Contract Law A Comparative Introduction (Jan M. Smits) (Z-Library)

Contract Law
SMITS (3e)_9781800373105_t (colour).indd 1 26/05/2021 09:30

Contract Law
A COMPARATIVE INTRODUCTION
THIRD EDITION
Jan M. Smits
Professor of Private Law, Faculty of Law, Maastricht University, the Netherlands
Edward Elgar
Cheltenham, UK • Northampton, MA, USA

© Jan M. Smits 2021
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted
in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the
prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.

William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book

is available from the British Library
Library of Congress Control Number: 2021936634
ISBN 978 1 80037 310 5 (cased)

ISBN 978 1 80037 312 9 (paperback)
ISBN 978 1 80037 311 2 (eBook)
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

02

Contents in brief
Contents in fullvii
List of boxesxi
Preface to the third editionxii
How to use this bookxiv
List of abbreviationsxvi
Table of casesxviii
Table of legislation and international instrumentsxxii
PART 1 CONTRACTS
1 Introduction 3
2 Sources of contract law 16
PART 2 THE FORMATION OF A CONTRACT
3 Offer and acceptance 41

4 The intention to create legal relations 63
5 Legal capacity of the parties 91
6 Formalities 101
PART 3 THE CONTENTS OF THE CONTRACT
7 The party agreement: Interpretation and gap filling 121

8 The principle of good faith and policing unfair contract terms 136
PART 4 VITIATING FACTORS
9 Defects of consent and misrepresentation 159

10 Prohibited contracts 177

vi · Contract law
PART 5 CONTRACTUAL REMEDIES
11 Performance 193
12 Damages for non-performance 209
13 Termination of the contract 229
PART 6 CONTRACTS AND THIRD PARTIES
14 Contracts and third parties 245
Glossary261
Index275

Contents in full
List of boxes xi
Preface to the third editionxii
How to use this bookxiv
List of abbreviationsxvi
Table of casesxviii
Table of legislation and international instrumentsxxii
PART 1 CONTRACTS
1 Introduction 3
Why contract law? 3
Types of contracts 4
Contract law as part of private law 7
Main principles of contract law 9
Topics for review 14
Further reading 14
2 Sources of contract law 16

The party agreement 17
Official sources 18
National law 18
European law 27
Supranational law 32
Informal rules 33
Further reading 36
PART 2 THE FORMATION OF A CONTRACT
3 Offer and acceptance 41

What is an offer? 43
Can an offer be revoked? 51
How long does the offer last? 53
What are the requirements that the acceptance must meet? 55
What is the time of conclusion of the contract? 58

viii · Contract law

Further reading 62
4 The intention to create legal relations 63

What is the intention of the parties? The objective approach to
agreement 64
The test of earnestness in problematic cases 70
Consideration and causa 77
Further reading 89
5 Legal capacity of the parties 91

Minors 92
Adults in need of protection 96
Further reading 100
6 Formalities101
Reasons for formalities 102
Types of formalities 103
What type of writing is required? On internet shopping 111
Sanctions if a contract lacks the required form 115
Further reading 117
PART 3 THE CONTENTS OF THE CONTRACT
7 The party agreement: Interpretation and gap filling 121

Interpretation of the party agreement 123
Ad hoc gap filling 130
Gap filling through default rules 132
Further reading 135
8 The principle of good faith and policing unfair contract

terms 136
The principle of good faith 136
Policing unfair contract terms 148
Further reading155

Contents in full · ix
PART 4 VITIATING FACTORS
9 Defects of consent and misrepresentation 159

A. Mistake 160
B. Fraud 167
C. Threat 168
D. Undue influence 169
E. Misrepresentation 172
Further reading 176
10 Prohibited contracts 177

A. When is a contract prohibited? 179
B. The effect of a prohibited contract; recovery of money or
goods 186
Further reading 189
PART 5 CONTRACTUAL REMEDIES
11 Performance 193
A. Civil law: Performance as the routine remedy 194
B. English law: Specific performance as an exceptional remedy 200
C. Unforeseen circumstances 202
D. European principles and the Consumer Sales Directive 206
Further reading 208
12 Damages for non-performance 209

A. Attributability of the non-performance 211
B. Types of damages and the mechanics of damage claims 215
C. Limitations of claiming damages 221
D. Damages clauses 225
Further reading 228
13 Termination of the contract 229

A. When is termination allowed? 230
B. The mechanics of termination 235
C. Anticipatory breach 236
D. The effect of termination 237
E. Withholding performance 240

x · Contract law

Further reading 242
PART 6 CONTRACTS AND THIRD PARTIES
14 Contracts and third parties245

Contracts for the benefit of a third party 246
Third-party effect of exemption clauses 248
Linked contracts 250
Third-party losers 252
Agency253
Assignment256
Further reading 259
Glossary261
Index275

Boxes
1.1 Contracts and the economy 5

1.2 The garment industry supply chain: A cascade of contracts 8
1.3 The contract as juridical act 9
1.4 From Roman to modern law: Pacta sunt servanda12
1.5 Regulated contracts 13
2.1 Legal families: Civil law 25
2.2 Recodification in Central and Eastern Europe 27
2.3 Legal families: Common law 28
2.4 EU directives on contract law 30
2.5 EU policy initiatives on European contract law: A European
contract code no more 31
2.6 Islamic contract law 35
3.1 The relative importance of the offer and acceptance model 42
3.2 From the Carbolic Smoke Ball to the Hoover flights fiasco 48
3.3 Battle of the forms 57
4.1 Dissensus: Different ways towards a similar result 66
4.2 The basis of contractual liability: Will, expression and reliance 69
4.3 Balfour v Balfour: A Victorian view of marriage and a feminist
critique 76
6.1 Civil law notary and notary public: A world of difference 105
6.2 Rights of withdrawal 114
7.1 Unambiguous clauses: Clauses claires et précises129
8.1 An alternative explanation for the absence of a general
principle of good faith in English law 144
8.2 A new era for good faith in English law? 146
8.3 The doctrine of iustum pretium147
9.1 Terms, representations and misrepresentations 174
10.1 Should a surrogate motherhood contract be enforceable? 185
11.1 How to enforce performance? 196
11.2 COVID and contracts: How to share the burden? 205
12.1 Going to court or not? Relational contracts 220
13.1 Efficient breach 235
13.2 An extra statutory right for the unpaid seller? 239
13.3 The right of retention 242
14.1 A German doctrine: Contracts with protective effect for third
parties249
14.2 Factoring 258

Preface to the third edition
Over the last two hundred years or so, contract law has been mainly national
in contents and outlook. This is reflected in the abundance of textbooks on
the contract law of national jurisdictions. These textbooks introduce stu-
dents to the national contract law of their own country in their own language.
Next to these traditional books, there is an increasing number of texts avail-
able that offer a comparative, European or even global perspective on the law
of contract – invariably designed to cater for the needs of students who are
already familiar with the fundamentals of contract law. This book seeks to
combine the two: it introduces students to the field of contract law by way of
a comparative approach. It assumes that contract law is an international disci-
pline that can be taught on the basis of common principles and methods, just
like economics, psychology or any other field of academic study. There are
two reasons why this approach is adopted.
First, substantive contract law is no longer the exclusive product of the

nation-state and introductory textbooks should reflect this. In particular in
the context of the European Union, law is shaped as much by the national
legislators and courts of the 27 Member States as it is by the European leg-
islature and the Court of Justice of the European Union. At a global scale,
the role of private regulation and of the Convention on Contracts for the
International Sale of Goods is increasing, as is the potential for choice of the
legal regime applicable to the contract. All this reduces the self-evidence of
teaching contract law on the basis of the intricacies of one national law alone.
Most of today’s law students will spend their professional life in a world in
which knowledge of only one jurisdiction is not enough.
Second, learning the law is as much about learning a method as it is about

mastering the substantive law. It is arguably more important to learn to ‘think
like a lawyer’ than it is to know about the details of a court case or a statute
that is likely to change anyway. In a similar way as economists do not focus
on the study of one particular economy but adopt a method of analysis (‘the
economic approach’), law is ideally regarded not as a subject but as a method.
Under this view, students no longer study German, English or Polish con-
tract law, but simply ‘contract law’ by applying the legal approach towards the
questions they are confronted with. This does not mean that the details of, or

Preface to the third edition · xiii
differences between, various legal systems are not discussed. To the contrary:
it is exactly by looking at these similarities and differences among jurisdic-
tions that one learns that much of the law is about exploring and contrast-
ing the implications of conflicting views of what is right. It is this approach,
focusing on arguments and policies that is at the core of this book. National
laws are presented as variations on common themes and as alternative ways
of dealing with some common problem.
This book thus caters to the needs of the international classroom. It was
originally written for use in the first-year contract law course of Maastricht
University’s Faculty of Law. The main materials used in the book come from
German, English, French and Dutch law and from international instruments,
but there is also ample attention for other jurisdictions, including those of
Central and Eastern Europe. Background knowledge of comparative law is
not required. Throughout the book separate textboxes provide information
essential to understanding the background to the substantive law, as well as
on other salient issues.
This third edition takes into account the most important developments over
the past four years. These include the enactment of the new European direc-
tives 2019/770 and 2019/771 (discussed here as if already implemented in
the national laws of the member states) and the consequences of the UK
leaving the European Union on 31 January 2020. A new textbox was added
about the effect of COVID-19 on contracts. The purpose of the book remains
as it was: to be a rewarding and stimulating tool in the study of contract law.
Comments are most welcome at jan.smits@maastrichtuniversity.nl.
Maastricht/Liège, October 2020

How to use this book
An academic textbook like this cannot be read like a novel. Although each
student has their own technique of studying, some suggestions on how to
master this book may be helpful.
This book consists of six parts, each asking a central question of contract law:
Part 1: What is contract law and what are its sources?
Part 2: How does a contract come into being?
Part 3: What are the contents of the contract?
Part 4: Can a validly formed contract be ‘avoided’ (set aside) and if so, for
what reason?
Part 5: What are the contractual remedies in case of breach of contract?
Part 6: How can third parties be affected by the contract?
Each part of the book consists of several chapters. Both the parts and the
chapters are preceded by an outline that highlights the key themes. It is a
good idea to get acquainted with the topics of a certain part or chapter by
first reading these outlines, followed by a first read of the chapter, skipping
the separate textboxes. After reading the list of Topics for review at the end
of each chapter, reread the chapter more slowly, making sure that you under-
stand each step of the argument. The law is often about structuring a topic (a
problem and its possible solutions) in a certain way; you need to make sure
that you are able to reproduce this structure and it usually helps a lot if you
try to make your own summary of the topic. It can be immensely useful to
make this summary by drawing your own table. You will find ready-to-use
tables in some parts of the book, but is highly advisable to build your own
ones when you go through the materials.
Each chapter highlights significant issues in separate textboxes. Their aim

is to provide background knowledge to the main text or to explore topical

How to use this book · xv
issues. The textboxes will often make the main points fall into place. A glos-
sary with definitions and key points is provided at the end of the book. If you
come across a concept that you are uncertain about, it is likely that you will
find it in the glossary. Remember that studying law is not about memorising
these definitions and key points, but about understanding them. If the glos-
sary does not provide you with an answer, check the index to see where a
concept is discussed in more detail. The table of statutes and table of cases
refer you to legislation and case law.
At the end of each chapter suggestions are made for further reading. If ref-
erence is made to case law or to non-reproduced statutory provisions, it is
highly advisable to consult these yourself. Links to English translations are
provided on the companion website, which is available at https://www.
e-elgar.com/textbooks/smits

Abbreviations
ABGB Allgemeines Bürgerliches Gesetzbuch (Austrian Civil Code)

AGBG Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbed-
ingungen (German Act on General Conditions)
All ER All England Law Reports
Art(s.) Article(s)
B2B Business-to-business
B2C Business-to-consumer
BGB Bürgerliches Gesetzbuch (German Civil Code)
BGH Bundesgerichtshof (German Federal Supreme Court)
BGHZ Entscheidungen des Bundesgerichtshofs in Zivilsachen
(Decisions of the German Supreme Court in Civil Cases)
Bull. cass. Bulletin des arrêts de la Cour de Cassation ( Journal of decisions
of the French Court of Cassation)
BVerfG Bundesverfassungsgericht (German Constitutional Court)
BW Burgerlijk Wetboek (Dutch Civil Code)
C2C Consumer-to-consumer
CC Code Civil (French Civil Code)
CISG Convention on Contracts for the International Sale of Goods
Civ. Cour de Cassation, Chambre civile
CJEU Court of Justice of the European Union
CRA Consumer Rights Act 2015
D. Recueil Dalloz
DCFR Draft Common Frame of Reference of European Private Law
DM Deutsche Mark
€ Euro
ed(s). editor(s)
ECHR European Convention on Human Rights and Fundamental
Freedoms
ECLI European Case Law Identifier
e.g. exempli gratia (for example)
EG Einführungsgesetz
et al et alii (and others)
EU European Union
ff following pages/articles
FF French Franc

Abbreviations · xvii
Fl Dutch guilder
HGB Handelsgesetzbuch (German Commercial Code)
HL House of Lords
HR Hoge Raad (Dutch Supreme Court)
J Judge, Justice
L Partie législative (of the French Consumer Code)
LJ Lord Justice
NGO Non-Governmental Organisation
NJ Nederlandse Jurisprudentie
OR Obligationenrecht (Swiss Law of Obligations)
p(p) page(s)
PECL Principles of European Contract Law
PICC UNIDROIT Principles of International Commercial Contracts
R Partie réglementaire (of the French Consumer Code)
RG Reichsgericht (highest German court until 1945)
RGZ Entscheidungen des Reichsgerichts in Zivilsachen (Decisions of
the German Reichsgericht in Civil Cases)
TEU Treaty on European Union
TFEU Treaty on the Functioning of the European Union
UCC Uniform Commercial Code (USA)
UCTA Unfair Contract Terms Act 1977
vol(s) volume(s)
ZPO Zivilprozessordnung (German Code of Civil Procedure)
§ Paragraph

Table of cases
France
Cass. Civ. 3 February 1919, DP. 1923.I.126 (Révocation offre)�� 53

Cass. Civ. 17 December 1954, D. 1955, 269 (Centre National de Transfusion Sanguine v L)��247
Cass. Com. 15 February 1961, Bull. Civ. III, 91 (Société Tirat et Cie v Société Orazzi et Fils)�� 68
Cass. Civ. 20 October 1964, DS. 1965, 62 (Exploding lemonade bottle)�� 51
Cass. Civ. 28 November 1968, Bull. Civ. III no. 507 (Maltzkorn v Braquet)�� 45
Cass. Civ. 2 April 1974, Bull. Civ. I no. 109 (Radio play)��131
Cass. Civ. 17 January 1984, RTD Civ. 1984, 711 (Piscine)��195
Cass. Civ. 13 February 1985, D. 1985, 462 (Manuela)�� 88
Cass. Civ. 28 April 1987, D. 1988, 1 (Abonnement téléphonique/Pigranel)��233
Cass. Civ. 12 January 1988, Bull. Civ. I no. 8 (Amusement park attraction)�� 56
Cass Civ. 14 May 1991, D. 1991, 449 (Minit France)��152
Cass. Civ. 9 March 1994, RTD Civ. 1994, 871 (La Concorde v Montagnani)��212
Cass. Civ. 3 July 1996, D. 1997, 500 (Vidéo-Club)�� 88
Cass. Civ. 22 October 1996, D. 1997, 121 (Chronopost 1)�� 88
Cass. Civ. 11 May 2005, RTD Civ. 2005, 596 (Belhadj v Les Batisseurs du Grand Delta)��195
Cass. Civ. 30 May 2006, D. 2006, 1599 (Chronopost 2)�� 88
Cass. Civ. 26 September 2012, 11-17-454 (Emil Cioran)��129
Germany
RG 8 June 1920, RGZ 99, 147 (Haakjöringsköd)��126

RG 28 November 1923, RGZ 107, 78 (Luderitzbucht Mortgage)��141
BGH 18 December 1954, BGHZ 16, 71 (Swapping doctors)��131
BGH 14 December 1956, I ZR 105/55 (Vorrechtsvertrag Verfasser)��181
BGH 22 June 1956, BGHZ 21, 102 (K Speditionsgesellschaft)�� 64, 66
BGH 27 October 1967, BGHZ 48, 396 (Kaufmannsehrenwort)��116
BGH 13 November 1975, NJW 1976, 565 (Matchfixing)��166
BGH 28 January 1976, BGHZ 66, 51 (Vegetable leaf)��249
BAG NJW 1983, 2782 (Wehrdienst im Ausland)��199
BGH 17 January 1985, BGHZ 93, 271 (Denied passenger)��247
BGH 17 April 1986, BGHZ 97, 372 (Pill case)�� 77
BGH 12 March 1992, NJW 1992, 1446 (Bürgschaft auf erstes Anfordern)��127

Table of cases · xix
Netherlands
HR 19 May 1967, ECLI:NL:PHR:1967:AC4745 (Saladin/HBU)��140

HR 12 January 1979, ECLI:NL:PHR:1979:AC2298 (Securicor)��249
HR 13 March 1981, ECLI:NL:HR:1981:AG4158 (Haviltex)��125, 128
HR 10 April 1981, ECLI:NL:HR:1981:AG4177 (Hofland v Hennis)�� 45
HR 15 April 1983, ECLI:NL:PHR:1983:AG4574 (Hajjout v IJmah)�� 67
Court of Appeal Den Bosch 22 January 2008, ECLI:NL:GHSHE:2008:BC2420 (Stichting
Postwanorder v Otto BV)�� 49
HR 5 January 2001, ECLI:NL:HR:2001:AA9311 (Multi Vastgoed v Nethou)��195
District Court Amsterdam 17 July 2020, ECLI:NL:RBAS:2020:3494 (Palace Hotel v Deka
Immobilien)��205
United Kingdom
Adams v Lindsell [1818] EWHC KB J59�� 60

Adler v Dickson (The Himalaya) [1955] 1 QB 158��248
Armhouse Lee Ltd v Chappell [1996] The Times 7 August��183
Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274�� 86
Balfour v Balfour [1919] 2 KB 571�� 76
Bear Stearns Bank plc v Forum Global Equity Ltd [2007] EWHC 1576�� 71
Bloom v Kinder [1958] 1 TR 91�� 72
Byrne & Co v Leon van Tienhoven & Co [1879–80] LR 5 CPD 344�� 61
Canary Wharf v European Medicines Agency [2019] EWHC 335��203
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256�� 48
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130�� 84
Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1��201
Coward v Motor Insurers Bureau [1963] 1 QB 259�� 74
Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696��203, 215
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623��174
Director General of Fair Trading v First National Bank plc [2001] UKHL 52��147
Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 �� 60
Farley v Skinner [2001] UKHL 49��225
Gibson v Manchester City Council [1979] 1 WLR 294�� 43
Glasbrook Brothers v Glamorgan County Council [1925] AC 270�� 81
Greaves & Co v Baynham Meikle & Partners [1975] 3 All ER 99��215
Hadley v Baxendale [1854] EWHC J70��223
Hadley and others v Kemp and another [1999] All ER 450��103
Harris v Sheffield United Football Club Ltd [1988] QB 77�� 81
Hart v O’Connor [1985] AC 1000�� 99
Hong Kong Fir Shopping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26��231
Houghton v Trafalgar Insurance Co Ltd [1954] 1 QB 247��149
Hyde v Wrench [1840] 3 Bea 334�� 54
Interfoto Library Ltd v Stiletto Ltd [1988] 2 WLR 615��137, 151
International Management Group UK Ltd v Simmonds [2003] All ER 199��145

xx · Contract law
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR
896��124
Krell v Henry [1903] 2 KB 740��203, 215
Leeds United Football Club v The Chief Constable of West Yorkshire Police [2013] EWCA
Civ 115�� 82
Liston v Owners of the SS Carpathian [1915] 2 KB 42��199
Liverpool City Council v Irwin [1977] AC 239��133–4
Lloyd’s Bank Ltd v Bundy [1975] QB 326��171
Lord Napier and Ettrick v R F Kershaw Ltd [1999] 1 WLR 756��125
Lovell & Christmas Ltd v Wall (1911) 104 LT 85��124
Lumley v Wagner [1852] EWHC Ch J96��200
The Moorcock [1889] LR 14 PD 64��132
Nicolene Ltd v Simmonds [1953] 1 All ER 822��214
Paradine v Jane [1647] 4 KB��214
ParkingEye Limited v Beavis [2015] UKSC 67��226
Partridge v Crittenden [1968] 1 WLR 1204�� 45
Pascoe v Turner [1979] 1 WLR 431��117
Pharmaceutical Society v Boots [1953] 1 QB 401�� 51
Printing and Numerical Registering Co v Sampson [1875] 19 Eq 462�� 12
Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] 1 All ER 542�� 93
Radmacher (formerly Granatino) v Granatino [2010] UKSC 42�� 77
Raffles v Wichelhaus (Peerless) [1864] 2 H&C 906��162
Read v J Lyons & Co [1947] AC 156�� 9
Shirlaw v Southern Foundries Ltd [1939] 2 KB 206��132
Smith v Hughes [1871] LR 6 QB 597�� 66, 172
Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15��175
Spring v Guardian Assurance plc [1994] 3 All ER 129��133
Spurling Ltd v Bradshaw [1956] 1 WLR 461��151
Stilk v Myrick [1809] EWHC KB J58�� 82, 83
Taylor v Caldwell [1863] 122 ER 309��201, 215
Thornton v Shoe Lane Parking [1971] 2 QB 163�� 47
Tinn v Hoffman [1873] 29 LT 271�� 56
Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 ��201
Walford v Miles [1992] 1 All ER 453��142
White v Jones [1995] 2 AC 207��250
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2 WLR 1153��82–3, 86
Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111��146
Yates Building Co Ltd v R J Pulleyn & Sons (York) Ltd [1975] 237 EG 183�� 56
Other
Oberste Gerichtshof (Austria) 7 August 2007, 4Ob135/07t (Bastlerfahrzeug)��147

Court of Justice of the European Union 12 March 2002, Case C-168/00, ECLI:EU:C:2002:163
Simone Leitner v Tui Deutschland�� 225

