From Freedom Of Contract

The modern entrant making process Is often a set of very complex agreements and usually Involves big amounts of money. The negotiations may last for months or even years. As a result, the parties will reach an agreement by piecemeal. There Is not a simple offer and an acceptance anymore, but there are offers, counteroffers, partial discussion. But when exactly the discussion is ended? For this still developing contract formation procedure, in most legal systems there are no special and adequate rules established. Since it is impossible to qualify in these cases offer and acceptance, a whole set of new problems arises: . As the agreement been concluded; 2. When was it concluded; 3. If the agreement is concluded, what are the terms of it. In this paper I will examine and discuss a very controversial topic in the theory of the formation of contracts: the relationship between parties in a situation in which an agreement has not been reached and one of the parties breaks off the negotiations. This can be done in several ways: one 2 can Just end the negotiations and walk away, the offered can revoke his offer, an option clause is violated etc.
Since there is still no contractual liability in these cases, he question arises if there is any liability at all and if so according to what theory a party is held liable. I will analyses this problem from the point of view of two legal families: Common Law and Civil Law. In the context of this paper by Civil Law I mean the codified law systems in Western Europe and I will discuss French, German and Dutch law. We will see that there are important differences between the Common Law and the Civil Law approach to these problems.
As a result of the still growing trade market between the United States and Western Europe it is of utmost importance that one is aware of these differences. I want to discuss three topics: 1 . Cross-boundary pre-contractual negotiations will bring together law and culture and reality and perception and so many problematic situations; I will give you Just some examples to show what I mean; 2. Then I will discuss the different approaches as mentioned above and even more important the different results on what is understand as pre-contractual liability; 3. He last topic will be on recent European developments in contract law in this field as realized in a proposed European Code of Contract Law. 2. Law and culture As I said before, pre-contractual negotiations will not only bring together law and ultra but also reality and perception. So it is quite possible that one party – from his particular background and legal culture – is convinced that after some meetings an agreement is reached, as the opposite party thinks these were still preliminary conversations. When this is the case severe problems will rise and immediately two questions have to be answered: 1 . According to which law the breaking off of the negotiations has to be Judged; 2. And which court has standing. In Common Law countries, as a rule lawyers will take part in the conversation in a very early stage of the negotiations. s true for The Netherlands you from the start of the 3 – it is all a matter of trust. If you take your lawyers with negotiations it means you don’t trust the other party so they don’t trust you. The result is that you start the negotiations one step behind the other party and that is exactly not what you want.

Probably this is also because English and American contracts are much longer than German, French or Dutch contracts. 1 Just one example; contrast these two standard forms of a forum selection clause: ; American clause: The exclusive forum for the resolution of any dispute under or rising out of this agreement shall be the courts of general Jurisdiction of xx and both parties submit to the Jurisdiction of such courts. The parties waive all objections based on forum non convenience; German clause: Cholinesterase Geriatricians sit xx (the only competent court is (P. 96) So when you enter into international contracting your first lessons are: 1 . Be aware of the cultural differences and legal mentality between you and the other party ; 2. Try to reach an agreement on two questions as early in the negotiations as possible: a. Which law has to be applied in case anything goes wrong (express choice of law); b. Which court has standing. A way to realize an answer to these questions in the pre-contractual stage is the use of a so called Letter of Intend or a Memorandum of Agreement.
In case anything goes wrong, such a Letter or Memorandum can save a lot of time and money for both parties. According to American case law the answer of the question if the Letter or Memorandum is legally binding depends on the following factors: – The amount of details; – The language used; – Are there any escape-clauses; – Are there ‘subject to formal contract/definitive agreement’ clauses; See for a comparison between American and German contracts: Claire A. Hill and Christopher King, How do German contracts do as much with fewer words? , 79 Chicago-Kent Law Review 2004, p. 889 – 926. – Complexity of the transaction; – The way parties behave in the pre-contractual stage; – Custom. In Civil law similar factors are used. For about seven years I was honorary Judge in the Court of Rotterdam in a division on international contracts. In a surprisingly amount of cases – where contracts were actually formed – there was no provision on an express choice of law and on which court has standing. Making a choice on forehand will save time and money and the allowing factors can be taken into account. In the first place parties create certainty; both parties know what to expect in case anything goes wrong.
I will take the English approach as a starting point, because this approach still resembles the classical theory on contract law. (Gigglier 2002, Cheshire and Foot 2001, Allen 1991) In the case William Lacey (Winslow) Ltd. V. Davis [1957] 1 W. L. R. 932, 934 (Q. B. 1957) the view is expressed that a party to negotiations undertakes this work as a gamble, and its cost is part of the overhead expense of his business which he hopes will be met out of the profits of such contracts as are made. ‘ More recently the leading case on this topic is Wallboard v.
Miles [1992] 1 All ERE 453. The question was if the parties can, by agreement, impose on themselves a duty to negotiate in good faith. Lord Cancer held: ‘Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiation or to withdraw in fact in the hope that the opposite party may seek to reopen negotiations by offering him improved terms.
A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of the negotiating party. In spite of this rather rigid and formalistic view English law has taken on this question, there are some grounds to pursue negotiations or to recover damages in case of breaking off the negotiations. 6 Although the main contract has not been concluded, the court may held that there is a collateral contract which gives rise to some rights during the negotiating process.
And even though there is no contract, a party may be entitled to restitution relief on the grounds that the other party has derived a benefit from the transaction for which he should compensate the plaintiff even if no contract has arisen (unjust enrichment). Finally a party can be held liable for loss which he inflicted on the other party in case of fraudulent misrepresentation (a claim in tort, e. G. When there was never an intention to form a contract) or negligent misrepresentation. In England one can only claim negative interests.
Specific performance – that is to say forcing parties to re-open negotiations – is not possible. 3. 1. 2 AMERICAN LAW (Tanner and Hamilton, paper 2004, Track 1991) Like in English contract theory, it is generally agreed that also in the United States the existence of a duty in good faith is denied in the absence of an enforceable contract. According to American law there are three other grounds for pre-contractual liability. As in England, unjust enrichment as a basis for liability could be a ground for restitution.
However, Just a few courts have entertained such claims and the prevailing view is still the alternator theory: both benefit and loss are at risk of the parties. Also the misrepresentation theory is considered to be a ground for recovering losses in the preoccupation stage in the United States, but situations in which this occurs American courts is the doctrine of promissory estoppels: one negotiating party cannot thou liability breach a promise made during negotiations, if the other party relied on that promise.

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