deliver goods and documents in accordance with the contract and transfer property.
Delivery of the goods; default rules:
Goods should be delivered in accordance with the contract; however, if the contract does not specify, CISG has 3 default rules:
1) If there is a carriage (ship) - delivery is assumed when the goods are given to the first carrier.
2) If there is no carriage agreement and parties know the place of manufacturing, the delivery takes place where the goods are located.
3) In other places, the delivery is assumed at the seller’s place of business.
risk passes to the buyer when the delivery takes place.
When to perform (CISG):
A party according to the contract will be asked to perform either at a specific date, fixed time period or within reasonable time after the contract is concluded.
When are the goods in conformity with the contract:
There is conformity of the goods only if:
-The goods are in conformity with the specifications of the contract (quantity, quality, package). Conditions for entry to a market are included in the contract if the parties intended for the goods to be marketable.
- The goods are suitable for ordinary purposes: covers list of factors (health, safety,…); standards at the time of conclusion of the contract; Standards of the place of use.
- The goods are suitable for a specific purpose made known to the seller.
When is the risk passed:
According to the contract or at the moment of deliver (default rule).