Table of cases · xxi
United States District Court for the Southern District of New York, 200 F 287 (Hotchkiss v National
City bank of New York)��123
United States Court of Appeals, 572 F.3d 677 (9th Cir. 2009) (Doe v Wal-Mart Stores)��252
Supreme Court of New Jersey, 109 N.J. 396 (N.J. 1988) (Baby M)��185

international
Table of legislation and
instruments
International
Convention on Contracts for the International Sale of Goods (CISG) see in Index, UN Convention
on Contracts for the International Sale of Goods (CISG)
Draft Common Frame of Reference of European Private Law (DCFR) see in Index, sources of
contract law, European law, Draft Common Frame of Reference of European Private Law (DCFR)
European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR)
97, 182
Principles of European Contract Law (PECL) see in Index, sources of contract law, European law,
Principles of European Contract Law (PECL) (Lando Principles)
UNIDROIT Convention on International Factoring, see in Index, UNIDROIT Convention on
International Factoring
UNIDROIT Principles of International Commercial Contracts (PICC) see in Index, UNIDROIT
Principles of International Commercial Contracts (PICC)
European Union
Treaty on the Functioning of the Directive 2008/122 on timeshare�� 30, 106

European Union��27, 29, 179–80 Directive 2011/7 on combating late
Directive 85/374 on liability for defec- payment in commercial transactions�� 30
tive products�� 30 Directive 2011/83 on consumer rights
Directive 86/653 on self-employed �� 30, 113
commercial agents�� 30 Directive 2015/2302 on package
Directive 93/13 on unfair terms in con- travel�� 30, 225
sumer contracts��30, 130, 153–4 Directive 2019/770 on the supply of
Directive 1999/44 on sale of consumer digital contents and digital services�� 30, 207
goods�� 30, 207 Directive 2019/771 on sale of goods�� 30,
Directive 2000/31 on electronic 194, 206, 207, 251
commerce��30, 50, 112
Directive 2002/47 on financial collat- Austria
eral arrangements�� 30
Directive 2002/65 on distance mar- Allgemeines Bürgerliches Gesetzbuch
keting of financial services�� 30 (1812)�� 147
Directive 2005/29 on unfair commer-
cial practices�� 30 Canada
Directive 2008/48 on credit agreements
for consumers��30, 110, 251 Code Civil du Québec (1994)�� 128

Table of legislation and international instruments · xxiii
France Switzerland
Code Civil see in Index, France and Obligationenrecht (1912)�� 10

Civil Code (Code Civil)
Code des Procédures civiles d’exécution United Kingdom
(2012)�� 196
Code du Travail (1973)�� 107 Consumer Credit Act 1974�� 107, 111
Code des Assurances (1976)�� 107 Consumer Rights Act 2015�� 32, 130,
Code de la Consommation (1978)��23, 32 133, 147, 152, 153, 173, 207
Contracts (Rights of Third Parties) Act
Germany 1999�� 24, 247
Corona Virus Act 2020�� 205–6
Zivilprozessordnung (1879)�� 196 Judicature Act 1873��28–9
Bürgerliches Gesetzbuch (1900) see Law of Property Act 1925�� 106, 256, 257
in Index, Germany, Civil Code Law of Property (Miscellaneous
(Bürgerliches Gesetzbuch) Provisions) Act 1989�� 84, 106
Handelsgesetzbuch (1900)�� 109 Mental Capacity Act 2005��97, 99
Beurkundungsgesetz (1969)�� 105 Mental Health Act 1983�� 97
Gesetz zur Regelung des Rechts der Misrepresentation Act 1967�� 24, 174
Allgemeinen Geschäftsbedingungen Sale of Goods Act 1979�� 24, 92–3, 99,
(1976)�� 150 133, 173, 231, 242
Produkthaftungsgesetz (1989)�� 23 Statute of Frauds 1677�� 103, 108
Schuldrechtsmodernisierungsgesetz Sunday Trading Act 1994�� 179
(2002)�� 23 Surrogacy Arrangements Act 1985�� 184
Unfair Contract Terms Act 1977�� 24,
Netherlands 149–50, 152
Burgerlijk Wetboek (1992) see in Index, Other

Netherlands, Civil Code (Burgerlijk
Wetboek) Digest (part of the Corpus Iuris Civilis)
(534)�� 25, 187
Romania Uniform Commercial Code (USA)��52–3
Ladenöffnungsgesetz (2006) (Berlin)�� 179
Codul Civil (2011)�� 27, 129

Part One
Contracts
Part 1 of this book discusses two main issues: what is contract law and what
are its sources.
z The question of what is contract law is answered by reference to which

types of contracts exist, why we need contract law, what its main princi-
ples are, and how it relates to other fields of private law (Chapter 1);
z The question of where to find contract law is asking about the sources
of rights and obligations of the contracting parties. The rules and princi-
ples that govern a contract can be found in the party agreement, in offi-
cial sources (such as national and European legislation and case law and
international treaties) and in informal rules (Chapter 2).

1
Introduction
CHAPTER OVERVIEW
This chapter explains:

• The need for contract law in a well-functioning society;
• The types of contracts that are usually distinguished;
• The place of contract law in the system of private law as a whole;
• The main principles of contract law;
• The historical development of these principles since Roman times.
A contract is usually associated with a piece of paper through which one buys
a house, takes up a job or ensures access to a mobile phone network, for
example. Although these transactions can in most cases indeed be qualified as
binding contracts, the law uses a broader definition. In any given jurisdiction,
contracts are defined as legally binding agreements, irrespective of whether
they are written down or not. This means that, in law, people conclude con-
tracts when they buy products in a supermarket, take out insurance, download
Contract software, are treated by their doctor or go to the hairdresser. Contracts can
even come about in cases where no word is spoken at all, as in case of putting
money into a machine to buy a cup of coffee and of computerised derivatives
trading. Each agreement that qualifies as legally binding – and therefore as a
contract – needs to meet certain requirements, that are discussed in Part 2
of this book. This chapter discusses the concept of a contract in general and
seeks to introduce the main principles of contract law.
Why contract law?

The need for a well-functioning contract law follows from the type of society
that we live in. A market economy as is now prevalent in almost the entire
world – with the possible exception of North Korea – is based on the
Voluntary
premise that people and companies should make their own bargains on the
exchange basis of a voluntary exchange of goods and services. It is not the government
that decides how many goods are produced or how much money a person is
to pay for the product they desire. Instead, within certain limits, it is left to
the needs of the people and therefore to the market’s price mechanism to

4 · Contract law
ensure that supply and demand correspond to each other. Such a market
economy – no matter if it comes in the version of continental Rhineland, the
Nordic social model, Anglo-American capitalism or China’s socialism –
Contract law cannot do without contracts. Contract law in turn ensures that these con-
tracts are binding, and can therefore be enforced in the courts in case the
other party does not perform. This turns contract law – the rules and princi-
ples that govern transactions among parties – into the cement of modern
society: it enables market actors (individuals and companies, but also gov-
ernment bodies, municipalities, NGOs, charities, etc.) to participate in eco-
nomic and social life. A manufacturer would not be able to run its business if
customers could simply renege on their orders. I would not be able to lead a
normal life if my landlord were allowed to evict me from my apartment any
time she received a better offer from a potential tenant. Contract law thus
allows planning by individual members of society. Aristotle, in his Rhetorics
(I, 14, 22), already saw this: ‘… so that if you destroy the authority of con-
tracts, the mutual intercourse of men is destroyed’. This does not mean that
no alternative ways of organising society are available (see Box 1.1), but
they are difficult to reconcile with today’s views of what a society must look
like.
Types of contracts
Most rules and principles of contract law are designed to apply to any con-
tract, regardless of the type of party and the type of obligations the parties
take upon them. In principle, it does not matter whether the contract con-
cerns the purchase of a pen or a one billion euro takeover: as will become
clear in this book, both transactions are governed by the same principles
General
character of (such as the freedom to decide what the conditions are) and rules (notably
contract law on the formation of the contract through offer and acceptance, interpreta-
tion, performance, damages, etc.). This is not just a matter of systematic
rigidity: the implicit assumption behind it is that the law must treat all con-
tracts and parties equally, no matter what they contract about or who they
are. What one party is entitled to, must also be afforded to the other party.
Classification Despite this general character of contract law, lawyers usually distinguish
between different types of contracts. One can classify contracts on basis of
the parties involved, the main characteristics of the contract, and the reason
why parties want to be bound.
It is obvious that not all contracting parties are the same. A multinational
company aiming to build a new factory does not have much in common with
a student looking for a new pair of shoes. This is why contracts are usually

Introduction · 5
BOX 1.1
CONTRACTS AND THE ECONOMY

It is surely imaginable how an individual no such thing as an employment contract
person could survive without making con- setting the working hours and pay. Instead,
tracts: he or she could live off charity or obligations followed from the status of
obtain the necessities of life (such as food servant, who had to do virtually everything
and housing) from his or her own resources. the master asked. The master in turn had
It is more difficult to conceive of a society to supply food and offer protection. This
in which the need to contract with other only changed with increasing division of
people is completely absent. One could labour and the ensuing development of the
think of the type of community that existed economy, prompting the need for binding
in prehistoric times before any division of contracts that free people could make with
labour occurred: small groups of nomadic each other. The German author Hein Kötz
people who shared what they found by put it like this: ‘People who specialise, like
hunting, fishing and gathering had no need the farmer in producing food, the trader in
for contract law. It may be true that one distributing goods, and the tailor in making
good was bartered for another (e.g. wool clothes, or the haulier, the moneylender,
for hops), but this exchange typically took the construction worker, the teacher, the
place on the spot, allowing the parties to doctor, and others who provide specialist
immediately inspect the goods, and not services, all such people must be able to
accept them if necessary. The nature of the exchange their products or services for
goods also made it unnecessary to have money and then use the money to procure
rules on hidden defects: it is easy to see the goods or services they need to live on:
whether wool and hop or an axe are suited they have to make contracts.’ In Europe it
for their intended use. Rules on future per- took until the eighteenth and nineteenth
formance and on non-performance of the centuries before this development ‘from
contract were therefore not needed. Status to Contract’ (as the English scholar
This example makes us realise that Henry Sumner Maine famously called it
contracts are superfluous as long as rights in his book Ancient Law) was completed.
and obligations arise from one’s personal Two factors were responsible for this: 1.
status as a member of the tribe or family of The move away from an agricultural to an
which one remains a member during one’s industrial economy; and 2. A fundamental
entire life. In a feudal society, as prevalent change in how society was regarded.
in Europe until around 1400, one’s inher- Liberalism emphasised that everyone should
ited status as a vassal or a landowner was be allowed to shape one’s life as he wished.
decisive for one’s legal position; the inten- Freedom of contract was seen as the neces-
tion to leave the group was irrelevant. And sary tool to make this laissez-faire possible.
if one worked as an employee, there was

6 · Contract law
distinguished on the basis of who concludes them. Commercial contracts

(contracts between two or more commercial parties, sometimes also referred
to as business-to-business or B2B-contracts) thus stand next to consumer
Type of parties contracts (contracts between a business and a consumer, or B2C-contracts).
Contracts concluded between two individuals (not a business) are some-
times referred to as consumer-to-consumer (or C2C-contracts). As we shall
see, the relevance of these distinctions is that legislators and courts some-
times make rules specifically designed for B2B- or B2C-contracts.
Contracts can also be distinguished on the basis of their main characteristics:

what parties need to do under the contract depends on the type of contract
they concluded. The seller and buyer in a contract for sale of goods need
to do something different than the employer and employee in an employ-
Type of
performance
ment contract, for example. While in a sales contract, the seller needs to
deliver the good and the buyer undertakes to pay the price, an employment
contract requires the employee to perform the contractually agreed work
and the employer to pay the required remuneration. These so-called specific
Specific
contracts contracts are all governed by their own specific rules, laid down in national
civil codes or developed by the courts. Typical specific contracts one can
find in civil codes are sale of goods, barter, lease, mandate, donation and the
employment contract. Other specific contracts do have a name (and there-
fore share with sale, barter, etc. that they are nominate contracts), but are not
dealt with in detail in statutory law. Examples are franchise and distribution
contracts.
A third categorisation of contracts is based on the reason why parties want to

be bound. In his Traité des Obligations of 1761, the famous French jurist
Pothier defined contract as an agreement ‘by which two parties reciprocally
promise and engage, or one of them singly promises and engages, to the other
to give some particular thing, or to do or abstain from doing some particular
act.’ The distinction made here between contracts in which each party
Reason for
performance assumes an obligation in order to obtain the performance to which the other
party, in exchange, obliges itself towards the first party (bilateral contracts)
and contracts in which a party is not promised anything in return for its per-
formance (unilateral contracts) has found its way to many civil codes, includ-
ing the French (Art. 1106 Code Civil: contrat synallagmatique and unilatéral)),
the German (gegenseitiger (§ 320 BGB) and einseitiger Vertrag) and the Dutch
(Art. 6:261 Dutch Civil Code: wederkerige and eenzijdige overeenkomst). In
Bilateral
contract
case of a bilateral contract, party A only wants to be bound to party B because
party B is also willing to oblige itself towards party A. Ally promises Bob to
pay a price for the bike he is selling to her. This element of exchange (do ut
des in lawyers’ Latin) is clearly present in contracts such as sale, lease, employ-

Introduction · 7
ment, franchising and insurance, but not in the contract of donation.

Catalina’s promise to Mark to give him her iPad when her newly bought
Unilateral Samsung Galaxy has arrived is at best a unilateral contract (if binding at all:
contract see Chapter 4). The presumed reason why the donor agrees to gratuitously
transfer ownership of a good to the donee is not because she receives any-
thing in return, but because she intends to benefit the donee.
Contract law as part of private law

In the civil law tradition, to which most countries on the European continent
System
belong (see in more detail Box 2-1), contract law is seen as only one part of a
more comprehensive ‘system’ of private law. Private law consists of the rules
and principles that deal with the relationships between private actors such
as individuals and companies. Next to contract law, also the fields of tort law
(sometimes referred to as the law of ‘delict’ or law of ‘civil wrongs’), restitu-
tion, property law, trust law, inheritance law, family law and company law are
part of the overall system of private law.
The law of contract, tort and restitution are often lumped together under
Law of
obligations the heading of ‘law of obligations.’ This is because they can all give rise to so-
called ‘obligations’, a legal term indicating that a (usually) enforceable duty
exists of one person vis-à-vis another person or several other persons. In a
bilateral contract, such as sale, typically two obligations come into being:
the obligation of the buyer to pay the price and the obligation of the seller to
deliver the good. While in case of a contract, this obligation arises voluntarily
because a party intends to be legally bound, in case of a tort the obligation
is imposed upon a person independent of its intention, usually because the
law wants to attach consequences to wrongful behaviour causing damage
to the victim. Typical tort cases concern victims claiming damages for per-
sonal injury (as in case of assault, medical negligence or liability for defective
products such as exploding iPhones) or for defamation (think of publishing
false statements damaging someone’s reputation). This distinction between
voluntary (self-imposed) and non-voluntary obligations is as old as the civil
law tradition itself: it was already set out as the summa divisio (ultimate parti-
tion) in the Institutes, a textbook for law students written by the Roman jurist
Gaius around the year 160.
This classification of different areas of law into one system of private law,
as well as of different types of obligations into one law of obligations, is
typical for the civil law tradition. German, French or Polish textbooks, for
example, only tend to deal with contract law as part of book series on the law
English law of obligations, if not on private law as a whole. This is different in the English

8 · Contract law
BOX 1.2
THE GARMENT INDUSTRY SUPPLY CHAIN:

A CASCADE OF CONTRACTS
The importance of contracts in the global from the price; shipment delivered with
economy can be illustrated by reference to a delay of 30 days or more: 100 per cent
the supply chain in the garment industry, deduction from the price’), on payment,
an industry worth over 1000 billion euro in on termination of the contract, on own-
2019. The typical supply chain consists of ership of design rights and on use of
Europe- or US-based clothing companies subcontractors.
that place orders with big manufacturers in • Shanghai Globaltex Inc. concludes sub-
Asia, which in turn subcontract to smaller contracts with several local companies in
factories in their home country, which again Shanghai (including China Jiajia Co.) for
may outsource to homeworkers. It is not dif- the delivery of materials, for cutting and
ficult to imagine the high number of widely sewing and for packing and transport;
diverse contracts required to make this • China Jiajia Co. hires homeworkers who
supply chain work. In a typical example, we are paid by the piece.
find four contracts at the core of the chain:
Next to this core supply chain, other con-
• Angelina buys a V-neck chiffon blouse at tracts that Primark will have to conclude,
her local Primark shop (consumer sale); include those for design, distribution and
• Primark concludes a two-year ‘cloth- marketing of the clothing, lease of offices,
ing manufacturing agreement’ with hiring of employees, insurance of the stock
manufacturer Shanghai Globaltex Inc. against the risk of fire, printing of cata-
(SG), requiring SG to manufacture a logues and web design. The retailer in turn
set quantity of clothes in accordance will have to lease shop space and employ
with the quality and design standards staff, while the manufacturer has to pur-
prescribed by Primark. This contract typi- chase or lease machinery. Most of these
cally entails provisions on quality control parties are likely to have concluded credit
(such as a duty to furnish to Primark a agreements with banks (ranging from the
sample of each product to be approved credit card that Angelina uses to buy her
before production starts), on delivery (‘60 blouse to an extended loan facility granted
days net term’), on contractual remedies to Primark by an international consortium of
(‘shipment delivered with a delay of ten banks). All in all, a true cascade of contracts
days or more: 20 per cent deduction is behind the simple purchase by Angelina.
common law, in which such academic rationalisation has long been absent.
The first comprehensive book on the English law of obligations was only
published in 2010 and is seen as an outlier. What one does find, however, are
separate textbooks on contract law, the law of torts, property law, etc. This
different mentality was well captured by the English judge Macmillan who
in 1947 called upon his fellow-judges not to rationalise the law of England:

Introduction · 9
BOX 1.3
THE CONTRACT AS JURIDICAL ACT

The law is not only shaped by legislators What Von Savigny sought to collect under
and courts. An equally important role is one umbrella term were acts that have
played by legal academics who analyse and legal consequences because of the fact that
systematise the products of the official law- these consequences are intended by the
makers. In particular in the civil law tradition person acting. Art. 3:33 of the Dutch Civil
law professors have had a profound influ- Code formulates it like this: ‘A juridical act
ence on the present system of private law. requires an intention to create legal rela-
The high tide of this influence was in nine- tions, which intention becomes manifest in
teenth-century Germany when the so-called a declaration.’ A contract is the most impor-
Pandectists, working on the basis of the tant example of a juridical act (sometimes
then still applicable Roman law, developed also called a ‘legal transaction’), but also the
sophisticated doctrines that subsequently making of a will (‘testament’) and the deci-
found their way into legal practice as they sion to start a company, to quit one’s job or
were taken over by legislators and courts. to legally recognise a child only have legal
This influence was not limited to Germany consequences because these are intended.
alone, but can be seen throughout the civil The juridical act has a prominent place
law world (and sometimes beyond). in civil codes. In the Dutch Code, a whole
One of these doctrines is the so-called title (Arts. 3:32–59) is devoted to the recht-
juridical act (Rechtsgeschäft in German, shandeling, dealing with questions of its
acte juridique in French, rechtshandeling formation and validity. The German Code
in Dutch). Its main intellectual father is places the Rechtsgeschäft even in the very
Friedrich Carl Von Savigny (1779–1861), a first Book, devoting almost 100 articles to it,
Berlin law professor who was to become while the French Code codifies the concept
one of the most famous jurists of his time. in Art. 1100-1.
arguments ‘based on legal consistency are apt to mislead for the common law
is a practical code adapted to deal with the manifold diversities of human life,
and as a great American judge has reminded us, “the life of the law has not
been logic; it has been experience”’ (Read v J Lyons & Co).
Main principles of contract law

When lawyers say that a field of law is governed by certain principles, they
Principles
intend to refer to the main values or goals that underlie this field. It may
be that these principles are laid down in legislation or court cases, but this
need not be the case. Sometimes principles are seen as so self-evident that
the official institutions do not bother to put them into writing. Thus, both

10 · Contract law
the French and the Dutch Constitution lack an explicit provision on the
rule of law, while the German Civil Code does not codify the binding force
of contract. As principles all refer to fundamental standards, it is difficult to
prioritise one principle over another: they can contradict each other. In addi-
tion, principles are so broad that they are never without exceptions. Given
this meaning, we can say that contract law is governed by four principles:
freedom of contract, binding force, the absence of formalities and contractual
fairness.
Freedom of contract has already been mentioned as an essential part of the

Freedom of
liberal politics of laissez-faire: it gives legal application to the idea that each
contract individual should be allowed the autonomy to make the choices they desire.
If parties are best able to decide what is in their own interest, they are also in
the best position to make the contract they prefer: the law presumes that a
party will not choose contract terms that are unfavourable to it. Article 19 of
the Swiss Code of Obligations puts this succinctly in one sentence: ‘Within
the limits of the law, the parties may determine the terms of their contract
as they please.’ But the principle of freedom of contract not only entails that
a person is allowed to conclude a contract on whatever terms it deems fit
(choice of contents), but also whenever it desires (freedom to contract at all)
and with whomever it wants (freedom to choose the other party).
It must be clear that this principle can never be applied across the board. In
General
the messy reality of daily life, many parties do not have the bargaining power
conditions needed to choose the terms they like best. The reality is that consumer-
buyers, insurees, tenants, employees and smaller businesses often simply
have to accept the terms dictated to them by their economically stronger
and more experienced counterparts. Often, these terms come in the form of
general conditions (see Chapter 8) that the other party is indifferent about
and simply accepts without bothering to read them. This is why legislators
and courts tend to intervene to protect the interests of the weaker party:
contracts like employment, residential lease, consumer credit and con-
sumer sale are governed by a myriad of mandatory laws that set limits to the
freedom of the professional party. This means that sometimes so little is left
of the freedom to contract that one speaks of regulated contracts (see Box 1.5
below).
The second main principle of contract law is that the contract is binding
Binding force
upon the parties (binding force). Each party has to perform the obligations it
took upon itself and if it fails to do so, the court can intervene at the request
of the other party. We will see in Part 5 that the law can react in different ways
to ensure the binding force of the contract: it can force the defaulting party

