Lecture 4 - foundations of contracting

Question 1

Why do we have contracts?

Answer 1

To bridge a lack of trust between parties.

Question 2

What is contract law?

Answer 2

A part of private law. The terms of the contract must be enforceable and we can use penalty clauses as safeguards. We need to consider if we are willing/able to hire lawyers, prove losses, etc, in case of breach.

Question 3

What is the definition of a contract?

Answer 3

An exchange of promises made between at least two parties. Typically it establishes rights and obligations on both parties, making them both accountable for their promises. Ultimately, the state (court) enforces the contract and makes them accountable.

Question 4

What are the main ways for contracts to be executed?

Answer 4

1. Completed by performance of obligations
2. Voided contract due to a vitiating factor
3. Breach of contract
4. Agreement between the parties to discharge
5. Frustration - unforeseen events makes performance impossible

Question 5

What is consideration?

Answer 5

Only a requirement in common law. Promises of exchange, need to offer something in return. “If you … then I …”

Question 6

When a contract is completed by performance, what are the parts of the process?

Answer 6

• A contract is perfectly formed (mutual agreement, consideration, intention to create legal relation)
• The contract contains obligations
• There is nothing that vitiate the contract and render it void by any party
• The obligations of the contract are fulfilled.

Question 7

Which rules govern contracts?

Answer 7

1. The contract itself - law between the parties. Parties are free to choose what national law that governs the contract.
2. National law. In case of breach, where will we resolve dispute?
3. International law. CISG applies if both parties have signed the convention, unless actively stating otherwise in the contract.
4. Soft law - internationally recognised principles, such as UNIDROIT.

Question 8

What are the most common questions related to contracts?

Answer 8

• What shall be performed under the contract? The promise.
• What happens in the case of non-performance of the contract? Terminate the contract? Compensation/damages? Obligation to perform some activity?
• What happens if the circumstances change? Force majeure? Hardship (increased cost, new safety regulations → claim renegotiation)?

Question 9

What is a letter of intent (LOI)?

Answer 9

Before signing a contract, it can be difficult to know how much information to disclose during the negotiation phase, if it won’t render in a contract. A LOI can be written to outline the understanding between the parties.

Question 10

What can be said about good faith?

Answer 10

In civil law we have a duty of acting in good faith

Question 11

What are important factors when forming the contract?

Answer 11

• Offer and acceptance
• (consideration)
• Intention to create legal relations (distinguish from social undertakings)
• Certainty of terms, possible to enforce in court

Question 12

How can an offeree respond to an offer?

Answer 12

• Acceptance. Actively fully and unconditionally accepting an offer means a contract is made. Silence is not an acceptance. An acceptance is effective when it reaches the offeror, if it is given within the fixed time frame or within a reasonable time.
• Rejection. The offer is terminated.
• Acceptance with alterations = counter-offer. Needs to be accepted from the counter party.

Question 13

When can a late acceptance to an offer be effective?

Answer 13

• If the offeror has not informed or dispatched a notice of otherwise
• The acceptance should have arrived on time in normal circumstances, unless notice of otherwise.

Oral offers must be accepted immediately.

Question 14

What are the rules on revoking an offer or an acceptance?

Answer 14

According to Art. 16 CISG, an offer may be revoked until a contract has been concluded, if the revocation reached the offeree before he has dispatched an acceptance. This is however not possible if:

• the offer is indicated irrevocable (fixed time stated or similar)
• it was reasonable for the offeree to rely on the offer as irrevocable and has acted in accordance

An acceptance can be withdrawn if it reaches the offeror before or at the same time as the acceptance would have become effective.

Question 15

What does the Doctrine of Privity say about (third) parties?

Answer 15

A contract only imposes rights and obligations on the parties involved in the contract. There are some exceptions, for example working as an agent for someone, or giving a third party rights (but no obligations).

Question 16

How can contracts be interpreted in cases of uncertainty?

Answer 16

• Silence in the law cannot be argued to favour any party.
• Clauses should be interpreted with consideration of the intention of the parties
• Contra proferentem rule; if one party had advantage of drafting contract, we prefer interpretations agains that party.
• Merger clauses (integration) constitutes entire agreements.

Question 17

When is non-performance excused as Force majeure?

Answer 17

You can show that non-performance was due to an impediment beyond your control AND it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract. A force majeure clause means that the parties themselves have agreed on conditions for release from liability.

Question 18

What is the difference between invoking force majeure vs hardship?

Answer 18

• Force majeure = excuses non-performance

- Hardship - renegotiate the contract

Question 19

What can be seen as a checklist for making a contract?

Answer 19

1. What law should apply?
2. Where should disputes be settled?
3. What are the obligations?
4. What liabilities are excluded?
5. What limitations are there on liability?
6. Have we agreed to consequences in case of breach of contract?