Introduction · 11
to perform the contract (as is the normal remedy in civil law jurisdictions),
or it can prefer to have the debtor pay damages (as in the common law).
Both reactions, however, are evidence of the principle that a contract must be
upheld. No one is forced to enter into a contract, but if one does, one is bound
by it in the same way as if the rules therein had been made by the legislator.
The French Civil Code of 1804 – drafted at the peak of the autonomy of
the individual citizen – encapsulates this succinctly in its famous Art. 1103:
‘Agreements lawfully entered into have the force of law for those who have
made them.’ This elevates a contract to the same level of bindingness as a
democratically enacted statute. However, as no principle is without excep-
tions, here too it is possible that the binding force might be set aside, for
example if the contract contains a clause that the law considers to be unfair or
prohibited (Chapters 8 and 10).
The third principle is that contracts do not require any particular form (prin-
Informality
ciple of informality). This is the necessary corollary of the rule we briefly
encountered before: if parties are legally bound to the contract because they
intend to be bound, their intention is apparently sufficient and there is, as a
matter of principle at least, no need to put the contract into writing, to utter
solemn words, to visit a notary, to have a witness present, or to hand over the
good in order to make it binding. Lawyers speak of the mere agreement that
suffices for a contract to exist, or consensus ad idem. Although this principle
may be self-evident to us, it has taken 2000 years of legal history to accept
that most contracts can do without formalities (see Box 1.4). Throughout
this book, we will encounter exceptions to the principle (see also Chapter 6).
The fourth and final main principle of contract law is that of contractual fair-
ness (Vertragsgerechtigkeit; justice contractuelle). Of the four principles dis-
cussed in this chapter, it is the one that is the least precise. This is because
views of what is ‘fair’ fundamentally differ. One extreme is to apply the idea
that a fair contract consists of simply following what the contracting parties
agreed upon when they exercised their autonomy. If an individual is in a better
position than anyone else – including a judge – to decide what is in their own
interest and they conclude a contract conscious of its consequences, it is fair
to hold this individual to what he or she agreed upon. The famous French
aphorism to describe this view is: ‘Qui dit contractuel dit juste’ (‘the contrac-
tual is fair out of itself ’). In this view the law is not concerned with the fair-
ness of the outcome or with the extent to which a contract is in line with the
public interest. The English judge George Jessel in 1875 explained it like this:
‘if there is one thing more than another which public policy requires, it is that
men of full age and competent understanding shall have the utmost liberty of
contracting and that their contracts, when entered into freely and voluntarily,

12 · Contract law
BOX 1.4
FROM ROMAN TO MODERN LAW: PACTA SUNT

SERVANDA
In the heyday of the Roman civilisation, in (commodatum: borrow a lion and give back
which its law reached its greatest degree the same lion) or consumption (mutuum:
of sophistication (roughly between the borrow wine and give back a similar quan-
years 0 and 250 AD), only certain types of tity of a comparable wine), pledge (pignus)
contract could be enforced. The abstract and depositum (deposit a good to be
principle that all agreements intended to looked after gratuitously by somebody else).
have legal effect are binding was absent. This so-called closed system of contracts
There were contracts, such as sale, lease (only those contracts that fell under one
and partnership, for which the consent of the accepted categories were binding,
of parties was indeed sufficient (‘consen- whereas ‘naked’ agreements were not: ex
sual contracts’), but others only became nudo pacto actio non oritur) was taken
binding if some formality was fulfilled. The over when Roman law was rediscovered in
most frequently used formality was the the eleventh century (see Chapter 2) and
so-called stipulatio, originally consisting of remained influential until the seventeenth
a formal question-and-answer ritual. The century. Under the influence of increased
promisee was to ask the promisor ‘Do you commerce, Canon law (which regarded the
promise such-and such?’, on which the breaking of a promise as morally wrong)
promisor had to answer in exactly the same and Natural law writers (such as Hugo
wording ‘I do promise such-and-such.’ In Grotius (1583–1645), who claimed in De
later Roman times, a document would be iure belli ac pacis (2,11,4,1) that ‘the duty
drawn up stating that the stipulatio had to keep promises flows from the very nature
been observed, which practically replaced of eternal justice’), the general principle was
the difficult Q&A-ritual. A third category of gradually accepted that any agreement vol-
contracts became binding on the delivery of untarily entered into is sufficient to count as
the good (‘real contracts’ or contractus re), a binding contract.
such as a gratuitous loan of a good for use
shall be held sacred and shall be enforced by Courts of Justice’ (Printing and
Numerical Registering Co v Sampson, 1875).
This view still largely forms the basis for our present-day contract law, be it
Two types of
that even the most liberal of contract lawyers accept that the conditions under
fairness which contractual autonomy is exercised are often flawed, and that the law
therefore needs to intervene to protect one party against the other. It could be
that a party misleads another by lying about the qualities of the sold product,
preventing the latter from forming his intention in the right way (Chapter
9). It could also be that a party is presumed to lack the necessary judgment

Introduction · 13
BOX 1.5
REGULATED CONTRACTS
Although the main principles of contract shortage of labour and housing – and most
law discussed in this chapter adequately jurisdictions therefore lay down detailed
describe the great majority of commercial rules aiming to protect the employee (on
(B2B) contracts and contracts among indi- dismissal, sick leave, safety at the work-
viduals (C2C), it is beyond doubt that most place, etc.) and the tenant (on access to
contracts relevant to the average person are the property, notice, maintenance, etc.) In
heavily regulated by the public authorities. some cases the law sets maximum prices (as
There is a good reason for this: despite the in some jurisdictions with public housing,
presumption that everyone is free to con- health care, certain insurance contracts,
clude the contract he or she wants, reality electricity and gas), or even forces people
is different. Economic and societal factors to enter into a contract (as in countries that
can have a grave impact on the freedom to require their citizens to have mandatory
choose. Some contracts are even so much health insurance). In particular the liberalisa-
constrained by mandatory laws that one tion of markets for energy, infrastructure
can speak of ‘regulated contracts’. In these (such as railways) and telecom in the 1990s
contracts the main decision to be taken by opened up a wide potential for the use of
parties is whether to enter into the contract, contracts as regulatory instruments: what
while the freedom left to decide upon its used to be public law was turned into
terms is severely curtailed. Good examples (heavily regulated) private law. The regula-
are employment contracts and residential tion aims to ensure access to these basic
leases. Both contracts are characterised by services and to avoid abuse of position by
the strong bargaining position of employer suppliers.
and landlord – in particular in times of
because of age or mental illness (legal incapacity: Chapter 5). In consumer

contracts, the law often requires the professional party to give all kinds of
information to the consumer so that the latter can take an informed decision
before entering into the contract (Chapter 6). In other words: this type of fair-
ness (often called procedural fairness) requires that an unequal position among
the parties is remedied, mostly by obliging a party to put the weaker one in
the same position in order to allow it to make an informed decision. But once
this has happened, it no longer matters that a party agrees to sell something far
below its value. That contract law must in any event be concerned with this
procedural fairness, as opposed to substantive fairness, is accepted everywhere.
Distributive At the other extreme, we find the view that a contract should also be an
function instrument to (re)distribute wealth in society. It should help the poor and

14 · Contract law
the weak at the expense of the rich and the strong. If a contract clearly favours
one party over the other, the law should intervene and either declare the con-
tract void or adapt it to meet requirements of social justice. This would first
require a political choice that best reflects the collective goals of society, but
once this choice is made the courts should apply it when being confronted
with ‘unfair’ contracts. It is not difficult to criticise this view. Redistribution
of wealth is traditionally the domain of politics, which does so by way of
progressive taxation. But when it comes to a contract, it is difficult for a judge
to assess whether it contributes to social justice or not. It would turn the
court into a highly political institution. What is more, it is probable that no
‘stronger’ contracting party will still be willing to conclude a contract with a
weaker one if its bindingness is debatable. As Kötz states:
Of course some people will fare better than others. A person is obviously going to
prosper if nature has endowed him with greater abilities and talents, if his parents
provide him with more capital or superior education, or if Lady Luck smiles on him
more frequently. But the adjustment of differences in income and wealth in a manner
consonant with standards of fairness and social justice is surely the role of tax laws and
the social services which taxes pay for, rather than the mission of the law of contract.
This does not mean that no elements of substantive contractual fairness can
be found in contract law. We will encounter some of these in Chapter 8.
TOPICS FOR REVIEW
The need for contract law

Contract law and society
Voluntary exchange
The development ‘from status to contract’
The different categorisations of contracts
Bilateral and unilateral contracts
The importance of contracts in the supply chain
The place of contract law in the law of obligations and in private law in general in civil law and
common law
Juridical acts
The four main principles of contract law
The historical development towards the principle of pacta sunt servanda
Formal and substantive contractual fairness
Regulated contracts
FURTHER READING
– Frances Quinn, Elliott and Quinn’s Contract Law, 12th ed., Harlow (Pearson) 2019.
– Hein Kötz, European Contract Law Vol. 1 (translated by Tony Weir), Oxford (Oxford University
Press) 1997 (2nd ed. 2017).

Introduction · 15
– Anthony Kronman, ‘Contract Law and Distributive Justice,’ Yale LJ 89 (1980), 472
– Henry Sumner Maine, Ancient Law, London ( John Murray) 1861.
– Study Group on Social Justice in European Private Law, ‘Social Justice in European Contract
Law: A Manifesto,’ European Law Journal (2004), 661.
– Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition,
Cape Town ( Juta) 1990 (paperback edition with Oxford University Press, Oxford 1996).

2
Sources of contract law
CHAPTER OVERVIEW
This chapter examines where to look for the rules and principles of con-
tract law. It shows that contract law flows from a variety of sources:
• the agreement of the parties;

• the official national, European and supranational sources, including
national legislation and case law, European directives and international
treaties;
• informal sources, such as European principles.
National jurisdictions differ with regard to the hierarchical place they give to
each of these sources. The main rift in Europe is the one between civil law,
which places legislation (in particular codification) at the top of the pyramid,
and common law, which gives a predominant role to judge-made law.
Contract law is the set of rules and principles that governs transactions
among parties, thereby establishing those parties’ enforceable rights and
obligations. This chapter investigates where we find these rules and princi-
ples. It is obvious why this is an important question: if one is not able to dis-
tinguish between the relevant contract law and other types of norms, either
every norm could be enforced in the courts (including, for example, the rule
that one must eat with knife and fork and rules and customs of the Mafia), or
none at all (with a lawless society as a result). It will be seen that, while each
jurisdiction recognises the same sources of law, the relative weight of these
sources differs from one jurisdiction to another.
The various rules of contract law are widely diverse in nature. This chapter
Sources
presents these rules on the basis of their origins. Such a categorisation on
the basis of sources allows us to distinguish between three types of rules
relevant to contract law: rules that are made by the contracting parties them-
selves (the party agreement), rules that emerge from the official national,
European and supranational sources (official sources) and, finally, informal
rules that are made by others than the official institutions, including non-

Sources of contract law · 17
state organisations and academics (informal rules). Together, these rules

of contract law originating at different geographical (national, European,
supranational) and actor-specific (parties, legislators, courts and other
actors) levels form what is often referred to as a ‘multi-level’ legal system.
Any lawyer should be able to find their way through this system in order
to identify the precise and detailed rules needed to solve a case or advise a
client. If, for example, the seller of a good is confronted with a buyer who
refuses to pay the price, one needs to be able to locate the relevant statutory
rules and judicial decisions.
The party agreement

Compared to many other fields of law, contract law is special in at least one
important respect: the question of what is the law (in the sense of the enforce-
able rights and obligations of the parties) can – to a large extent – be decided
by the parties themselves. Freedom of contract entails that parties are not only
free to decide whether they want to contract at all, and with whom, but also
that they can determine the contents of their contract. The party agreement,
consisting of what the parties expressly agreed upon when entering into the
contract, typically includes the price of the good or service and the qualities it
must possess. For the rest, it depends heavily on the type of contract and the
relationship between the parties what it is that they add to these essentials. In a
commercial setting of parties who have been dealing with each other for a long
time (think of a transport company that has served one particular customer
for over 20 years), it is not uncommon that in the course of dealing parties
only still need to agree upon the price for each transport. On the other hand,
the end result of long negotiations on an international merger or takeover is
usually laid down in a document of several hundred pages.
Contractual rules need not be made for one contract only. In practice com-
mercial parties often make use of standardised sets of rules that are suited to
their own interests. These so-called general conditions, or standard forms, are
used by almost all professional parties (including supermarkets and retailers)
for the contracts they conclude with consumers or other professional parties.
The advantages of this are clear: it saves a party from having to negotiate and
draft contract conditions for every new contract it wants to conclude. When
used in a B2C-contract the law has always been suspicious of standard terms.
In so far as the consumer is even willing to read and understand the standard
terms, he is hardly ever in the position to renegotiate them: it is a matter of
accepting the conditions or not contracting with this party at all. This is why
legislators and courts have developed mechanisms to avoid that the consumer
is confronted with general conditions that are too one-sided (Chapter 8).

18 · Contract law
Official sources
It is clear that in most cases the party agreement alone cannot set all rights and
obligations under the contract. Often, parties only discuss those elements of
the contract that they consider essential (such as the price and the time of
delivery), not saying anything about other aspects (such as the place of deliv-
ery or what will happen if the other party does not perform the contract). In
so far as such matters are not covered by general conditions, the law should
provide so-called default (or ‘facilitative’) rules that are automatically appli-
Default rules cable if the parties have not made any other arrangements. Default rules are
thus rules that parties can deviate from: they are applicable subject to agree-
ment otherwise and fill the gaps left open by the parties (see Chapter 7). It
may also happen that parties would like to contract in a way that is considered
contrary to law, public policy or good morals (such as hiring someone to steal
a painting, or – to give a more disputed example – paying someone to give
birth to a baby, discussed in Chapter 10). In such cases, the law may have to
intervene with so-called mandatory rules that declare such a contract void, or
Mandatory at least avoidable by one of the parties. Both facilitative and mandatory laws
rules can flow from the ‘official’ national, European and supranational sources.
National law
Official contract law at the national level is primarily produced by the legis-
lature and the courts. In civil law countries, general rules on contract law are
typically found in the Civil Code. Thus, the French Code Civil (CC) of 1804
places contract law in its Book III on the different ways of acquiring property,
whereas the German Bürgerliches Gesetzbuch (BGB) of 1900 has general pro-
visions on juridical acts (see Box 1.3) in Book 1 and specific rules on contracts
in Book 2. The Dutch Burgerlijk Wetboek (BW) of 1992 places the provisions
on juridical acts in Book 3, on contracts in general in Book 6 and on specific
contracts in Book 7. To get a better picture of the central place of contract law
in these three codes, their tables of contents are reproduced below.
French Code Civil
Preliminary Title: Of the Publication, Effect and Application of
Laws in General (art. 1–6)
Book I. Of Persons (art. 7–515-13)
(…)
Book II. Of Property and of the Different Modifications of
Property (art. 515-14–710-1)
(…)
Book III. Of the Different Ways to Acquire Property (art.
711–2279)

Title I Of Successions
Title II Of Donations
Title III Of the Sources of Obligations
Title IV Of the General Regime of Obligations
Title V Of the Contract of Marriage and of Matrimonial
Regimes
Title VI Of Sales
Title VII Of Barter
Title VIII Of the Contract of Hiring
Title VIII-bis Of the Contract of Real Estate Promotion
Title IX Of the Contract of Partnership and Companies
Title IX-bis Of Agreements Relating to the Exercise of
Undivided Rights
Title X Of Loans
Title XI Of Deposit and Sequestration
Title XII Of Contracts of Chance
Title XIII Of mandate
(…)
Book IV. Of Securities (art. 2288–2488)
(…)
German Bürgerliches Gesetzbuch

Book 1. General Part (§§ 1–240)
Division 1 Persons
Title 1 Natural Persons, Consumers, Businesses
Title 2 Legal Persons
Division 2 Things and Animals
Division 3 Juridical Acts
Title 1 Capacity to Contract
Title 2 Declaration of Intent
Title 3 Contract
Title 4 Conditions and Specification of Time
Title 5 Agency and Authority
Title 6 Consent and Ratification
Division 4 Periods of Time and Fixed Dates
Division 5 Limitation
Title 1 Subject-Matter and Duration of Limitation
Title 2 Suspension of Expiry and Recommencement of the
Limitation Period
Title 3 Legal Consequences of Limitation
Division 6 Exercise of Rights, Self-Defence, Self-Help
Division 7 Giving of Security

20 · Contract law
Book 2 Law of Obligations (§§ 241–853)

Division 1 Contents of Obligations
Title 1 Duty of Performance
Title 2 Default by the Creditor
Division 2 Drafting Contractual Obligations by Means of
Standard Terms
Division 3 Contractual Obligations
Title 1 Creation, Subject-matter and Termination
Title 2 Bilateral Contracts
Title 3 Promise of Performance to a Third Party
Title 4 Earnest, Contractual Penalty
Title 5 Termination, Right of Termination and Right of
Return in Consumer Contracts
Division 4 Extinction of Obligations
Title 1 Performance
Title 2 Deposit
Title 3 Set-Off
Title 4 Release
Division 5 Assignment of a Claim
Division 6 Assumption of Debt
Division 7 More than one Obligor and Obligee
Division 8 Specific Types of Obligations
Title 1 Sale, Exchange
Title 2 Time-Share Agreements, Contracts relating to
Long-Term Holiday Products, Brokerage Contracts and
Exchange System Contracts
Title 3 Credit Contract; Financial Assistance and
Contracts for Delivery by Instalments
Title 4 Donation
Title 5 Lease, Usufructory Lease
Title 6 Gratuitous Loan
Title 7 Contract for the Loan of a Good
Title 8 Service Contract and Similar Contracts
Title 9 Contract for Work and Similar Contracts
Title 10 Brokerage Contract
Title 11 Promise of a Reward
Title 12 Mandate, Contract for the Management of
Another’s Affairs and Payment Services
Title 13 Managing Another’s Affairs
Title 14 Deposit
Title 15 Bringing Things onto the Premises of Innkeepers
Title 16 Partnership

Title 17 Co-Ownership
Title 18 Life Annuity
Title 19 Imperfect Obligations
Title 20 Suretyship
Title 21 Settlement
Title 22 Promise to fulfil an Obligation; Acknowledgement
of Debt
Title 23 Order
Title 24 Bearer Bond
Title 25 Presentation of Things
Title 26 Unjustified Enrichment
Title 27 Torts
Book 3 Law of Property (§§ 854–1296)
(…)
Book 4 Family Law (§§ 1297–2385)
(…)
Dutch Burgerlijk Wetboek

Book 1 Family Law and the Law of Persons
(…)
Book 2 Legal Persons
(…)
Book 3 Patrimonial Law in General
Title 1 General Provisions
Title 2 Juridical Acts
Title 3 Power of Attorney
Title 4 Acquisition and Loss of Property
(…)
Book 4 Inheritance Law
(…)
Book 5 Proprietary Rights
(…)
Book 6 General Part of the Law of Obligations
Title 1 Obligations in General
Title 2 Transfer of Claims and Debts
Title 3 Torts
Title 4 Obligations from A Source Other than Tort or
Contract
Title 5 Contracts in General
Book 7 Specific Contracts
Title 1 Sale and Barter
Title 1A Timeshare and Long-Term Holiday Products

22 · Contract law
Title 2 Financial Collateral Contracts

Title 2A Consumer Credit
Title 2B Credit of Goods
Title 2C Money Loan
Title 2D Pawn Loan
Title 3 Donation
Title 4 Lease and Hire
Title 5 Agricultural Tenancy
Title 7 Services
Title 7A Package Travel
Title 7B Payment Services
Title 9 Deposit
Title 10 Employment Contract
Title 12 Contract for Works
Title 14 Suretyship
Title 15 Contract of Settlement
Title 17 Insurance
Title 18 Annuity
Book 7A Specific Contracts, Continued
Title 9 Partnership
Title 13 Loan for Use
Title 15 Vested or Perpetual Annuity
Title 16 Contracts of Chance
Book 8 The Law of Carriage and Means of Transportation
(…)
Book 10 Private International Law
These tables of contents of three major European civil codes reveal a number
of differences in their treatment of contract law. The oldest code, that of
France, is sometimes referred to as ‘the code of the owner’: the fact that it
places contract law in the book on ways to acquire property is clear evidence of
the post-revolutionary focus on property (a right ‘sacred and inviolable’ as the
French Constitution says) as the most important right of the citizen. Until the
grand reform of 2016 (see below), the French Code lacked a general part on
the law of obligations. The French lawmaker sought to repair this deficiency
by revamping and renaming Titles III and IV of Book III. However, it would be
an overstatement to say that this led to a whole new system of French contract
law: the reform was more the work of a carpenter than of an architect.
The German and the Dutch Code are much more systematised: they are
Layered drafted as a coherent whole with a high level of abstraction. They both have
structure a so-called layered structure, which means that the more general provisions

precede the more specific ones, thus avoiding repetition. The reverse of this
internal economy of the Code is that only trained lawyers are able to find
their way through the scattered provisions. In the Dutch Code, for example,
a contract of sale is governed by the provisions in Title 2 of Book 3 on juridi-
cal acts, by Title 5 of Book 6 on contracts in general, and by the provisions
specific to the sales contract in Title 1 of Book 7 (with even more specific
rules on consumer sales within this Title). A similar need to go through the
entire Code exists in the German case, where one finds the juridical act in
the General part of Book 1 (containing rules relevant for all areas of private
law, including the law of obligations, property, succession and family law)
and a whole range of different rules on the law of obligations in general
(Divisions 1–7) and on specific contracts (a large part of Division 8) in
Book 2.
The French, German and Dutch Civil Codes have undergone significant
Reforms
changes in the last two decades. The German Schuldrechtsmodernisier-
ungsgesetz (Act on the Modernisation of the Law of Obligations) of 2002
incorporated doctrines developed by the courts and academia (such as
precontractual liability) and made important changes to the law of con-
tractual remedies and consumer protection, partly to incorporate law of
European origin. In the Netherlands, the change was even more radical as
the country adopted a whole new Civil Code that replaced the old Code
of 1838, which was based on the French Code Civil. The nine books of the
new Code have gradually entered into force since 1970 when Book 1 was
introduced (Book 10 on Private International Law became law in 2012;
Book 9 on Intellectual Property is yet to be introduced and the same is
true for some specific contracts that are still covered by the Code of 1838
and that are brought together in the provisional Book 7A). Partly inspired
by these modernisation efforts, as well as by the wish to re-establish the
French Code as an attractive model abroad, the French Ministry of Justice
introduced a major reform of French contract law in 2016. Next to a
reformulation and renumbering of existing provisions, this reform brought
some changes in the existing law. These changes will be dealt with in the
subsequent chapters.
Next to the civil code, many civil law countries have more specific statutes in
Specific statutes
which contract law can be found. France, for example, has adopted a separate
Consumer Code (Code de la Consommation) that collects and consolidates
laws on consumer protection, as well as a Commercial Code that provides
additional rules on B2B-contracts. Germany also keeps some laws outside
the BGB, such as the Product Liability Act (Produkthaftungsgesetz) of 1989
and statutory implementations of recent European directives (see below).

24 · Contract law
Figure 2.1 The world’s legal families
The dominant source of contract law in the common law family is not legis-
lation but the case law developed by the courts. The primary reaction of an
English judge or lawyer when confronted with a contract case is to consult
the decisions of the Supreme Court of the United Kingdom (until 2009
the judicial division of the House of Lords) and of the Court of Appeal of
English law England and Wales. This does not mean that specific statutes on contract
law are absent in England. They just do not aim to comprehensively sys-
tematise the existing law, nor do they make it redundant to consult judicial
decisions. In most cases statutes only attempt to amend the common law on
a particular point. The most important statutes on contract law are the Sale
of Goods Act 1979, the Misrepresentation Act 1967, the Unfair Contract
Terms Act 1977 and the Contracts (Rights of Third Parties) Act 1999. In
2015 the Consumer Rights Act (CRA) was introduced. This statute, essen-
tially consolidating the English implementations of EU directives, is gener-
ally considered as the biggest overhaul in consumer law in a generation. It
remains to be seen how the CRA will be affected by Brexit. The rules of
European origin laid down in the CRA are completely part and parcel of
UK domestic law and will continue to be in force. The UK government
may choose to repeal or amend the CRA, for example in case it regards its
consumer-friendly rules as burdensome, but it is too soon to say whether
this will happen.

BOX 2.1
LEGAL FAMILIES: CIVIL LAW

The world’s legal systems can be catego- legislator restates, simplifies, consolidates
rised into groups on the basis of char- and changes the existing law, and is able
acteristics such as their common history, to make a new start. Codification abolishes
characteristic mode of legal thought, domi- the old law. The telling story is that of the
nant sources of law and ‘mentality.’ The French law professor Bugnet who in the
two best known of these ‘legal families’ early nineteenth century told his students:
are the civil law and common law family. ‘I know nothing of civil law; I only teach the
Although this is undoubtedly a Eurocentric Code Napoleon.’ And Napoleon himself is
approach that neglects the law that existed claimed to have said when the first com-
in many parts of the world before European mentary on his code was published that
colonisation, it is a useful tool to map the ‘his’ Code was now lost for good (‘Mon
diverse global legal landscape of today. Code est perdu’).
The only national jurisdictions that are not A second feature of the civil law is that
covered by the dichotomy are so-called its historical roots lie in the so-called ius
mixed jurisdictions (such as Scots and South commune. Most jurists agree that one of
African law, that constitute a mixture of civil the great lasting achievements of Roman
law and common law elements) and coun- civilisation was the private law they devel-
tries that declare Islamic law to be the law oped. The sixth-century compilation of this
of the State (as in for example Saudi Arabia law by Emperor Justinian, now known as
and Iran: see Box 2.6). the Corpus Iuris Civilis, was rediscovered in
The civil law family, predominant in Italy in the late eleventh century, which led
Europe, Africa and South America, is char- to a ‘second life’ of Roman law. It formed
acterised by a number of common features. the basis for law teaching at the newly
First, almost all jurisdictions within the civil founded European universities, first in Italy
law tradition have a civil code as the domi- and later elsewhere, and was subsequently
nant source of law. The prime examples applied in practice (the so-called ‘reception’
of such codes are the French Code Civil of Roman law). By the seventeenth century,
of 1804, adopted under Napoleon, and this reworked Roman law had become the
the German Bürgerliches Gesetzbuch of ius commune (literally ‘common law’) of
1900. Both codes were introduced after much of Europe and was applicable unless
revolutionary events, namely the French local statutes or customs ruled differently on
Revolution of 1789 and the German unifica- a certain point. It was only from the end of
tion in 1871. In both cases, the Code put the eighteenth century onward that Roman
an end to the legal diversity that had existed law was gradually replaced by national codi-
both in France and in the 39 independent fications. It may seem at odds with the idea
German states. This reveals two important of the Code as making a fresh start that
aspects of codification. It is not only a way its substantive rules are still based on the
to unify previously diverse laws, but it is also Roman legacy, but it is not: codification fun-
the instrument through which a national damentally changes the hierarchy of sources


26 · Contract law

to the benefit of the (democratic) legislator, that the dominant role of the Civil Code in
but it may still make use of the substantive civil law jurisdictions means that case law is
rules, arguments and principles of the pre- not important. This was the naïve view of
codified time. eighteenth-century legislators that indeed
A third essential element of the civil tried to cover every possible situation, the
law tradition is its overall mentality. This is Prussian civil code of 1794 (the Allgemeines
well captured in Schlesinger’s textbook on Landrecht) being a frightening example
Comparative Law: ‘The very idea of codifica- with no less than 19,000 articles. We still
tion rests on the (…) belief that the human find a reminiscence of this in Art. 5 of the
mind could use reason to project the solu- French Code Civil stating that ‘The courts
tion of future controversies in a systematic shall be prohibited from issuing rules which
and comprehensive manner. (…) … a true take the form of general and binding deci-
code [is] a systematic, authoritative and sions on those cases which are submitted
direction-giving statute of broad coverage to them.’ Reality is different. The Code is
(…).’ The civilian mentality is thus one of sometimes not only silent, but also needs
trying to systematise the law by developing interpretation in the light of the circum-
principles and concepts with a view to stances of the case and changed views in
their application in future cases. If there is society of what is right. The older the Civil
any jurisdiction in which this comes out, it Code, the more important it therefore is to
is German law, on which the comparatist take note of the decisions of the highest
Markesinis once wrote: national court in civil law matters, such as
the German Bundesgerichtshof, the French
German private law is a meticulous piece of
Cour de Cassation and the Dutch Hoge
legal engineering which, by use of concepts,
Raad. Art. 1 of the Swiss Civil Code (1907)
attributes legal solutions to legal problems as
well reflects how important the task of the
precisely and mercilessly as a Swiss chronom-
court can still be as it assigns to the court
eter ticks away the years, hours, and seconds
the task of acting as a substitute legislator:
of a human life from the cradle to the grave.
German law, it has been suggested, is forever The Code governs all questions of law which
prepared to sacrifice notions of justice to the come within the letter or the spirit of any of
altar of the concept. its provisions. If the Code does not furnish an
applicable provision, the judge shall decide in
In line with this, academic writing has great
accordance with customary law, and failing
persuasive authority in Germany and is
that, according to the rule which he would
often quoted by the courts (in contrast to
establish as legislator. In this he shall be
England, where at least until recently only
guided by approved legal doctrine and judicial
deceased authors could be cited under the
tradition.
rule: ‘Better read when dead’).
It would be a grave mistake to assume

BOX 2.2
RECODIFICATION IN CENTRAL AND EASTERN

EUROPE
Although this chapter discusses codifica- Civil Codes. This was partly inspired by the
tion primarily in Germany, France and the wish to adapt the law to meet the needs
Netherlands as representative jurisdictions of a market economy and attract foreign
(much of what is said for Germany applies investment, but certainly also by the wish
mutatis mutandis to Austria, Switzerland to make a fresh start, of which a new Code
and Greece, what is said for France often is typically a symbol. Thus, new Civil Codes
also applies to Belgium, Italy, Spain and were adopted in Lithuania (2000), Romania
Portugal), special attention must be paid (2011), the Czech Republic (2014) and
to codification in the EU-Member States Hungary (2014), while efforts to develop
in Central and Eastern Europe. Despite an entirely new Code are under way in
the wide variety of countries involved, Poland (that still has its Code of 1964) and
they all have in common that they were Slovakia. Estonia gradually adapted its exist-
for several decades under communist rule ing Code (1993–2002) while Latvia simply
and all (except for Romania, which kept re-enacted an amended version of its old
its – amended – Code of 1864) adopted a Code of 1937. Outliers are Bulgaria and
Code that was true to socialist values. In Croatia: they lack a comprehensive Civil
many of these countries the whole period Code (but have introduced separate stat-
between 1939 and 1991 is seen as one of utes on contract law and the law of obliga-
discontinuity and all have made (or are still tions) and have no plans to draft one.
making) efforts to amend or replace their
European law
Contract law also flows from European sources. In the last 25 years, the
European legislature has promulgated over 15 ‘directives’ with relevance for
contract law. Article 288 of the Treaty on the Functioning of the European
Directives Union (TFEU) describes a directive as a European legislative instrument
that ‘shall be binding, as to the result to be achieved, upon each Member
State to which it is addressed, but shall leave to the national authorities the
choice of form and methods’. This means that, unlike the name suggests, a
Rationale directive obliges each of the 27 EU-Member states to implement its rules into
national law. After this implementation, the directive’s rules are in force as if
they had been created by a national legislator, be it that the Court of Justice
of the European Union (CJEU) is competent to interpret the directive at
the request of a national court (in the so-called preliminary reference proce-
dure). The reason why the EU is active in the field of contract law is directly

28 · Contract law
BOX 2.3
LEGAL FAMILIES: COMMON LAW

The common law prevails in England and was not needed as a weapon against legal
in almost the entire English-speaking world diversity (which had ceased to exist a long
beyond Britain, including the United States, time before) and neither was it necessary
Australia and India. Apart from England to use it to build a nation. In addition, the
and Wales and Northern Ireland, the other ruling class regarded the idea of codification
two common law jurisdictions in Europe as too revolutionary. The result is that the
are Ireland and Cyprus. Scotland is a mixed English common law could develop uninter-
jurisdiction with considerable civil law influ- rupted: old case law was never ‘abolished’,
ence. Scotland has its own court of appeal leading to some 350,000 published cases
(the Inner House of the Court of Session), being, in principle, still relevant today. The
but its decisions can be challenged before only way to make this mass of cases practi-
the UK Supreme Court. cally workable is by applying the doctrine of
The most important difference between stare decisis or binding precedent, meaning
the civil law and common law tradition is that precedents coming from a court further
the way in which the unity of (and thereby up the hierarchy are binding for the lower
equality before) the law is maintained. In court. In the UK, there is a small Supreme
the common law, this is not primarily the Court of only 12 justices that can efficiently
task of the democratically elected legislator, render well-balanced decisions that become
but of the courts. The dominant source of binding precedent. The court usually decides
private law is therefore the case law of the no more than 80 cases each year, dealing
highest courts. The main explanation for only with matters that the judges regard as
this lies in history. Unlike on the European of ‘general public importance’.
continent, a reception of Roman law did not Next to the emphasis on case law, a
take place in England. After the Norman second characteristic of English law is the
Conquest of 1066 William the Conqueror distinction it makes between common law
found in place a highly fragmented law: and ‘equity’. This distinction goes back to
local statutes and customs differed from the Middle Ages, when the common law
one place to another and were enforced by courts came to interpret the law in a rather
a variety of courts. The King (and later the strict manner. Justice-seeking individuals
Royal Courts at Westminster in his name) who were confronted with a common
assumed the role of highest court, which law court unwilling to give them what
gradually led to the development of one they wanted, could complain to the Lord
uniform law for the whole of England. This Chancellor (later the Court of Chancery)
centralisation and unification was com- who was allowed to grant them relief on
pleted around 1500, and from that time the basis of ‘equity’. Over the centuries,
onwards it was possible to speak literally the case law of this equity court became
of a ‘common law.’ Nineteenth century a whole separate legal system side by side
attempts to replace the common law by a with the common law. It was only with the
codification failed. In England, codification Judicature Act of 1873 that the two



jurisdictions were merged procedurally: the social conduct than as a set of rules of deci-
common law and equity courts were com- sion for the relatively few disputes that cannot
bined in one and the same court that from be settled extra-judicially. (. . .) Those ex-
then on had to apply both sets of rules. barristers who occupy the bench are close to
The plaintiff was also no longer required to the course of affairs and know how to decide
indicate whether he was seeking a common a concrete case that is presented to the court
law or equitable remedy. Substantively, in oral contradictory trial by the members of a
however, both systems have continued to highly experienced bar.
exist beside each other. This is for example
Unlike their civil law colleagues, English
clearly visible in the law of contractual
judges are often prepared to discuss and
remedies: while the action for damages is
balance the policy considerations that
a common law remedy, the claim for spe-
underlie a particular rule in all openness.
cific performance is an equitable one (see
By doing so the court gives insight into the
Part 5).
reasons for making a particular decision.
Also in its overall mentality, the common
English judges often adopt a personal,
law is different from the civil law. English
sometimes even literary, style, which is natu-
lawyers do not tend to look at the law as a
rally promoted by the possibility of deliver-
coherent system, but rather as a set of prac-
ing dissenting and concurring opinions. This
tical rules. The German-American compara-
is consistent with the scepticism in England
tist Max Rheinstein once put it like this:
concerning the proposition that there is
policies are not always followed with consist- only one outcome logically considered to be
ency, nor are concepts always clean-cut; the correct.
law is thought of less as a body of norms of
related to the main aim of the EU: the development of a European single
market in which the free movement of goods, services, capital and persons is
ensured and in which European citizens are free to live, work and do business
wherever they want. However, unlike national legislators, the EU can only act
in so far as a competence to do so is provided in one of the European treaties.
For contract law the source of this competence is usually found in Art. 114
TFEU, which allows the European legislator to adopt measures harmonis-
ing national provisions ‘which have as their object the establishment and
functioning of the internal market’. The European Commission has always
been keen to argue that differences among the contract laws of the Member
States hinder this internal market. In the words of the Commission itself in a
Communication it issued in 2001:
For consumers and SMEs in particular, not knowing other contract law regimes
may be a disincentive against undertaking cross-border transactions. (…)
Suppliers of goods and services may even therefore regard offering their goods

30 · Contract law
BOX 2.4
EU DIRECTIVES ON CONTRACT LAW

The coverage of contract law by EU direc- • Directive 2002/47 on financial collateral
tives is sector-specific: the European legisla- arrangements
tor never deals with contract law as a whole, • Directive 2002/65 on distance marketing
but only with specific contracts (such as of financial services
package travel, sale of consumer goods or • Directive 2005/29 on unfair commercial
timeshare), and with certain aspects of these practices
contracts (often on information require- • Directive 2008/48 on credit agree-
ments vis-à-vis the consumer and contrac- ments for consumers (formerly Directive
tual remedies). The great majority of the 87/102)
directives aim for so-called minimum-har- • Directive 2008/122 on timeshare (for-
monisation: they set a minimum level of pro- merly Directive 94/47)
tection for the consumer and leave it to each • Directive 2011/7 on combating late
individual Member State to offer more pro- payment in commercial transactions (for-
tection if it considers this appropriate. merly Directive 2000/35)
The most important directives with rel- • Directive 2011/83 on consumer rights
evance for contract law are: (replacing directive 85/577 on door-to-
door sales and Directive 97/7 on distance
• Directive 85/374 on liability for defective contracts)
products • Directive 2015/2302 on Package Travel
• Directive 86/653 on self-employed com- (formerly Directive 90/314)
mercial agents • Directive 2019/770 on the supply of
• Directive 93/13 on unfair terms in con- digital contents and digital services
sumer contracts • Directive 2019/771 on sale of goods
• Directive 2000/31 on electronic commerce (replacing Directive 1999/44)
and services to consumers in other countries as economically unviable and refrain

from doing so. (…) Moreover, disparate national law rules may lead to higher
transaction costs (…).
By harmonising at least some of these rules, the EU hopes that more busi-
nesses and consumers will be willing to contract across borders. If a Spanish
trader would like to buy goods from a party in Germany, it may refrain from
doing so because it does not know German law. A diligent party will in any
event have to obtain expensive legal advice before entering into the contract.
Creating a level playing field of one harmonised law must help to avoid this.
Likewise, a consumer in Liège wishing to buy a TV at the Mediamarkt in
Maastricht may be less inclined to do so because of diverging laws – or at
least this is how the European Commission reasons.

BOX 2.5
EU POLICY INITIATIVES ON EUROPEAN CONTRACT

LAW: A EUROPEAN CONTRACT CODE NO MORE
In the last 20 years the European to rely on the standards these codes
Commission often took a strong stance set. Examples are the safety certificates
on the future of contract law in the EU. issued by associations of e-commerce
The Commission, strongly supported by retailers, such as the Dutch label <www.
the European Parliament, tried to push an thuiswinkel.org> and the French label
agenda of maximum harmonisation for a <www.fevad.com>;
wide range of topics. This was led by criti- 2. next to the PECL, several other sets of
cism on the then prevailing approach of principles were drafted, including prin-
harmonisation by way of minimum-direc- ciples for specific contracts such as fran-
tives. This method was seen as slow, frag- chise and distribution contracts as part of
mentary and not very effective in view of the DCFR (see below);
the different national implementation tech- 3. existing EU directives were revised and
niques. In 2001, the European Commission new directives adopted, combined with
therefore published a Communication on a strengthening of the enforcement of
European Contract Law, which sketched European consumer law under the so-
four options for the future: called ‘New Deal for Consumers’;
4. in 2011 the European Commission pub-
1. no EU action, and leave problems to
lished a Proposal for a Regulation on a
be resolved by the market (consumers,
Common European Sales Law (CESL).
NGOs and businesses);
This draft did not propose to intro-
2. draft common contract law principles
duce a full-fledged European contract
such as the PECL (see below), provid-
code that would replace the existing
ing guidance to legislators, courts and
national contract laws (as early as 1989,
parties, but not binding them in any
the European Parliament even sug-
way;
gested introducing a whole European
3. improve the quality of existing European
Civil Code, an idea the Member States
directives;
have never supported), but a so-called
4. adopt new EU-legislation that is not-
‘optional code’: a European set of
sector-specific, for example by adopt-
rules on cross-border contracts of sale
ing the far-going option of a European
that can be chosen by the contracting
Contract Code that would replace the
parties if they prefer this over the appli-
existing national laws.
cability of a national law. Criticism of
Instead of choosing only one of these increasingly Eurosceptic Member States
options, progress was made on each of led the Commission to withdraw the
them in the last two decades: CESL proposal in 2014. Since then the
Commission stopped pushing the idea of
1. retailers increasingly commit themselves
a contract code for Europe.
to codes of conduct, allowing consumers

32 · Contract law
It is characteristic of EU directives that their method of implementation

Implementation
is left to the Member States. This leads to significant differences in imple-
mentation. While Germany and the Netherlands usually give effect to
directives by inserting them into their civil codes, France collects them in
its separate Consumer Code (Code de la Consommation). In the UK direc-
tives were transposed into the Consumer Rights Act 2015 as well as (in
so far as the Consumer Rights Directive is concerned) into the Consumer
Contracts (Information, Cancellation and Additional Charges) Regulations
2013/3134. It is clear that these different implementation techniques can
endanger the goal of harmonisation.
Supranational law
A third source of official contract law consists of supranational rules. Long
before the EU had such a pervasive influence on national contract laws
by issuing directives, there have been efforts to unify parts of the law on
a regional or even global scale. A successful example is the unification of
conflict-of-laws rules in the context of the Hague Conference on Private
International Law (established in 1893). Also parts of substantive trade law
have been unified, led by the United Nations Commission on International
Trade Law (UNCITRAL). Its most important achievement is the Convention
CISG on Contracts for the International Sale of Goods (CISG), concluded in Vienna
in 1980 and in force since 1988. The CISG has been ratified in 94 states and
contains rules that apply to commercial cross-border sales contracts. If both
contracting parties are a business and they reside in a country that has ratified
the CISG, the rules of the convention are applicable to the contract unless
the parties have explicitly excluded it. For example: because Israel and the
Netherlands are both a party to the CISG, an Israeli company selling oranges
to a Dutch business is governed by the rules of the convention on, e.g. forma-
tion of contract and remedies in case of non-performance.
Just like the European directives discussed in the above, the CISG is inspired
by the idea that the adoption of uniform rules promotes the development
of international trade. This is in fact facilitated by the fact that the CISG
is applicable in the world’s largest economies, including the United States,
China, Japan, Germany, Brazil and Russia. The most notable European
trading country where the CISG is not applicable is the UK. It is said that
the main reason for this lies in a lack of interest of domestic business and in
the fear that London may lose its edge as one of the world’s leaders in inter-
national arbitration and litigation if inroads are made on the applicability of
English law. This fits in with the criticism that is sometimes expressed about
the CISG. Critics argue that the CISG does not reach much uniformity in

practice: despite the existence of one uniform text (be it in six authentic
language versions), there is not one international court that is able to give
definitive interpretations of this text. In reality, the national courts of the 94
ratifying countries all adopt diverging approaches to interpretation of the
CISG, even though Art. 7(1) of the Convention requires that ‘regard is to be
had to its international character and to the need to promote uniformity in its
application.’
Informal rules
As is the case in many other areas of law, contract law is increasingly influ-
Soft law
enced by rules that are not officially binding, but have the status of soft law.
Soft law can take the form of, for example, guidelines, codes of conduct, reso-
lutions, action plans, principles and model rules. Although it is by definition
not binding ‘hard’ law, it is important in practice for various reasons. One is
that soft law is often a first step towards adopting a binding instrument: legis-
lators tend to look at soft law as a blueprint for future statutory rules. Another
is that soft law often reflects the more progressive opinio juris, the direction
in which the law is to develop according to the cutting-edge opinion makers.
This aspirational aspect of soft law can make it a very useful source in inter-
preting and criticising existing laws as well as in teaching the law. In the field
of contract law, it can also be a reference point for parties having to draft a
contract.
The best-known soft law rules in the field of contracts are so-called ‘prin-
Principles ciples’. Unlike the four substantive principles of contract law identified in
Chapter 1, these principles aim to identify rather detailed commonalities
among different jurisdictions and put these down in the form of a rule. In
so far as commonalities are difficult to find, the principles make a choice for
what their drafters consider to be the ‘best’ rule. The three most important
examples of such ‘restatements’ of the law are the UNIDROIT Principles
of International Commercial Contracts (PICC), the Principles of European
Contract Law (PECL) and the Draft Common Frame of Reference of
European Private Law (DCFR).
PICC The PICC are drafted by UNIDROIT (International Institute for the
Unification of Private Law), an intergovernmental organisation founded in
1926 and located in Rome. The UNIDROIT Principles (originally published
in 1994, but now in their third edition of 2010) are intended to provide a
system of rules especially tailored to the needs of international commercial
transactions by offering rules designed for use throughout the world ‘irre-
spective of the legal traditions and the economic and political conditions

34 · Contract law
of the c ountries in which they are to be applied’. The Preamble to the PICC
makes clear how they can be used:
These Principles set forth general rules for international commercial contracts.
They shall be applied when the parties have agreed that their contract be governed
by them.
They may be applied when the parties have agreed that their contract be governed
by general principles of law, the lex mercatoria or the like.
They may be applied when the parties have not chosen any law to govern their
contract.
They may be used to interpret or supplement international uniform law
instruments.
They may be used to interpret or supplement domestic law.
They may serve as a model for national and international legislators.
The PICC have come to play an important role in international commercial

arbitration. If a business party from Kenya and its counterpart from the UK
find it difficult to reach agreement on the law that should be applied by arbi-
trators in case of a dispute, they may be able to agree on the PICC as a neutral
set of rules.
A comparable document are the Principles of European Contract Law, some-

times also referred to as the ‘Lando Principles’ after their initiator, the Danish
law professor Ole Lando who assembled a group of academics from European
PECL countries to draft the text. Unlike the PICC, the PECL are a private initia-
tive, drafted between 1982 and 1996 with the financial help of the European
Commission. They have a wider scope of application than the PICC as they
are intended to reflect the common core of contract law in general (also cover-
ing B2C- and C2C-contracts); on the other hand, they only mean to restate
the contract laws of the EU Member States, and not of the entire world. As
Art. 1:101 PECL makes clear, their aims are very similar to those of the PICC:
(1) These Principles are intended to be applied as general rules of contract law in
the European Union.
(2) These Principles will apply when the parties have agreed to incorporate them
into their contract or that their contract is to be governed by them.
(3) These Principles may be applied when the parties:
(a) have agreed that their contract is to be governed by ‘general principles of law’,
the ‘lex mercatoria’ or the like; or
(b) have not chosen any system or rules of law to govern their contract.
(4) These Principles may provide a solution to the issue raised where the system or
rules of law applicable do not do so.

BOX 2.6
ISLAMIC CONTRACT LAW

Islamic law stands apart from the civil law public policy and good morals (see Chapter
and common law tradition in not having a 10), Islamic law prescribes that contracts
codification or accepting binding precedent. should be permitted by religion (or, in other
The religious law of Islam (the so-called words, should be halal). This means that
sharia) consists of the norms of the Quran contracts relating to, for example, alcohol,
and the Sunnah (both seen as divine, sup- tobacco, pork, pornography, gambling or
posedly going back directly to the prophet prostitution are not allowed (and are there-
Muhammad) and their interpretation by fore haram). Islamic market indices (see e.g.
Islamic scholars (fiqh). Judicial decisions www.financialislam.com/islamic-market-
by judges (qadis) – from which appeal indexes) therefore provide lists of stocks in
is not possible – are not a main source companies that comply with the sharia.
of Islamic law. The best-known rules of A remarkable difference between Islamic
the sharia are those that clearly deviate law and national jurisdictions is the prohi-
from Western secular values because they bition of claiming interest on loans. Verse
violate women’s rights, allow stoning for 2:275 of the Quran states: ‘those who
adultery, or go against human rights such consume interest cannot stand [on the
as freedom of expression and of sexual Day of Resurrection] except as one stands
orientation. However, only a few countries who is being beaten by Satan into insanity.
(notably Saudi Arabia, Iran, Pakistan and (…) Allah has permitted trade and has
Sudan) have promulgated the sharia as the forbidden interest.’ Islamic jurists argue
exclusive law of the state. Most countries about the exact reason for this prohibition
with a dominantly Muslim population (such (that can, by the way, also be found in the
as Egypt and Indonesia) adopt only some Old Testament in Deuteronomy 23:19).
aspects of the sharia, while other countries Some say that a loan in Islam is always a
(such as Turkey) do not accept it at all. charitable act, which therefore does not
An interesting question is whether sharia allow the making of profit. Others simply
contract law is any different from secular hold that if Allah imposes a rule one should
contract laws. The main principles of con- not look for any worldly explanation. But
tract law are not. Thus, verse 5:1 of the regardless the reason for the rule, banks
Quran explicitly adopts the binding force in both the Islamic and Western worlds
of contract (‘O you who believe! Fulfill [all] have developed halal alternatives for loans
contracts’) and verse 2:282 states that con- bearing interest. One of these alternatives
tracts can be made in any form (‘But if it be is musharaka, a form of joint venture in
a transaction which you carry out on the which both the lender and the borrower
spot among yourselves, there is no blame participate in profits and losses alike. In the
on you if you reduce it not to writing’). last two decades many Western banks have
The most important difference with non- opened Islamic windows facilitating Islamic
religious contract laws concerns the ques- banking, including interest-free Islamic
tion which contracts are prohibited. While mortgages.
secular laws prohibit contracts contrary to

36 · Contract law
The third set of principles worth mentioning consists of the Draft Common
DCFR Frame of Reference of European Private Law. The so-called Study Group on a
European Civil Code, the main drafter of the DCFR, sees itself as the suc-
cessor body to the Commission on European Contract Law that drafted the
PECL. The DCFR published in 2009 builds upon the PECL, partly because
it covers other fields of private law (mainly torts and property) and partly
because it deals with a range of specific contracts that are not dealt with in the
PECL (sale, lease of goods, contracts for services, mandate, agency, franchise,
distributorship, loan contracts, personal security and donation). Much more
than the PICC and PECL the DCFR aims at being a model for the European
legislator. This is evident from the – German law inspired – structure of the
DCFR that consists of ten books, including a general part. The DCFR can
easily be read like a civil code. But much more important is the use that can
be made of the DCFR and other sets of principles in teaching the law: it is
now common practice in many European countries to compare the national
law with PECL and DCFR, thus providing a true common frame of reference
for European teaching.
TOPICS FOR REVIEW
Sources of contract law

Contract law as a multi-level legal system
Default rules
The place of contract law in the French, German and Dutch Civil Code
The layered structure of the German and Dutch Civil Code
Contract law outside the Civil Code in civil law jurisdictions
Legal families and where to find them
The main differences between the civil law and common law family
Codification in Central and Eastern Europe
The aim, form and problems of European legislation on contract law
Minimum harmonisation
Policy initiatives on European contract law
The aim and scope of application of the CISG and the extent to which it is successful
The relevance of soft law for the law of contract
The various sets of principles of contract law and their functions
Islamic contract law
FURTHER READING
– Hugh Beale et al, Cases, Materials and Text on Contract Law, Ius Commune Casebooks for the
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapter 3.
– Raoul van Caenegem, Judges, Legislators and Professors, Cambridge (Cambridge University
Press) 1987.
– James Gordley and Arthur Taylor Von Mehren, An Introduction to the Comparative Study of
Private Law: Readings, Cases, Materials, Cambridge (Cambridge University Press) 2006.
– Basil S. Markesinis, Hannes Unberath and Angus Johnston, The German Law of Contract: A
Comparative Treatise, 2nd ed., Oxford (Hart) 2006.

– Ugo A. Mattei et al, Schlesinger’s Comparative Law: Cases-Text-Materials, 7th ed., New York
(Thomson Reuters) 2009.
– Matthias Reimann and Reinhard Zimmermann (eds.), Oxford Handbook of Comparative Law,
2nd ed., Oxford (Oxford University Press) 2019.
– Max Rheinstein, Gesammelte Schriften Vol. 1, Tübingen (Mohr) 1979.
– Jan Smits, The Making of European Private Law, Antwerp-Oxford-New York (Intersentia) 2002.
– Jan Smits and Caroline Calomme, ‘The Reform of the French Law of Obligations: Les Jeux
Sont Faits’, Maastricht Journal of European and Comparative Law 23 (2016), 1040.
– Omar Salah, ‘Islamic finance: the impact of the AAOIFI Resolution on equity-based sukuk
structures’, Law and Financial Markets Review (2010), 507.
– Konrad Zweigert and Hein Kötz, An Introduction to Comparative Law (translated by Tony
Weir), 3rd ed., Oxford (Oxford University Press) 1998, Part B.

Part Two
The formation of a contract

Three main requirements need to be met before a contract is validly
concluded:
z Agreement of the parties, usually consisting of an offer by one party

(the offeror) and acceptance of this offer by the other party (the offeree)
(Chapter 3)
z An intention to create legal relations; under English law supplemented
by the requirement of consideration to be provided by each party, and
in the French legal tradition by the requirement of causa (Chapter 4)
z Legal capacity of the parties (Chapter 5)
Although a contract is in principle binding without any form, sometimes

certain formalities have to be fulfilled in addition to these requirements
(Chapter 6).

3
Offer and acceptance Offer and acceptance
CHAPTER OVERVIEW
The formation of a valid contract requires the agreement of the parties.

This agreement normally consists of an offer by one party (the offeror)
and a corresponding acceptance by the other party (the offeree). This
chapter explains:
• how to define an offer and how to distinguish it from a mere invitation

to enter into negotiations;
• whether an offer can be revoked before it is accepted by the offeree;
• how long the offer lasts;
• what are the requirements that the acceptance must meet;
• what is the time of conclusion of the contract.
Civil codes, legal doctrine and case law of any jurisdiction in the world define
a contract as a legally binding agreement. The two following definitions of
the French Code Civil and the European DCFR express the same thought:
Art. 1101 CC: ‘A contract is an agreement of wills among two or more persons
intended to create, modify, transfer or extinguish obligations.’
Art. II-1:101 (1) DCFR: ‘A contract is an agreement which is intended to give rise
to a binding legal relationship or to have some other legal effect. (…)’
The question when exactly the necessary agreement exists (sometimes

referred to with the Latin phrase consensus ad idem) is usually answered by
dissecting the contracting process in terms of offer and acceptance. A contract
only exists if one party (the offeror) has made an offer (offre, Antrag, aanbod)
and the other party (the offeree) has accepted this offer by way of an accept-
ance (acceptation, Annahme, aanvaarding). This model is a convenient way of
analysing the negotiations or any other previous contacts between the parties:
by identifying an offer and a corresponding acceptance, it becomes clear from
which exact moment in time the contract comes into existence. Before the
acceptance, no one is bound to do anything under the contract, while after

42 · Contract law
BOX 3.1
THE RELATIVE IMPORTANCE OF THE OFFER AND

ACCEPTANCE MODEL
The model of offer and acceptance is from each other and time lapses between
universally applied in both civil law and their declarations of offer and of accept-
common law jurisdictions. It was devel- ance (because they send letters or exchange
oped in the seventeenth and eighteenth e-mails). This rationale makes it somewhat
centuries when trade and travel expanded artificial to identify offer and acceptance in
and more and more contracts were made case parties are in each other’s presence,
among people who could not see each as when a customer buys something in a
other face-to-face. It must be remembered shop or when a notary drafts a deed that is
that the question of when an offer is made signed simultaneously by the parties.
and acceptance is sent does not arise as Despite the universal use of the offer
long as contracts are concluded between and acceptance model by courts and aca-
bystanders. In that case, the communica- demics, not all civil codes use the terms.
tion is instantaneous and it is immediately The French Code Civil (Art. 1113) only does
clear if parties have reached agreement or so since 2016. Art. 6:217 (1) of the Dutch
not. Offer and acceptance as the mechanics Civil Code resolutely states that ‘A contract
of contract formation only become indis- is concluded by an offer and the acceptance
pensable when the parties are at a distance thereof.’
acceptance one party (in case of a unilateral contract) or both parties (in case
of a bilateral contract) are bound. This offer is often made explicit, as when
Adelina tells her twin sister Viorelia that she can buy her wedding dress for
€150, but it can just as often be inferred from the circumstances of the case,
as when a supermarket puts products on the shelf in order to be bought by its
customers.
There are five important issues that need to be discussed concerning offer
and acceptance:
z What is an offer and how to distinguish it from a mere invitation to enter

Five questions
into negotiations?
z Can an offer be revoked before it is accepted by the offeree?
z How long does the offer last?
z What are the requirements that the acceptance must meet?
z What is the time of conclusion of the contract?
This chapter addresses these five questions.

Offer and acceptance · 43
What is an offer?
A. General
Article 2:201 (1) PECL states the following:
A proposal amounts to an offer if:

(a) it is intended to result in a contract if the other party accepts it, and
(b) it contains sufficiently definite terms to form a contract.
This provision represents what all European systems have in common when
Invitation
defining an offer. The offer must be such that it creates a contract if accepted
by the other party. This requires that the offer indicates both the intention of
the offeror to be bound and the terms by which the offeror is willing to be
bound (think of the price of the goods and possibly the time of delivery).
If both these requirements are not met, there is no offer at all, but at best
an invitation to the other party to enter into negotiations (also called an
invitation to treat in England, an invitatio ad offerendum in Germany, an offre
de pourparlers in France and a uitnodiging om in onderhandeling te treden in
Dutch). Only if the invitee finds such an invitation attractive enough, it can
decide to make an offer itself, leaving it to the original invitor to either reject
or accept it.
It is not difficult to tell an offer from an invitation if the proposal itself indi-
Binding offer
cates that it is to be seen as a ‘binding offer’. Things are also easy if the offer
contains the clause that it is made ‘subject to agreement’, ‘subject to confirma-
tion’, ‘without any obligation’, ‘freibleibend’ or ‘sans engagement’, or makes
use of similar wording. Often, however, the statements made by the offeror
are more vague and may incite the other party to think that an offer was
made. In such a case, it is decisive how the proposal would be understood
by a reasonable person in the position of the offeree: could such a reason-
able person believe that an offer was made? It cannot be denied that this
is a vague criterion. As the English legal historian John Baker once wrote:
‘Despite many judicial expeditions to find him, the reasonable man has not
been reduced into captivity.’ This means that the criterion needs to be sub-
stantiated by reference to case law.
A good example is provided by the English case Gibson v Manchester City

Council (1979). Mr. Gibson was the tenant of a house who was interested
in buying it. After having completed an application form, the City Council
sent him a letter stating that it ‘may be prepared to sell the house to you’ for
£1,180. When Mr. Gibson said he found the price too high because of the

44 · Contract law
bad condition of the path to the house, the Council replied it did not want
to change the price. On 18 March 1971 Mr. Gibson wrote to the Council to
‘carry on with the purchase as per my application’. Shortly after, the politi-
cal winds in Manchester changed and the Council decided to no longer sell
municipal property. Mr. Gibson claimed that the letter of the Council consti-
tuted an offer that he had accepted on 18 March. However, the court did not
find an offer in the Council’s letter: this was only an invitation to the tenant
to make an offer. Mr. Gibson had subsequently done so on 18 March, but
the Council had not accepted it. A reasonable person in the position of Mr.
Gibson could not have believed that the Council’s letter, only containing the
price of the house, was an offer that only needed to be accepted by the offeree
in order to form a contract.
The offer must also contain sufficiently definite terms. This is the logical
Definitiveness
consequence of the very nature of an offer: if an offer can bring about a
contract by a simple ‘Yes, I accept’, it must contain all essential elements by
which the parties will be bound. If I propose to sell you three paintings from
my art collection, this would usually not qualify as an offer: we will first need
to know which specific paintings you are interested in. Any agreement that is
too vague or incomplete will therefore not be regarded as a binding contract.
This does not mean that the parties need to have reached agreement on all
possible details, but they do need to agree on what they consider as vital. In
case of a sales contract, this will include the good to be sold and the price
(Art. 1583 of the French Code Civil even requires this explicitly). For the
rest, Art. 6:227 of the Dutch Civil Code well expresses what any jurisdiction
would accept: ‘The obligations the parties take upon them, must be deter-
minable.’ If Julieta sells Argentinian beef to William, they will have to agree
on the quantity and the price and anything else they find essential (such as,
perhaps, that the meat emanates from eco-friendly cows). But they are free to
say that they leave for example the place and time of delivery to be decided
upon by a third party (‘Delivery on future dates as indicated by the restau-
rants mentioned in the annex to this contract’).
B. Offers to the public: advertisements

An offer does not have to be directed towards a specific person. It can also
be addressed to the general audience. Many products are put up for sale in
advertisements, ranging from a used study book advertised by a student who
no longer needs it, to clothing, food and consumer electronics advertised in
Proposal to magazines or leaflets distributed door-to-door, on television or on a website.
public Although all jurisdictions concur that in case of such a proposal to the public
the rule also applies that it only amounts to an offer if the offeree could rea-

sonably believe that an offer was made, the outcome of this test differs from
one jurisdiction to another. Some jurisdictions regard an advertisement as an
offer, others only as an invitation to treat.
French and In French and Dutch law, an offer to the public is binding in the same way as
Dutch law
if it had been made to a particular person. In one of the leading French cases
(Maltzkorn v Braquet of 1969), a Mr. Braquet placed an advertisement in a
local newspaper advertising a plot of land for sale for FF250,000 (€ 38,000).
Mr. Maltzkorn saw the advert and accepted the ‘offer’, as he said. Mr. Braquet
denied that he was bound, arguing that an advertisement can never be a
binding offer. However, the Cour de Cassation could not find any legal basis
for this rule and considered it possible that an advertisement is a binding offer
to the public that binds the offeror to the first person who accepts it. This does
not mean that any advertisement is an offer. If the personal qualities of the
other party are of interest to the offeror, as is undoubtedly the case in employ-
ment contracts and credit agreements, but also in case one wants to rent out
an apartment or buy a house (or indeed a plot of land, as in the French case),
these are usually contracts intuitu personae. An illustration of this is provided
by the Dutch case of Hofland v Hennis (1981), in which a house in the Dutch
town of Bussum was put up for sale in a local newspaper. The advertisement
contained the address, the price and details of the layout of the house. When
Mr. Hennis had visited the house, he told the seller that he accepted his offer.
However, when the sale had to be closed, the seller refused to cooperate with
the transfer of the house, arguing that no contract had come into being. The
Netherlands Hoge Raad denied that an offer had been made:
An advertisement offering to sell a specific property at a certain price does in

principle not qualify to be interpreted by potential offerees as anything else than an
invitation to enter into negotiations, whereby matters such as the price, additional
conditions of the purchase and the prospective buyer may be of importance.
English and Contrary to French and Dutch law, English and German law do not accept
German law that an advertisement to bring about a bilateral contract can amount to an
offer. It merely invites potential customers to make an offer to the seller to buy
the good. In the curious case of Partridge v Crittenden (1968), Lord Parker of
the High Court put it like this: ‘I think when one is dealing with advertise-
ments and circulars (…) there is business sense in their being construed as
invitations to treat and not offers for sale.’ This conclusion was beneficial to
the advertiser Mr. Partridge, who had put on sale in a magazine ‘Bramblefinch
cocks, Bramblefinch hens, 25 s. each.’ As it happened, these birds were pro-
tected by law and Mr. Partridge was charged by the Royal Society for the
Prevention of Cruelty to Animals (RSPCA) with unlawfully offering the

46 · Contract law
cocks and hens. However, as the advertisement was only seen as an invitation
to treat, he could not be convicted. German law adopts the same position.
More interesting than describing this difference between the French-Dutch

Policy reasons
and the English-German approach is why it exists. What are the policy
reasons behind treating an advertisement as a mere invitation to treat instead
of as an offer? The rule is clearly to the advantage of the seller, who can still
decide after the advertisement was published whether he wants to deal with
the interested party or not. This may even lead to further negotiations to
the seller’s benefit who by contrast in French law is in principle bound by
the stated price – something that French supermarkets take pride in, using
slogans such as ‘Un prix affiché est un prix tenu’ (‘We stick to the price we
published’). What the French and Dutch could contend against this view is
that their rule at least protects customers against a seller who advertises at a
low price to lure people into his shop or onto his website, and then makes
up some excuse for not selling to them. In addition, it is argued in Germany
and England that, as an advertisement can be read by anyone, the advertiser
cannot be expected to sell to all interested parties as stocks are always limited.
This last argument, in turn, does not convince the French and the Dutch as
they assume that an offer will automatically lapse when the stock is finished.
This is again a matter of the reasonable person: the offeree cannot reasonably
expect that the offeror is still willing to sell if the products are sold out. This
is also the position taken by Art. 2:201 (3) PECL:
A proposal to supply goods or services at stated prices made by a professional

supplier in a public advertisement or a catalogue, or by a display of goods, is
presumed to be an offer to sell or supply at that price until the stock of goods, or
the supplier’s capacity to supply the service, is exhausted.
No matter how one appreciates these different policy arguments, there is one
Unilateral
important practical difficulty with the English-German approach. In some
contract cases the advertiser simply wants to be bound to its proposal by the mere
acceptance of somebody else without the need to negotiate. The police may
wish to offer a reward for information that can lead to the arrest of a criminal,
or a driver may wish to park her car in car park with a ticket machine. Buying
a Coca-Cola can from a vending machine falls in the same category of cases.
In such cases French and Dutch law have no trouble finding an offer that
is accepted when the other party performs the act for which the reward,
service or product was offered. If these were only invitations, a binding con-
Reward tract would not emerge from providing information, parking one’s car or
quenching one’s thirst. It lies in the very nature of these announcements
that the advertiser demonstrates a serious intention to be bound to potential

respondents. This is why English law regards these as offers for a unilateral
contract. In the case of parking one’s car, the Court of Appeal held in the case
Thornton v Shoe Lane Parking (1971), per Lord Denning:
The customer pays his money and gets a ticket. He cannot refuse it. He cannot get
his money back. He may protest to the machine, even swear at it. But it will remain
unmoved. He is committed beyond recall. He was committed at the very moment
when he put his money into the machine. The contract was concluded at that time.
It can be translated into offer and acceptance in this way: the offer is made when
the proprietor of the machine holds it out as being ready to receive the money. The
acceptance takes place when the customer puts his money into the slot.
Another classic illustration of regarding an advertisement for a unilateral

contract as an offer under English law is provided by the Carbolic Smoke Ball
case (see Box 3.2).
Meanwhile, German law provides another solution in case of an advertise-

ment for a reward (Auslobung). § 657 BGB states:
Anyone offering by means of public announcement a reward for undertaking an

act, including without limitation for producing an outcome, is obliged to pay the
reward to the person who has undertaken the act, even if that person did not act
with a view to the promise of a reward.
This provision places the reward outside contract law. It regards the
announcement of a reward as an independent juridical act that out of itself
creates the legal effect that whoever undertakes what is necessary is entitled
to the reward. Interestingly, this means that even if the finder of a lost laptop
was not aware of the €1,000 reward announced by the owner, she can still
claim the money. However, the advertiser may withdraw the offer for the
reward before the necessary act is performed (§ 658 (1) BGB).
The above rules are not any different in cases where goods are offered for sale
Website on a website. Although European directives require online sellers to supply
the consumer with extensive information on the product, giving them the
possibility to withdraw from the contract within 14 days after delivery (see
Chapter 6), the offer and acceptance question is governed by the respective
national laws. German and English law therefore regard advertising goods on
a website as non-binding invitations to treat. This proved convenient when
in 1999 Argos accidentally put Sony televisions up for sale at a price of £2.99
instead of £299: orders of customers were not acceptances but offers to buy
that could easily be rejected by the UK retailer.

48 · Contract law
BOX 3.2
FROM THE CARBOLIC SMOKE BALL TO THE

HOOVER FLIGHTS FIASCO
One of the best-known English contract that you cannot contract with everybody. It is
law cases is Carlill v Carbolic Smoke Ball Co, not a contract made with all the world. There
decided by the Court of Appeal in 1893. is the fallacy of the argument. It is an offer
The background to the case is formed by made to all the world; and why should not
the flu pandemic that killed one million an offer be made to all the world which is to
people worldwide between 1889–94. ripen into a contract with anybody who comes
During this period, a business called the forward and performs the condition? It is an
Carbolic Smoke Ball Company produced offer to become liable to any one who, before
and sold a product called the ‘Carbolic it is retracted, performs the condition, and,
Smoke Ball’, filled with phenol and aimed at although the offer is made to the world, the
providing protection against the potentially contract is made with that limited portion of
lethal influenza virus. The company placed the public who come forward and perform the
several advertisements in newspapers to condition on the faith of the advertisement. It
market the product. One such advertise- is not like cases in which you offer to negoti-
ment, published in the Pall Mall Gazette ate, or you issue advertisements that you have
in November 1891, read as follows: ‘£100 got a stock of books to sell, or houses to let,
reward will be paid by the Carbolic Smoke in which case there is no offer to be bound by
Ball Company to any person who contracts any contract. Such advertisements are offers to
the increasing epidemic influenza colds, negotiate – offers to receive offers (…). If this
or any disease caused by taking cold, after is an offer to be bound, then it is a contract
having used the ball three times daily for the moment the person fulfils the condition.
two weeks, according to the printed direc- That seems to me to be sense (…).
tions supplied with each ball. £1000 is
Mrs. Carlill was therefore entitled to the
deposited with the Alliance Bank, Regent
£100 reward. She died (not of influenza) in
Street, showing our sincerity in the matter.
1942 at the age of 96.
(…).’ A Mrs. Carlill bought one of the balls
The main lesson a good lawyer would
and used it as instructed. Unfortunately,
learn from this case is that marketing efforts
she still contracted influenza and decided
should go hand in hand with measures to
to claim the £100. The company refused to
limit liability. If advertising for free trips to
pay, arguing that the ad was not meant as
exotic places, T-shirts, or dinners in expen-
an offer, but was a mere advertising hype
sive restaurants is seen as an offer that
that was not to be taken seriously.
becomes a binding unilateral contract as
The company’s argument was rejected
soon as people satisfy the requirements, it is
by the court. Bowen LJ reasoned in the fol-
necessary to limit the time during which the
lowing way:
promotion is valid, or to add to the offer
It was also said that the contract is made with that it only lasts until the stock is exhausted.
all the world – that is, with everybody; and No doubt the biggest marketing disaster


in UK history was caused by forgetting to big success: Hoover had 200,000 extra cus-
consult the in-house lawyer on this impor- tomers (with not surprisingly a high interest
tant point. When in 1992 the British division in the Turbopower Total System vacuum
of electronics manufacturer Hoover wanted cleaner, priced just over £100). However,
to get rid of its surplus stock of washing the collateral damage consisted of Hoover
machines and vacuum cleaners, it promised Britain having to pay £50 million on air
free airline tickets to continental Europe and tickets, leading to such financial difficulties
the US to anyone buying more than £100 that the company had to be taken over by a
worth of their products. The action was a competitor in order to survive.
Products offered on websites are considered as offers under French and

Dutch law. In a case similar to Argos (Stichting Postwanorder v Otto BV, 2008)
the Dutch court therefore had to find a different way of dealing with a clear
mistake in the advertisement. In this case online retailer Otto had offered for
sale a Philips HD Ready LCD TV for €99.99. This proved to be an attrac-
tive offer: in six days, 11,000 customers ordered 14,000 televisions through
the Otto website. All customers received an automatic e-mail confirming
their order. When Otto refused to deliver, claiming that there was an obvious
mistake in the pricing of the product, dissatisfied customers took Otto to
court. The Court of Appeal in Den Bosch made clear that an offer was made
by Otto, but denied that a valid contract had come into being:
The question is whether the consumers at the moment they accepted the offer –
thus at the moment they ordered over the internet – could reasonably assume in
the circumstances of the case that this offer was correct. (…) The answer to this
question is dependent on what an average consumer, i.e. a consumer who is as
informed as the average person, can expect. One can expect from a consumer who is
planning to buy an LCD TV that they prepare themselves generally on the prices of
LCD TVs. If this consumer subsequently sees that the Otto website offers for sale:
a) an HD ready widescreen LCD television

b) of A-brand Philips
c) with a screen diameter of 80 cm
d) for a price of €99.90 or €99.00
e) with in red capitals the qualification ‘NEW’
f) while there is no indication that this is a one time stunt offer, a blockbuster
or in any other way a ‘special’ offer,
then this consumer must understand that there is an inaccuracy. An average

informed consumer knows, or at least should know, that the prices of comparable
LCD televisions vary between €700.00 to approximately €1,300.00.

50 · Contract law
Even if the consumer does not immediately recognise the error, the difference in
price is so considerable that in any case there must have been doubt. In case of
doubt about the correct price, the consumer should have further investigated the
matter. (…)
In order to address this problem, many websites provide specific rules to the
consumer on how to order, avoiding the situation where the online seller is
bound too soon. A website could for example state that the prospective buyer
only becomes bound if he submits a form and that the seller is to confirm the
order. A common clause is that ‘By completing and submitting the following
electronic order form you are making an offer to purchase goods which, if
accepted by us, will result in a binding contract.’ It follows from European law
that in cases where the online seller makes use of such a special procedure, it
must communicate to the consumer the technical steps to follow in a clear,
comprehensible and unambiguous way prior to the order being placed (Art.
10 of EU Directive 2000/31 on electronic commerce). This explains why
many websites require the consumer to click his way through several ‘I agree’-
boxes before the contract is finally formed.
C. Offers to the public: goods on display in shops

Not only advertisements can qualify as offers to the public: if goods are put
on display in a shop or a window, the question also arises whether the cus-
tomer can claim that the good is to be sold to him at the indicated price. If the
law says he can, this means that the shopkeeper is obliged to sell to anyone
who is willing to pay the price. The contrary view implies that bargaining is
still needed, giving the seller the freedom to select whom he wants to serve.
In the latter case a shop does not have to stick to the price tag it put on the
product, nor does it have to sell the item at all: the shopkeeper can simply tell
the customer to go somewhere else.
Policy The policy arguments behind the choice that the various jurisdictions make
arguments are identical to those in case of a public offer by way of an advertisement. It
therefore does not come as a surprise that French and Dutch law consider
the display of goods in a shop as an offer, while English and German law in
principle do not. The customer at a Tesco in Bath actually makes an offer to
buy to the cashier (acting on behalf of the shop) at the checkout and it is up
to the cashier whether or not to accept this offer. The cashier’s colleague at
the Casino supermarket in Bourg d’Oisans, however, cannot but conclude
that the customer has accepted the offer by the time the latter has reached
the till.

The leading case Pharmaceutical Society v Boots (1953) provides an interest-

ing reason for the English approach. Display of goods in a shop could never
qualify as an offer for a bilateral contract because, in the words of Somervell
LJ, ‘once an article has been placed in the receptacle [basket, shopping cart]
the customer himself is bound and would have no right, without paying for
the first article, to substitute an article which he saw later of a similar kind and
which he perhaps preferred’. But this is a false reason. It can also be argued
that the acceptance of the buyer takes place at the till at the moment of
check out – even though French law did indeed adopt the peculiar position
that Somervell criticises in the case of the Exploding lemonade bottle of 1964.
In this case, a bottle of Vittel lemonade that had just been taken out of the
basket at the checkout exploded and injured the customer. The French court
held that the customer could claim damages in contract (which was easier for
her to do than file a tort claim) as, in the words of the Court of Appeal:
the sale takes place as soon as the customer, seeing an item marked with a price
the client is prepared to accept, places the item in the basket or bag made available
to her and which she is required to use until the goods are checked out by the
employee at the till.
This leaves as the main policy reason for the English position – as we saw
before with the advertisement – that it reserves to the shop the right to do
business with whom it wants, possibly putting it in a better position to nego-
tiate. But while this may be true for the bespoke tailor, the antiques shop
and the art dealer, it is difficult to see the argument in a world dominated by
Sainsbury’s, Kaufhof and H&M. In addition, the freedom of a business not to
accept a customer is limited by anti-discrimination rules, not only in the UK
but in any other European country.
Can an offer be revoked?

Once it is established that a binding offer was made, a second question
emerges: is it possible for the offeror to revoke his offer before the offeree has
brought about the contract by acceptance? Revocation (révocation, Widerruf,
herroeping) of an offer means that the offeror is no longer bound by his offer.
Allowing revocation is clearly in the interest of the offeror, who may have dis-
covered that he is able to sell the goods at a much better price to somebody
else and therefore wants to end his dependency on the offeree. The offeree
on the other hand relies on the offer and may have taken action as a result
before formally accepting (for example by negotiating a loan from a bank,
or trying to find potential customers to whom he can resell the products).
Different jurisdictions weigh these two interests in different ways.

52 · Contract law
Germany German law is at one end of the scale (and the same is true for other coun-
tries in the German legal tradition such as Austria, Switzerland and Greece).
§ 145 BGB reads as follows: ‘One who has offered to conclude a contract
with another is bound by that offer unless he states that he is not bound.’
This provision leaves no doubt that the offeror cannot revoke his offer. If
Jonas offers for sale to Bild some private pictures of Kim Kardashian and
receives a better offer from Express a few days later, he cannot run away from
the offer he made; the only thing he can hope for is that Bild will reject his
offer. But Jonas is bound if it is accepted. Of course, he does not have to wait
indefinitely: if a reasonable period has expired during which he does not hear
anything from the offeree, Jonas is again free to offer the pictures to anyone
else (see below). To avoid this uncomfortable position, he can of course limit
the validity of the offer by telling Bild that it is only made freibleibend (subject
to change) or that he reserves the right to revoke it. This follows from the fact
that the rules on offer and acceptance are only default rules and can be set
aside by the parties if they wish (see Chapter 2).
It is important to note that there is one self-evident case in which an offer

need not be revoked. This is not only true in German law, but also in any
other jurisdiction. An offer is a declaration of intention that naturally needs
to reach another person before it can become effective. If the offeree does not
know of the offer – which can only happen if some means of distance com-
munication such as e-mail or post were used – no harm is done if the offer is
Withdrawal withdrawn by the offeror. It is therefore generally accepted that an offer may
be retracted if the withdrawal (rétractation, Widerruf, intrekking) reaches the
offeree before or at the same time as the offer. The withdrawal then simply
‘overhauls’ the offer; the result is as if it was never made. Art. 1115 CC, Art.
3:37 (5) Dutch Civil Code and § 130 (1) BGB explicitly provide so, as does
Art. 1:303 (5) PECL.
England English law is at the opposite end of the scale. Revocation is always allowed: an
offer can be revoked at any time before it has been accepted, even if the offeror
included a deadline for acceptance in the offer. If Adele offers her veterinary
practice for sale to James and tells him that ‘a definite answer needs to be given
within six weeks’, she can still revoke it regardless of the time limit. The reason
for this extreme view lies in a peculiar requirement of English contract law
called the doctrine of consideration. Consideration will be explained in detail
in Chapter 4, but at its core lies the idea that a promise can only be enforced
if the other party does or promises something in return. In the case of an
offer, the offeree does not provide any consideration and therefore the offer
is not binding. This sounds harsh on the offeree and indeed English law is
exceptional in adopting this position in the common law world. The Uniform

Commercial Code (UCC), the uniform law that governs commercial transac-
tions in almost the entire US, has for example abandoned the English view
and provides that ‘firm offers’ are not revocable ‘during the time stated or if
no time is stated for a reasonable time’ (Section 2-205). If an English offeror
is determined to give the other party the right to accept the offer within a set
time, it can always make an ‘option contract’, for which consideration does
exist, but this may be too complicated in normal day-to-day transactions.
France French law and most other jurisdictions that stand in the French legal tradi-
tion such as Belgium adopt an intermediate position. It is settled case law of
the Cour de Cassation since 1919 that any offer is revocable before acceptance,
but that this revocation is abusive (and therefore a tort under Art. 1240 Code
Civil) if it frustrates the legitimate expectations of the offeree. This is the case
if the offer contains a time period within which it is to be accepted (offre avec
délai), or if the offeree could reasonably believe that the offer would remain
open for a reasonable time (offre avec délai raisonnable). This does not mean
that revocation does not have effect in these two cases, but the offeror must
compensate the damage the offeree suffers as a result (for example the costs
of travel to inspect the goods or the lost profits on other deals the offeree
turned down). The new Art. 1116 CC contains a rule to this effect.
Despite the different approaches of these three jurisdictions, there is una-

nimity among the drafters of international texts such as the CISG (Art. 16),
PECL PICC (Art. 2.1.4), PECL (Art. 2:202) and DCFR (Art. II-4:202). Art. 6:219
of the Dutch Civil Code also adheres to this position. Art. 2:202 PECL
speaks for all others:
(1) An offer may be revoked if the revocation reaches the offeree before it has
dispatched its acceptance (…).
(2) An offer made to the public can be revoked by the same means as were used to
make the offer.
(3) However, a revocation of an offer is ineffective if:
(a) the offer indicates that it is irrevocable; or
(b) it states a fixed time for its acceptance; or
(c) it was reasonable for the offeree to rely on the offer as being irrevocable and the
offeree has acted in reliance on the offer.
How long does the offer last?

It was seen above that, except in German law, an offer can in principle be
Lapse
revoked, after which it is no longer in existence. If the offer is accepted, the con-
tract comes into being. But what if the offeror does not revoke the offer, or is not

54 · Contract law
allowed to do so, and the offeree does not accept it either? Does this mean that
the offer stays open forever? It is clear that this would be too great a burden on
the offeror. Commercial intercourse would come to a near standstill if an offer
remains open until the offeree is so good to give a definitive answer. The law
therefore provides rules on when an offer ceases to exist. This so-called lapse
(caducité, Erlöschung, verval) of an offer exists in the following circumstances.
A. The offer is rejected

If Brahim offers to lease his Audi A6 to Caroline for €200 per month and she
says no, she is not able to come back the next day and still accept the offer.
She will have to make a fresh offer to Brahim, who is subsequently free to
accept or reject it. The PECL put this succinctly in Art. 2:203: ‘When a rejec-
tion of an offer reaches the offerer, the offer lapses.’
In case Caroline’s initial reaction were that she was willing to lease the car
Counter-offer for €100, this is seen as a counter-offer that also terminates Brahim’s original
offer. It does not make a difference whether the time fixed for acceptance has
expired or not. In the English case of Hyde v Wrench (1840), Wrench offered
to sell his farm to Hyde for £1,000 and two days later Hyde offered £950,
which was rejected by the seller. When Hyde then told the seller that on
second thought he agreed to buy for £1,000, the seller was no longer bound
to his offer: the offeree’s counter-offer had terminated it.
B. The time for acceptance expires

§§ 146–148 of the German BGB read as follows:
§ 146 An offer expires if a refusal is made to the offeror, or if no acceptance is made

to this person in good time in accordance with § 147 to 149.
§ 147 (1) An offer made to a person who is present may only be accepted
immediately. This also applies to an offer made by one person to another using a
telephone or another technical facility.
(2) An offer made to a person who is absent may be accepted only until the time
when the offeror may expect to receive the answer under ordinary circumstances.
§ 148 If the offeror has determined a period of time for the acceptance of an offer,
the acceptance may only take place within this period.
These provisions reflect what any jurisdiction would accept (see also Art.
Circumstances
2:206 PECL). The offer lapses if the time that the offeror has set for accept-

ance expires. An offer ‘valid until 30 April 2014’ can no longer be accepted
on 1 May. If no time has been fixed, acceptance must take place within a
reasonable time. How long this is will depend on the circumstances of the
case. As the German Code implies, an answer can be expected in the very
same conversation if the offer was made face-to-face or in any other type
of real time (instantaneous) communication (such as telephone, Skype and
online chat). If the offer is made inter absentes (for example by post, e-mail
or WhatsApp), much depends on the speed of the means of communication
(someone who sends his offer by regular mail cannot expect an answer on
the next day: the offeree can generally be expected to make use of the same
means of communication for transmitting his answer) and on the subject
matter. An offer to buy fresh fish, or any other perishable good, will usually
last for a shorter period than an offer to buy a painting. If the price of the
product is susceptible to market fluctuation (as in case of shares on the stock
market), a reasonable period may even be a matter of seconds.
What are the requirements that the acceptance must

meet?
The contract is concluded when the offer is accepted. This acceptance (accep-
tation, Annahme, aanvaarding) will usually take place in writing or orally. It
does not have to meet any specific requirements as long as it makes clear to
the offeror that the offeree unconditionally agrees with the terms of the offer
(English law speaks of the ‘mirror image’ rule: the offer must be mirrored by
an acceptance). If it does not, it is at best a counter-offer that ‘kills’ the origi-
nal offer. Art. 2:204 PECL reflects this:
(1) Any form of statement or conduct by the offeree is an acceptance if it indicates

assent to the offer.
(2) Silence or inactivity does not in itself amount to acceptance.
It is not uncommon that the offer specifies the method of acceptance. This
Prescribed
means that it indicates, for example, in what form the acceptance must be
method sent and to whom it must be addressed. For example, the offer could pre-
scribe: ‘Acceptance must take place by returning the attached form’, or indi-
cate that any replies are ‘to be sent by registered delivery’. This raises the
important practical question what happens if a disobedient offeree simply
sends an e-mail containing his acceptance. Does this mean that the contract
is not concluded? In other words: is the specified method of acceptance
exclusive or not? The answer naturally depends on how the offer should
be interpreted. Normally, the offeree will have to comply with the specified
method of acceptance. But if the only reason why the offeror prescribed a

56 · Contract law
certain method is to ensure a speedy reaction, the offeree’s use of another

method that achieves the same purpose also forms a valid acceptance. English
law seems to get this right. Thus, in Tinn v Hoffman (1873), it was held that
that if ‘post’ is described, a quicker method is fine as well. And if ‘registered
or recorded delivery’ is required, an ordinary letter is also acceptable (Yates
Building Co Ltd v R.J. Pulleyn & Sons (York) Ltd, 1975).
An important question is whether silence can count as acceptance of the

offer. Article 2:204 (2) PECL reflects the view of any jurisdiction that
Silence silence ‘in itself ’ does not suffice. There is good reason for this. If Anna
writes an email to Agustin in which she offers to buy his Aquariva Super for
€100, adding ‘If I do not hear from you before next Monday at noon, you
have accepted my offer’, Agustin’s mere silence cannot be seen as evidence
of his intention to sell the boat. It may be that he did not receive the e-mail
or thought this was a joke. The true reason, however, is that the law is gen-
erally suspicious of such surprise tactics. This is also why so-called inertia
selling is prohibited by the EU Directive on Consumer rights (2011/83),
which states in Art. 27:
The consumer shall be exempted from the obligation to provide any consideration
in cases of unsolicited supply of goods, water, gas, electricity, district heating or
digital content or unsolicited provision of services (…). In such cases, the absence
of a response from the consumer following such an unsolicited supply or provision
shall not constitute consent.
Despite the law’s general aversion to considering silence as an acceptance of an

offer, it is not impossible. Most examples deal with commercial relationships.
Thus, in a case decided by the French Cour de Cassation in 1988, the parties had
agreed that the buyer could exercise an option to buy an amusement park attrac-
tion from the seller by proposing a price and that the seller would then reply
within 14 days. After the offeree had exercised the option by offering FF100,000
(€15,000), he did not hear anything from the seller. The court found that the
silence amounted to acceptance. It is clear that, in cases like this, silence never
comes alone: it is usually accompanied by a whole range of surrounding circum-
stances such as previous negotiations between the parties, a long-standing busi-
ness relationship and thereby a course of business that parties are used to, the
need for a speedy reply, etc. The French speak of a silence circonstancié (‘circum-
Confirmatory stantial silence’), now codified in the new Art. 1120 CC. Another example is
note the commercial practice of so-called confirmatory notes (Bestätigungsschreiben
in German). If parties have been in negotiations and are almost ready to enter
into a contract, one of them is likely to send a ‘confirmation’ of what they orally
agreed upon, summarising the main points and possibly adding its general con-

BOX 3.3
BATTLE OF THE FORMS

It is not always easy to apply the offer and solution is to apply the ‘first shot’ rule: the
acceptance model. A notoriously difficult conditions of the offeror prevail unless they
question is what happens if each party were explicitly rejected in the acceptance
uses its own general conditions. A com- (a rule adopted by Art. 6:225 (3) Dutch
mercial buyer of goods will usually send a Civil Code). English law adopts a different
written purchase order with reference to solution. It considers each new reference
the general conditions it uses on the back to general conditions as a counter-offer; if
or in the attachment. These conditions are this offer is accepted by performance of the
obviously designed to be the most ben- obligation (such as delivery of the goods),
eficial from the buyer’s perspective. The the offeree is presumed to have accepted
seller is then likely to confirm the receipt the general conditions referred to in the
of the order with reference to his condi- latest offer (the ‘last shot’ prevails). But the
tions, naturally drafted with a view to his criticism of both solutions is that it is often
interests. This does not pose a problem if mere coincidence who fired the first or the
the standard forms are not in conflict with last shot. This is why German law adopts
each other, but this is rarely the case. The yet another solution, the so-called ‘knock
question then is how to solve this ‘battle of out’ rule. This rule entails that general con-
the forms’. A strict application of contract ditions only become part of the contract
law rules results in the conclusion that no in so far as they are common in substance.
contract at all has come into being for lack If they are different, they ‘knock out’ each
of agreement. But this would be an absurd other, leaving the resulting gap to be filled
outcome: parties were agreed on the by default rules (called ‘terms implied in
main points, have often already started to law’ in England, as we shall see in Chapter
perform, and only find out about the differ- 7). This is also the solution adopted by Art.
ing standard forms at a later stage. Another 2:209 PECL and Art. 2.22 PICC.
ditions. German case law firmly states that if the other party does not agree with
the document, it must quickly reject it at the risk of being bound.
Another phenomenon that is not uncommon in practice is that the offeree

does not formally accept the offer, but acts as if it has accepted it. Sometimes,
Conduct we do not even realise that there is such acceptance by conduct: only an eccen-
tric would tell a taxi driver that he accepts his offer when opening the door
of the car. Another example is an offeree who refrains from sending back the
order form, but simply starts to deliver the goods to the offeror who will-
ingly accepts them. And if KLM offers to buy ten A380 airliners and Airbus
already starts to paint the planes in white and blue, this may also amount to
acceptance. The criterion in each of these cases is whether there is a need to

58 · Contract law
c ommunicate the acceptance to the offeror or whether the latter can already
reasonably infer from the circumstances that his offer was accepted.
What is the time of conclusion of the contract?

The final question to be addressed in this chapter is at which moment in time
the contract is concluded. The obvious answer is ‘upon acceptance of the
offer’, but the truth is that one can have different views of when exactly the
acceptance has to take effect. There is no need to think about this if the con-
tract is concluded while both parties are present (as in a shop), or make use of
an instantaneous means of communication such as the telephone or Zoom).
But this is different if time passes between the various moments necessary to
form the acceptance. Consider the following example:
On 1 May, Brad offers for sale to Amélie the Golden Bear he won at last year’s
Berlin film festival. On 2 May, Amélie saves in her ‘drafts’ folder a draft e-mail in
which she accepts Brad’s offer. On 3 May at 23.58, she sends the message to Brad,
who receives it in his mailbox on 4 May at 00.03. On 5 May, Brad checks his e-mail
and reads Amélie’s acceptance.
In this example there are four possible moments at which the acceptance
takes effect:
Four theories (a) the moment the message containing the acceptance is written (2 May),
known as the externalisation theory;
(b) the moment the message is sent or posted (3 May), the expedition or
dispatch theory;
(c) the moment the message is received by the offeror (4 May), the receipt
theory;
(d) the moment the offeror reads the message (5 May), the actual notice
theory.
Before we discuss which of these theories is applied in practice, it is impor-

tant to realise why the question is relevant at all. One reason is, of course
– as we saw before – that from this moment onwards the offeror can no
longer revoke his offer. Another is that the parties need to know as of when
they have to perform the contract. In addition, many jurisdictions (includ-
ing France, Belgium, England and Poland) make the transfer of property
dependent on the conclusion of the contract: once the contract of sale is
formed, the buyer becomes the owner of the good, even if the actual delivery
did not yet take place (as is required in for example German and Dutch law).

Only two of the four mentioned theories are serious candidates to be short-
Shortlist
listed in an economically viable jurisdiction. Both the externalisation theory
and the actual notice theory suffer from a lack of practicability. In the above
example, it will be difficult to establish when Amélie wrote the e-mail or
when Brad actually read it. If the actual notice theory was applied, it would
also open the door to unscrupulous manipulation by the offeror. All he
needs to do to prevent the contract from being concluded is to leave his mail
unopened.
It is therefore not surprising that all jurisdictions adopt either the expedi-
tion or the receipt theory. The clearest proponents of the latter are German,
French and Dutch law, all three followed by the PECL.
§ 130 (1) BGB: ‘A declaration of intention to another, if it is made to another in his

absence, is effective at the moment when it reaches him. (…)’
Art. 1121 CC: ‘A contract is concluded as soon as the acceptance reaches the
offeror. (…)’
Art. 3:37 (3) BW: ‘A declaration addressed to a specific person must have reached
(‘bereikt’) this person in order to have the sought legal effect. Nevertheless, if
such a statement has not reached this person or it did not reach him in time, and
this is merely a result of his own actions, of the actions of other persons for whom
he is responsible, or the result of other circumstances which justify that he is
accountable for any disadvantage caused by it, then this statement will still have its
originally intended legal effect.’
Art. 2:205 (1) PECL: ‘If an acceptance has been dispatched by the offeree the
contract is concluded when the acceptance reaches the offeror.’
This is a sensible approach: the acceptance (or any other declaration) takes
effect when it reaches (zugeht, bereikt) the addressee, meaning that it has entered
into his sphere of influence. This puts the risk of the message getting lost before
arrival in the hands of the sender (which seems right because he has chosen the
medium and route of communication), while the risk of the message not being
read after arrival lies with the recipient. This is also what the clumsily formu-
lated second sentence of Art. 3:37 (3) Dutch Civil Code aims to express. The
example mentioned in the well-known textbook by Zweigert and Kötz is that
of the bird lover who chooses not to empty the letterbox in his garden for fear of
scaring the birds within: then, the declaration is treated as having arrived. Other
examples are not regularly checking one’s e-mail or simply deleting unread
e-mails out of fear that the sender has indeed accepted the offer.

60 · Contract law
Is the receipt theory so sensible that all jurisdictions accept it? The outlier in
Europe is English law (other common law-jurisdictions, including the US,
English law adopt the same position). English law makes a sharp distinction between
instantaneous and non-instantaneous communication. In the former case,
if parties sit opposite each other or speak to each other over the phone, the
receipt theory is applied. The famous example given by Lord Denning is the
following:
Suppose, for instance, that I shout an offer to a man across a river or a courtyard
but I do not hear his reply because it is drowned by an aircraft flying overhead.
There is no contract at that moment. If he wishes to make a contract, he must
wait till the aircraft is gone and then shout back his acceptance so that I can hear
what he says. Not until I have his answer am I bound.’ (Entores Ltd v Miles Far East
Corporation, 1955)
The motivation for this is that the offeree will know when his acceptance
was not communicated to the other party, and can try again. This reasoning
can also be applied to other instant methods of communication, such as the
use of telex (as the Court of Appeal held in the Entores case), and probably
also fax and online chatting. In all these cases, the acceptor is likely to know
whether its communication has reached the other party or not: fax machines
and chat services tend to indicate a failure in sending the message. An inter-
esting question is whether communication by e-mail must also be seen as
instantaneous. The problem with e-mail is that the moment the ‘send’ button
is pressed is not always the same moment the message is received at the other
end (as in the above example). During busy times e-mail servers tend to store
the message and deliver it later without the sender necessarily noting this.
Sometimes, e-mail even gets lost in cyberspace. Although the English courts
have yet to decide on the question, it seems likely that they will not treat
e-mail as a form of instantaneous communication.
The relevance of all this is that in case of non-instantaneous communica-

tion, such as sending a letter by regular post, English law does not accept
the receipt theory. Instead, it adopts the expedition theory, usually referred
Postal rule to in England as the postal rule or mailbox rule. This follows from a deci-
sion made in 1818 in the case of Adams v Lindsell, at a time when the use of
postal services was becoming increasingly popular. The postal rule entails
that the acceptance becomes effective at the moment of posting and not
when it is received by the offeror. This means that in the above example the
contract is formed on 3 May. It is good to consider the implications of this
view.

First, the postal rule implies that the contract is formed even in cases where
the letter containing the acceptance never arrives at its destination, for
example because it gets lost in the post. Contrary to the receipt theory the
Policy reasons postal rule thus favours the offeree by putting the risk of a late or lost accept-
ance on the party that made the offer. The historical reason for this is that the
rule was formulated in a time when the post was not too reliable and it was
easier to prove that one posted a letter than it is to prove that it was received
by the other party.
Second, the practical effect of the postal rule is that it limits the possibility of
revocation by the offeror. It was seen above that under English law revocation
is always allowed before acceptance. If the acceptance has already taken effect
when it is posted, the effective time left to revoke the offer is restricted. This
is even more so as the revocation of an offer must reach the offeree before it
becomes effective. The classic illustration of this rule is provided by the High
Court case Byrne & Co v Leon van Tienhoven & Co (1880). Van Tienhoven
posted a letter in Cardiff on 1 October, offering tinplates for sale to Byrne
in New York. Byrne received the letter on 11 October and immediately tel-
egraphed acceptance. But on 8 October Van Tienhoven had posted a letter
revoking its offer because of the fact that tinplate prices had risen by 25 per
cent. The court found that the postal rule should not be applied to a revoca-
tion, leading to the result that a contract had in fact been formed. Lindley J
considered that any other conclusion would lead to extreme injustice and
inconvenience:
If [Van Tienhoven’s] contention were to prevail no person who had received an

offer by post and had accepted it would know his position until he had waited such
a time as to be quite sure that a letter withdrawing the offer had not been posted
before his acceptance of it.
The practical relevance of the now almost 200 years old postal rule is some-
times questioned. In today’s world less and less communication takes place
by regular mail, and even where it does postal services tend to be more reli-
able than they were in the nineteenth century. However, the postal rule is still
applied and has even found new applications with the rise of modern tech-
nology. Telemessaging (which has replaced the use of telegrams), e-mail and
texting through mobile phones are also likely to qualify as non-instantaneous
forms of communication and are therefore governed by the postal rule – even
though the highest courts of England have not yet had the opportunity to
decide as much.

62 · Contract law
TOPICS FOR REVIEW
Consensus ad idem
Offeror and offeree
The importance of the offer and acceptance model
Offer and invitation to enter into negotiations
Offers to the public
Rewards
Goods on display in shops
Revocation of an offer
Withdrawal of an offer
Rejection and counter-offer
Lapse of an offer
Acceptance
Battle of the forms
Time of conclusion of the contract
Acceptance theories
Postal rule
FURTHER READING
– John H. Baker, ‘From Sanctity of Contract to Reasonable Expectation?,’ 32 Current Legal

Problems (1979), 17.
– Hein Kötz, European Contract Law (translated by Gill Mertens and Tony Weir), 2nd ed.,
Oxford (Oxford University Press) 2017, Chapter 2.
– Ewan McKendrick, Contract Law: Text, Cases and Materials, 9th ed., Oxford (Oxford University
Press) 2020.
– Arthur Von Mehren, The Formation of Contracts, IECL VII-9, 1992.
– Edwin Peel, Treitel on The Law of Contract, 15th ed., London (Sweet & Maxwell) 2020.
– Frances Quinn, Elliott and Quinn’s Contract Law, 12th ed., Harlow (Pearson) 2019, Chapter 1.
– Rodolfo Sacco, ‘Formation of contracts’, in: Arthur Hartkamp et al (eds.), Towards a European
Civil Code, 4th ed., Nijmegen (Ars Aequi) 2011, Chapter 20.
– Rudolf B. Schlesinger, Formation of Contracts: A Study of the Common Core of Legal Systems,
Dobbs Ferry (Oceana) 1968.
– Francois Terré et al, Droit civil: les obligations, 12th ed., Paris (Dalloz) 2019, Book 1, Title 1.
Weir), 3rd ed., Oxford (Oxford University Press) 1998, Chapter 26.

4
The intention to create legal
relations
CHAPTER OVERVIEW
An essential element of a contract is that parties have the intention to be

legally bound to their agreement. This chapter discusses:
•
when the intention to be legally bound exists;
•
how the test of earnestness is applied in different types of agreements
(commercial, gratuitous and disadvantageous as well as social and
domestic agreements).
In addition to the intention to create legal relations, English law requires

that the contractual promise be supported by consideration. This means
that a party must give, do or promise something in return for what it
obtains from the other party. Jurisdictions in the French legal tradition,
though no longer French law itself, require that the contract have a causa.
This chapter also explains these extra requirements.
A legally binding contract must, in addition to meeting the requirement that

the parties have the intention to create legal relations between themselves,
also ensure that the agreement of the parties consists of an offer and a cor-
Consensus ad responding acceptance. This means that parties not only need to agree on
idem the same thing (a meeting of minds, or consensus ad idem), but they also
need to agree that what they agree upon is binding in law, meaning that each
of them can go to court and enforce the agreement if necessary. The differ-
ence between a mere agreement and an agreement with intended legal con-
sequences becomes clear if one thinks of a person who promises his fiancée
to take her to dinner tomorrow evening. If he does not show up, no sensible
person would claim that she can go to court and force her partner to feed her.
Of the vast majority of promises that people make in their lives, we can say
at best that it would be morally wrong not to keep them. Breaking a promise
may have many negative consequences for the friends that we keep, for the
people we love and for the reputation we have – but none of this is the law’s

64 · Contract law
business. A contrary view would make society unliveable and would flood
the courts with futile cases.
All modern jurisdictions accept the intention to create legally binding rela-
tions as the criterion to distinguish binding promises or agreements from
statements that do not qualify as such. The PECL put this succinctly in Art.
2:101 (1) by stating that a contract is concluded ‘if the parties intend to be
legally bound’ and ‘reach a sufficient agreement’. As we saw before (Chapter
1), this provision is the end result of a long historical process in which the
law of contract moved from accepting the binding nature of only certain
contracts towards the general principle of pacta sunt servanda. Of course,
the exact formulation may differ from one legal system to another, but they
all adhere to the same thought. While the Dutch Art. 3:33 BW plainly states
that ‘a juridical act requires an intention to create legal relations, which inten-
tion becomes manifest in a declaration’, the well-known English textbook of
Treitel on The Law of Contract requires a similar ‘intention of creating legal
relations.’ In K Speditionsgesellschaft (1956), the German Bundesgerichtshof
spoke of the ‘intention to create a legal commitment’ (‘Rechtsbindungswille’)
while the French analyse a contract as a ‘meeting of intentions’ (‘rencontre
des volontés’).
Despite this common core of the world’s legal systems on how to separate
binding from non-binding agreements, one cannot say that the criterion is
without its problems. This chapter looks into three main questions that can
be asked about the intention to create legal relations:
Three z What is the intention of the parties and when does it lead to agreement?
questions
z What test of earnestness is to be applied in problematic cases in which
there is doubt about a party’s intention?
z How does the legal intention relate to another requirement that some
jurisdictions pose for the valid formation of a contract, namely the
common law requirement of consideration and the French requirement
of cause?
What is the intention of the parties? The objective

approach to agreement
All communication has two parts: a sender and a receiver. While the sender
aims to convey a certain message by putting it into words, the receiver inter-
prets the message in a certain way. Luckily, in the great majority of cases
sender and receiver understand each other perfectly well, but these are not
the cases that lawyers are interested in. Many things can prevent the intended

The intention to create legal relations · 65
message from being received accurately. If you rent ‘the first floor’ of my
house and I understand this to refer to the rooms on the first level above the
ground, while you believe to have rented the ground floor, our intentions
differ. Likewise, if we agree that you will ‘clean my house’ for €50 and you
believe this only means to clean the inside, while I meant you would also
wash the windows on the exterior, what have we agreed upon, if anything?
These examples show that it is not always clear what the intention of the
parties is when making a contract. But there are not the only cases in which
Dissensus a so-called dissensus of intention and declaration exists. Next to the misun-
derstandings mentioned above (parties disagree as a result of their use of
vague terms), parties can also fall prey to a slip of the pen or the tongue (they
say ‘40’ in their offer but they mean ‘4’) or send their message to the wrong
person (your e-mail to book a room in a B&B is not sent to zimmer@gmail.
com as intended, but to its more expensive competitor zimmer@hotmail.
com). It can also happen that someone declares he wants to conclude a con-
tract while being under the influence of stress, alcohol or drugs, or being
hypnotised or mentally ill, and later argues this is not what he intended.
The law has to deal with this problem of diverging intention and declaration
in various stages of the life of the contract. In the stage of formation, differ-
ent intentions may stand in the way of the parties actually having reached an
agreement (discussed in this chapter). Once this hurdle is overcome, and
the consensus ad idem is present, it may be that the parties still quarrel about
what they could expect as to the qualities or the value of the good that they
bought possibly leading to avoidance of the contract (a question of mistake,
discussed in Chapter 9), or about what it is that they actually agreed upon in
their contract (a question of interpretation, discussed in Chapter 7).
As a matter of legal technique, the problem of dissensus is treated differently

in different jurisdictions (see Box 4.1). However, the criterion that is used
Objective and the results that are reached do not fundamentally differ. Contract law
approach is not interested in the parties’ mental state of mind: all legal systems accept
that it is impossible to look into the mind of man. The approach is instead to
look for an objective meaning of the used words rather than to try to discover
what the ‘real’ intention of the parties was. In the law, intention is always
imputed. Decisive is what the words or actions of the other party suggest
to a reasonable person in the position of the promisee. This is a sound view
because a person making a statement must always realise that the addressee
is likely to rely on what he thinks it means. This puts a responsibility on the
person expressing himself. It is useful to look at some different formulations
of this objective approach.

66 · Contract law
BOX 4.1
DISSENSUS: DIFFERENT WAYS TOWARDS A SIMILAR

RESULT
A contract is not concluded if there is no in French law, a party’s reasonable reliance
meeting of the minds. This means that dis- is protected by way of a damages claim:
sensus (the intention and declaration of a § 122 BGB prescribes that ‘the person
party differ) prevents the formation of a declaring must (…) pay damages (…) for
contract, albeit that the reasonable reliance the damage that the other (…) party suffers
of the other party is protected. While this as a result of his relying on the validity of
objective approach to contract formation is the declaration.’ The Dutch Art. 3:35 BW
accepted in all European jurisdictions, the provides a third alternative by prohibiting
doctrinal technique used to reach this result a party from invoking the discrepancy
differs from one legal system to another. between intention and declaration against
In French law, any dissensus is regarded someone who could reasonably rely on this
as standing in the way of the valid forma- party’s declaration. The effect of this is that
tion of a contract (cf. Art. 1101, 1128 CC), the juridical act is concluded as if there is
but if the other party could reasonably consensus. The English solution, finally, is a
believe the first party intended to say what highly practical one. Again, the absence of
it did, the latter is to compensate the other a meeting of the minds prevents the con-
party for the damages on basis of tort (Art. tract from coming into being. But whether
1240 CC). German law regards a ‘mistake or not there is a meeting of the minds is
in the declaration’ (Erklärungsirrtum) as a assessed objectively: reasonable reliance on
ground to avoid the contract on basis of § a party’s declaration will bring the contract
119 I BGB (cited in Chapter 9). However, as about.
The classic English case is Smith v Hughes (1871), in which Blackburn J held: ‘If,
whatever a man’s real intention may be, he so conducts himself that a reasonable
man would believe that he was assenting to the terms proposed by the other party,
and that other party upon that belief enters into the contract with him, the man
thus conducting himself would be equally bound as if he had intended to agree to
the other party’s terms.’
In K Speditionsgesellschaft (1956), the German Bundesgerichtshof considered:

‘The question of whether there is an intention to be legally bound should not be
decided according to some inward intention of the person giving the service which
has not been made apparent. It should be determined by whether the recipient of
the service should have concluded from the actions of the person providing the
service that there was such an intention in the given circumstances according to
the principle of good faith and having regard to business custom. It is therefore

a question of how the actions of the person providing the service appear to the
objective observer.’
Art. 3:35 BW: ‘The absence of intention in a declaration cannot be invoked against
a person who has interpreted another’s declaration or conduct in conformity with
the sense which he could reasonably attribute to it in the given circumstances, as a
declaration of a particular meaning made to him by that other person.’
Art. 2:102 PECL: ‘The intention of a party to be legally bound by contract is to

be determined from the party’s statements or conduct as they were reasonably
understood by the other party.’
The French textbook of Terré et al, on Les obligations states: ‘Since the consent
of the parties is a psychological phenomenon, it can only lead to a contract if it is
externalised in order for the other party to be understood.’
What this means in practice only becomes clear in the circumstances of each
Factors
individual case. Courts apply the objective approach by looking at factors
such as:
z How easy it is for the addressee to investigate whether the declaration

was really intended to mean what it says. If a shop offers to sell the latest
state-of-the-art television at a price of €99 only, it is fairly easy for the cus-
tomer to ask if this is a stunt offer or if perhaps a mistake was made (as in
the case of Stichting Postwanorder v Otto (2008), discussed in Chapter 3).
In such a case, a reasonable consumer should doubt the intention of the
seller and without further investigation by the buyer a contract has not
come into existence. This is different in cases where the other party has
no reason to doubt what is said. If someone orders a curtain at Kwantum
of four metres, while he actually means five, the salesperson normally
does not have any reason to believe this was not what the buyer intended.
This is simply a mistake that is the fault of the buyer (an example of what
is called culpa in contrahendo, fault in contracting).
z Whether the transaction would be beneficial for one of the parties. A
promise to provide free services or to sell a house far below its value
should make the other party doubt about the true intentions of the
promisor. In the Dutch case of Hajjout v IJmah (1983) the foreign
employee Mr. Hajjout, who only knew a few words of Dutch (‘such as
bread, milk and holidays’, as the court observed), was dismissed on the
spot and asked by his employer to sign a piece of paper waiving all rights
following from the termination of the contract. The Hoge Raad held that
‘the employer will have to investigate with reasonable care whether the

68 · Contract law
employee understood that he was asked to agree with ending the employ-
ment contract’ because of the severe consequences this can have for the
employee (such as losing one’s job without any claim to social security).
z What is customary in a certain branch or location. The stock example is
someone who visits an auction and waves to a friend sitting at the other
end of the room. It is customary at auctions that raising one’s hand means
that one bids on the object. If the auctioneer could reasonably believe
that the visitor was making a bid, a contract has come about.
z The meaning of the disputed term in everyday speech. This meaning
will prevail unless special circumstances dictate that the term should
be understood differently by a reasonable person in the position of the
addressee. If a person, when talking to friends, constantly refers to her
old Lada as her ‘Mercedes’, and then decides to sell this ‘Mercedes’ to one
of these friends, the buyer cannot claim that the contract does not exist
arguing that he did not intend to buy a Lada. In contract law, the literal
meaning of words as contained in the dictionary is never decisive. So if a
party uses a technical term, it is relevant whether this party could expect
the other party to know of its meaning. If parties are in the same line of
business, the meaning a term has in that context prevails.
z The place of contracting. If the seller intended to get paid in US dollars,
but the buyer had in mind Canadian dollars, the place where the contract
was made or the location of the bank may reveal to a reasonable person
what was agreed upon.
z The expertise and experience of the parties. A more sophisticated party,
or one that is assisted by experts, should make greater effort to make sure
that the other party understands what its intention is than a layperson. A
municipality buying land from an individual will have a hard time invok-
ing the technical meaning of terms in the contract if it has not made any
effort to inform the seller about these terms at the time the contract was
made.
The effect of the objective approach to agreement is that the party who jus-
tifiably relies on the contents of the other party’s unintended declaration can
claim that the contract has come into being. Only in cases where it is impos-
sible to find one meaning of an ambiguous term on an essential point of the
agreement (meaning that a reasonable person would find more than one
meaning plausible), is there no agreement. A nice example of this is provided
by the French case of Société Tirat et Cie v Société Orazzi et Fils (1961). Orazzi
intended to buy 2,000 hectolitres of wine to be transported to Algiers. Tirat
offered to sell the wine at FF60 per hectolitre. Orazzi found this too much
and sent a telegram that it was willing to buy for FF30, but due to a mistake
the text read ‘FF300.’ The seller naturally accepted and delivered the wine.

BOX 4.2
THE BASIS OF CONTRACTUAL LIABILITY:

WILL, EXPRESSION AND RELIANCE
One of the most discussed questions in this view would clearly disrupt society. The
the European legal literature of the late other extreme is the expression theory. It
nineteenth and early twentieth century looks at what a party has declared, regard-
was why exactly a contract is binding. The less of what its intention was. This favours
debate received impetus from the German too much the interest of the addressee,
case Oppenheim v Weiller, decided in 1856 who could then even claim a contract was
by the local court in Cologne. Oppenheim concluded if it knew, or had to know, that
intended to send his broker Weiller a written the declaration was not in conformity with
message to buy shares on the stock market, what the other party intended (perhaps
but due to a mistake made by the telegraph Weiller knew that Oppenheim did not have
operator, Weiller received a message to any shares in the company to sell). The third
sell shares. Weiller now had to deliver the theory is the reliance theory. In its original
shares, which he first had to buy himself at version, this theory applies the criterion
great loss because they had risen in value. that a party is bound if it could reasonably
The court found that Oppenheim was liable rely on the other party performing in line
in damages. In cases like this, three theories with the declaration that it made. A more
compete to be applied. In the will theory viable version is the one that finds decisive
(in line with the emphasis on the autonomy whether there is reliance on the will of the
of parties as discussed in Chapter 1), the other party to be bound (the will-reliance
internal will of a party is decisive. However, theory, as for example adopted by the Arts.
even if it were possible to discover in hind- 3:33 and 3:35 of the Dutch Civil Code). This
sight what this internal intention must have debate on the foundations of contractual
been (something that future neuroscience liability still continues today. Next to the just-
will perhaps be able to discern with the help mentioned theories, numerous other views
of brain scans), this cannot be decisive. The have been proposed to explain why one is
other party is not able to read the person’s bound to a contract. Well-known theories
mind at the time of contracting. In addition, explain the contract as a Geltungserklärung
if the will were indeed decisive, a party could (Karl Larenz), as a speech act (John Austin),
always claim after having declared some- as a promise (Charles Fried), or as a means
thing that it has changed its mind and now to advance the objective of economic effi-
no longer wants to be bound. Adopting ciency (Richard Posner).
When the contract was later disputed by Orazzi on the ground that he did
not intend to buy the wine for a price five times as high as the original offer,
the court held that no contract had come into being as the parties’ intentions
differed. This so-called erreur-obstacle (‘mistake-obstacle’) literally expresses
that the mistake a party has made prevents the meeting of the minds.

70 · Contract law
Some comparative lawyers assert that French law gives more weight to the
Difference?
subjective intention of the parties than other jurisdictions. If a party can
prove that it did not intend to declare as it did, the internal will would prevail
and the contract is not seen as validly concluded. It is true that legal doctrine
in France puts more emphasis on the will of the parties, but it is hard to say if
this is also reflected in court practice. If it is, it would mean that French courts
would be less willing to uphold a contract in cases where a party’s intention
and declaration diverge. If this were so, it would not mean that the reason-
able expectations (confiance légitime) of the other party are not protected. It
only may take place in a different way, for example by forcing the party that
recklessly made a declaration that did not accord with his intention to pay
damages in tort for the losses suffered by the relying party.
The test of earnestness in problematic cases

Now that the intention of the parties as a requirement for the valid formation
Legal question
of a contract has been considered, a second question must be asked: when is
this intention directed towards the creation of legal relations? The first thing
to say is that this is a legal question: the law decides when such an intention
exists. It is usually not a problem to ‘find’ this intention in cases where the
respective promises of the parties are more or less of the same value, or if the
parties are sophisticated businesspeople who can take care of their own inter-
ests (as in commercial agreements). However, the law is much more reluctant
to enforce purely gratuitous promises or promises among family members
or friends (domestic and social agreements). This is because it finds it much
less likely that someone would wish to be legally bound in these situations.
The law, suspicious as it is of altruism, presumes that a party will only bind
itself legally if it is to gain from the transaction.
In the following, these various types of situations will be discussed in some

Four categories
detail. Next to commercial agreements (A) and gratuitous and disadvanta-
geous transactions (B), we will look at agreements in the social sphere (C)
and at promises in a domestic (usually family) context (D). In each of these
situations, the question is how to apply the test of earnestness. We will find
that the distinction between promises serious enough to be enforced in the
courts and non-binding promises is primarily a matter of what society finds
appropriate.
A. Commercial agreements
Parties to commercial contracts are assumed to have the intention of being
legally bound. The reason for this is that it lies in the very nature of com-

mercial parties that they make contracts, and that if they do not wish to be
bound, they should take appropriate measures to prevent this from happen-
ing (for example by agreeing on a ‘subject to contract’ clause: see below).
This assumption exists in all jurisdictions, but it is perhaps the strongest in
English law in which there is even a legal presumption that a commercial
agreement is legally binding. Such a presumption means that it is for the
other party to prove that it did not intend to be bound, which is difficult in
practice. In the English case of Bear Stearns Bank plc v Forum Global Equity
Ltd (2007), Forum Global was one of the creditors of the insolvent Italian
dairy company Parmalat. When it became clear that Forum Global would
receive back some of the money it had lent to Parmalat, it sold the title to this
loan to investment bank Bear Stearns in New York for almost €3 million. This
agreement was made over the phone and the parties decided that the details
would be worked out later by their lawyers. When Forum Global refused to
finalise the transaction, Bear Stearns brought a successful claim in the High
Court. Smith, J held:
If the parties have shown an intention to be contractually committed, albeit while

deferring discussion of some aspect or aspects of the deal, then the court will
recognise a contract unless what remains outstanding is not merely important but
essential in the sense that without it the contract is too uncertain or incomplete to
be enforced.
Forum Global was not able to rebut the presumption that it intended to be
bound.
The main exception to the bindingness of commercial agreements is when

parties explicitly say that they do not intend to be bound. They are able to
‘Subject to do so because it is also part of the freedom of contract not to conclude a con-
contract’ tract. They can do so by making their negotiations ‘subject to contract’, which
means that any agreement the parties reach orally or by way of a written
summary or ‘heads of agreement’ is not binding: only a signed formal con-
tract will then count as such. It is clear why the parties would make such an
agreement: first, it allows them to negotiate in all freedom and second, once
the contract is put into writing, to have it checked by lawyers and approved
by whoever needs to approve of it before it is formally signed.
The deliberate intention not to be bound can also be put in different wording.
Parties could for example agree to be bound only ‘in honour’ (a so-called
honour clause) or conclude a ‘gentlemen’s agreement’. The result is the same:
there are no legally enforceable rights if the other party does not do what it
promised. This led an English judge to define a gentlemen’s agreement as ‘an

72 · Contract law
agreement entered into between two persons, neither of whom is a gentle-

man, with each expecting the other to be strictly bound, while he himself has
no intention of being bound at all’ (Bloom v Kinder, 1958).
B. Gratuitous and disadvantageous transactions

In a second category of cases the intention to be legally bound is not assumed.
Donation
If a party enters into a gratuitous transaction, the law raises suspicions about
the earnestness of the intention. The first type of a gratuitous transaction is
the promise to make a gift (donation) – usually viewed with so much suspi-
cion that most civil law jurisdictions require this promise to be put in the
form of a notarial deed. This forces the donor to think through his act of
benevolence and allows an independent notary (in most civil law countries a
trained lawyer) to warn the donor of the consequences of his act and to check
if he really intends to give something away.
Under English law, a gratuitous promise is equally unenforceable, but for the
reason that it does not have any consideration. Consideration requires that
there is a quid pro quo (‘something for something’): as we shall see later in
this chapter, a promise must always be given in return for a counter perfor-
mance by the other party, or at least the promise thereof. This requirement is
clearly not met in case of a gratuitous promise. If businessman and owner of
the New England Patriots Robert Kraft promises to donate his Super Bowl-
ring to Vladimir Putin, this is not a binding promise as Putin does nothing
in return. In the absence of a notary as exists on the European continent,
English law therefore requires the donative promise to be put in a deed. This
written and signed document that is attested by a witness may not offer the
same security as a notarial deed on the continent, but it does make the donor
reflect upon his plan to perform an act of altruism and forces him to put his
promise into precise writing. One could say that the law’s suspicion about an
intention being present in case of a donation is made good by satisfying the
formality.
Other This is more difficult in a second type of gratuitous transactions. My neigh-

gratuitous
transactions
bour can allow me to live in her house for free, I can give someone a loan of
€1,000 without interest, or I can allow the owner of my favourite delicatessen
to use my car on Mondays. These transactions are not formal gifts, and yet
they concern cases in which a party does something without asking anything
in return (the French would say ‘par complaisance’). English law normally
does not find these promises enforceable as they lack consideration, but in
the civil law they can be enforced even without a notarial deed. Decisive

is whether the promisee could reasonably expect from the words and the
conduct of the promisor that the latter intended to be bound, which is prob-
ably dependent on what the reasons for making the promise were and what
the consequences would be for the promisee if the promise were to be held
unenforceable. If the promisee has acted to its detriment in reliance upon the
promise, the presumption against an intention may be rebutted. Thus, in the
examples above, if I immediately gave notice to my landlord after hearing my
neighbour’s generous offer, thereby leaving me without a home if she should
renege on her promise, or if the deli owner had already sold her own car in
reasonable reliance on my promise, these are strong arguments to claim that
there is a binding contract.
This is not any different in a third category of cases. A promise need not be
purely gratuitous for it to raise suspicions about the earnestness of the inten-
tion. I can sell my Tesla X for €10 or agree to provide legal services to coffee
shop Easy Going on the sole condition that its owner regularly comes over to
my house to water my plants. Neither civil law nor English law requires these
Disadvantageous disadvantageous transactions to be put in any particular form, but whether
transactions
or not they are enforceable depends again on how likely it is that the court
will find an intention to be legally bound on the part of the promisor. As
these transactions are not particularly beneficial to the promisor, there must
be clear evidence that he was really willing to commit himself beyond the
boundaries of the ordinary. The same factors as just mentioned will play a
role here.
C. Social agreements
The third type of situation concerns promises in the social sphere, usually
among friends or people who know each other well enough to enter into an
agreement without realising the consequences. Again, such an agreement is
not assumed to be legally binding, unless clear and unequivocal evidence
exists for the contrary. Particularly in the social sphere the law tends to
protect the ‘freedom from contract’: in their private lives, citizens should be
protected from unnecessary interference by the courts.
Social agreements often lack any money value. The understanding of two
No money
friends to go on holiday together, to organise a barbecue next week, or that
value one of them will be the designated driver on a night out are in principle not
relevant to the law. Even if parties explicitly want to make this promise legally
binding by putting it in writing, it would be difficult to find a court willing to
enforce it. So it is highly unlikely that the dinner host will be able to force her
friend to come over or claim back the costs she incurred in preparing the meal.

74 · Contract law
There is more doubt in cases where someone provides services without

remuneration if these services have money value and would normally be paid
Babysitting
for, but parties deliberately refrain from making them paid. One can think of
a professor who promises to give a speech for a student society, the promise
to help a friend move house and the reassurance that one will come over this
Thursday to babysit a friend’s son. These cases do not tend to end up in the
courts – and rightly so, most people would say.
A type of promise that lies even more in the economic sphere is the agree-
ment to share costs. Car-pooling in particular is a fertile ground for court
Cost-sharing
cases. If parties agree that one of them will drive one day and the other the
other day, no problems occur. But this is different if one of them pays the
other. Courts concur that a cost-sharing agreement can be enforced, but it is
not likely that the parties’ intention is also directed at the duty of the driver
to ensure the safety of the passenger, or at a contract of carriage to give lifts in
the future. As Upjohn LJ held in the English case of Coward v Motor Insurers
Bureau (1963):
The hazards of everyday life, such as temporary indisposition, the incidence of

holidays, the possibility of a change of shift or different hours of overtime, or
incompatibility arising, make it most unlikely that either contemplated that the one
was legally bound to carry and the other to be carried to work.
An interesting question arises if a group of friends or colleagues buys tickets

Lottery
for the lottery or play bingo and the person who actually bought the ticket
wins a prize. Can the others claim their part? It must be assumed that the
answer is affirmative if the parties all contributed to the competition and
could reasonably expect that any prize money would be shared. This was
also the outcome in the English case of Simpkins v Pays (1955), in which the
defendant had told her fellow-bettor ‘You’re lucky, May, and if we win we will
go shares.’ This must be distinguished from the situation in which people club
together to make a bet and the person who promised to place it forgets to do
so or puts the money on the wrong numbers or on the wrong horse. What
happens if the bet would have won? Under English law, there is not likely to
be any consideration for the promise to place the bet. In the Lotteriefall case
decided in 1974 the German Bundesgerichtshof also denied a legal obligation
to correctly hand in the lottery ticket. It weighed the interest of the parties
and found that against the economic interest of the bettors to cash the prize
stands the interest of the ‘agent’ not to be held liable for the damage in the
very unlikely case that the bet would have won. This would lead to the ‘elimi-
nation of his economic existence’. The court thus reasoned that ‘the person
placing the bet would be affected incomparably more severely than his fel-

low-bettors would be affected by losing the chance of winning, something

that they could not seriously count upon’. So the court found that the only
thing he had agreed to do was to share the winnings if the ticket had been
placed in the right way. We must keep in mind that the parties were individu-
als and that no money was paid to the unlucky agent to place the bet. If they
had paid a betting company to place the bet, or if they had been businessmen
who systematically engaged in betting with large amounts of money, things
would have been different.
D. Domestic agreements
A lesson to be drawn from the above is that the context in which a promise is
made makes a lot of difference. The situation in which I promise to put away
your car when you come over to my house for dinner, differs fundamentally
from the one in which you trust a fancy restaurant’s valet service to park your
car. The importance of context is also clearly visible in the final group of
cases discussed here. These concern domestic or family agreements. A father
can promise his daughter to pay for her driving lessons if she does not smoke
until she is 18 years old and a husband can promise his wife that he will no
longer visit the local bars. No sensible lawyer would advise these promisees
to take their relative to court for not keeping their word. The law is reluctant
to deal with what people agree upon in a family context. Most legal systems
assume that people in one household are not legally bound to their promises
unless the contrary is proved. The emphasis must here of course be on the
word ‘legally’: socially and morally close relatives are arguably more obliged
towards each other than anyone else.
Most court cases on domestic agreements are about (former) spouses or

Prenups
cohabitants. Civil law courts across Europe have come to accept these agree-
ments as valid if they deal with the financial consequences of living together
(cohabitation agreements) or of future divorce or separation. These latter so-
called premarital or prenuptial agreements (‘prenups’) are contracts entered
into prior to the marriage or civil union and provide for what happens to
the property of the partners in case of divorce or separation. In most civil
law countries, including Germany and the Netherlands, they are a matter of
routine and usually come with the matrimonial regime (‘marriage contract’)
that the spouses can choose with the help of a notary.
In England, however, prenuptial agreements have long not been enforceable

for being against public policy, leading to the qualification of London as the
wife-friendly ‘divorce capital of the world’. English courts have been willing
to set aside prenuptial agreements, even if these were made under a foreign

76 · Contract law
BOX 4.3
BALFOUR v BALFOUR: A VICTORIAN VIEW OF

MARRIAGE AND A FEMINIST CRITIQUE
In the seminal decision in Balfour v Balfour preferences as a deviation from what is
(1919), which is still regarded as a prec- ‘normal.’ The decision in Balfour v Balfour
edent under English law, Lord Atkin gave and the general presumption that domestic
the traditional reason for the reluctance to agreements are not enforceable are in this
enforce domestic agreements. He wrote: view prime examples of a masculine society.
‘The common law does not regulate the It favours market relations over things like
form of agreements between spouses. love, care and community. The author Steve
Their promises are not sealed with seals and Hedley has argued that the role of the
sealing wax. The consideration that really intention to create legal relations is then
obtains for them is that natural love and nothing but a veil for the policy decision to
affection which counts for so little in these keep contract in its masculine environment,
cold Courts.’ In this case a civil engineer, namely ‘to keep it in the commercial sphere
who was stationed in Ceylon, (the present and out of domestic cases’. Lord Atkin’s
Sri Lanka) had to leave behind his wife in focus on ‘natural love and affection’ may
England because her arthritis did not react seem impartial, but is in reality a subjective
well to the jungle climate at her husband’s view of what should be the nature of the
workplace. Before leaving, he promised relationship between husband and wife and
to pay her £30 per month until she came the roles and duties they have.
back to Ceylon. When the couple decided Regardless of what one thinks of this
to separate, she claimed that he should feminist analysis, one cannot deny that the
continue to pay the monthly allowance. decision in Balfour v Balfour is particularly
The court denied the claim on basis of the harsh on the ill Mrs. Balfour. The message
above reasoning. her husband – supported by the court
This case – that would probably be – sends her is that after 16 years of mar-
decided differently today – was later heavily riage it is in his power not to honour his
criticised by legal feminists. Feminist juris- promise to financially assist her. She will not
prudence is a field of law that originated have had many possibilities to find suitable
in the 1960s. It adopts the view that the employment and earn a living for herself.
law is mainly written from a male perspec- Is it proper reasoning to give Mr. Balfour’s
tive. Legal rules would therefore be biased promise to support his (ex-) wife the same
and reinforce male values. This shows for legal status as the promise to a friend to
example by presenting things that men join him for a walk in the park? Lord Atkin
value as the norm, considering female had no difficulty in saying so.
law that does recognise the agreement. Famous cases include ex-Beatle Paul
McCartney who had to pay £24 million to Heather Mills and Formula I
boss Bernie Ecclestone who is supposed to have settled with his ex-wife
for £750 million. However, the English position changed with the decision

in Radmacher v Granatino (2010), in which the UK Supreme Court held

that ‘in the right case’ a prenup can have decisive weight in a divorce settle-
ment. This was to the benefit of Ms. Radmacher who, in a German marriage
contract, had stipulated that her (at that time future) husband would not
make any claims on her fortune of (supposedly) £100 million. The Supreme
Court upheld the clause, reversing a previous decision of a High Court
judge that she had to pay almost £6 million to her ex-partner. Meanwhile,
although it was hailed by some as a legal revolution, the decision does not
mean that any prenup will from now on be enforced: it still allows the court
to refuse to do so, in particular if this is found to be unfair to any children
born out of the marriage. In 2014 the English Law Commission drafted a
Nuptial Agreements Bill that, upon enactment, should end the uncertain
state of the present law and accept prenups, provided certain safeguards are
met.
Domestic agreements can also relate to matters that the law does not see as
Public policy
suitable for contracting because they violate public policy (see Chapter 10).
When an 18-year-old woman agreed with her boyfriend that she would use the
pill, but stopped taking it without his ‘consent’ and gave birth to a child, the
court did not allow the father to claim for breach of contract or to be relieved
of the duty to pay alimony for the child. In the pill case (1986) the German
Bundesgerichtshof did not consider her promise legally binding because of a
lack of intention. The policy argument behind this somewhat clinical reason-
ing was of course that the law regards it as a violation of one’s personal freedom
if one could make binding contracts about having a child or not.
Consideration and causa

It was seen in the above that both agreement and intention to create legal
relations are required for the formation of a valid contract. Art. 2:101 (1)
PECL provides the concise summary of this:
A contract is concluded if:
(a) the parties intend to be legally bound, and

(b) they reach a sufficient agreement without any further requirement.
The law of many jurisdictions, including those of Germany, the Netherlands,

the Nordic countries and the CISG, is accurately described by this provi-
sion. But this is not true for all. In English law, an agreement also needs to
be supported by so-called consideration. In French-based legal systems (such
as Italy, Spain, Belgium, Romania and Bulgaria) on the other hand, the civil

78 · Contract law
code requires the contract to have a so-called causa. Interestingly, France

itself decided to abolish the causa requirement with the grand reform of
2016. The new Art. 1128 CC no longer mentions causa as a requirement
for the valid formation of a contract. The reasons for this bold decision
are discussed below (sub-section C). Both consideration and causa are
complicated legal devices and it is not always clear what their exact role in
the process of contract formation is. The following will first consider the
common historical roots of consideration and causa (A) and then continue
to describe consideration in English law (B) and causa in the French legal
tradition (C).
A. Common historical roots: finding the reason for being

bound
Although the requirement of consideration is a unique feature of the
common law family and causa makes French-based legal systems stand apart
from the rest of the world, both doctrines have very similar origins. It was
explained in Box 1-4 that on the European continent the Roman system of
Pacta sunt recognising only a limited number of enforceable types of contract had, by
servanda the seventeenth century, made way for the general principle of pacta sunt
servanda. But this raised the question of whether or not this was too wide a
principle: that to hold all agreements made by consent enforceable was too
broad. There was, therefore, a need for a criterion to distinguish binding
from non-binding agreements. This badge of enforceability was found in
the requirement of causa: a naked agreement (nudum pactum in Latin, the
legal language of that time) was not enforceable for lack of causa, whereby
‘causa’ simply stood for a proper reason to be bound. This allowed courts
to consider if the parties’ motives for contracting were legitimate. If one
asks which elements played a role in answering this question, it is likely that
these were the same as when we analysed the intention to enter into legal
relations: the value of the counter performance, the context in which the
contracting took place (commercial or social/domestic) and the interests
of the parties.
A similar development took place in the common law. The actions a party
could bring in case of non-performance of a contract were at first limited,
but by the sixteenth century a claim for damages (as we shall see in Part 5 the
main action in common law in case of breach of contract) could be brought
on basis of assumpsit in any case in which the promisor did not perform.
But in England too this was seen as a principle too wide to be accepted
across the board. The English courts therefore also developed a device to
keep the expansion of binding contracts under control. This was found in a

sufficiently adequate ‘consideration’ for the promise, a good enough motive

for why a promisor was bound.
The observant reader will comment that on this account causa and consid-
eration must have become superfluous when the criterion of the intention
to create legal relations rose to prominence in the nineteenth century. As was
seen earlier in this chapter, it is after all this intention that now fulfils the role
of separating binding from non-binding agreements. Put differently: the only
good reason (causa, consideration) why a party is bound to its promise is
because it seriously and deliberately intended to be bound. This is a sharp
comment that has a lot of merit. It is exactly the reason why the Dutch decided
to abandon causa when they introduced their new Civil Code in 1992 and it
also played a role for the French lawmaker when it decided to get rid of causa.
However, the law does not always develop in a logical way and sometimes
suffers from historical accidents. We already encountered the saying of the
great American judge Oliver Wendell Holmes (1841–1935) that ‘The life of
the law has not been logic: it has been experience.’ The explanation for why
causa and consideration are still requirements for the formation of a valid con-
tract is therefore mostly historical. This helps us to understand why both have
an uneasy relationship with the intention to create legal relations and why in
jurisdictions that require causa or consideration, constant pleas are made –
sometimes successful – to abolish the requirement.
B. Consideration in English law

English law requires that an agreement is supported by consideration. This
means that each party to the agreement must give, do or promise some-
thing in return. If you pay me £100 and I give you my bike, our agree-
ment is supported by consideration. To be more precise, English law will
dissect our agreement into two separate acts. My payment is consideration
for your delivery of the bike whereas your delivery is consideration for
me paying the price. The consideration often only consists of a promise
without the other party acting. If you promise to paint my house, there
is no consideration if I do or promise nothing in return. But if I give you,
or promise to give you, £2,000 in return, this is consideration for your
promise and I will be able to enforce the agreement. This makes clear
that in the terminology of English lawyers, the consideration is the thing,
service or promise that is given in return. This is confirmed in a recent
restatement of the English law of contract, where it says: ‘“Consideration”
means that, in exchange for a promise by one party, a counter-promise or
performance is given by the other party.’ In cases where there is only an
exchange of promises to perform acts in the future (for example if A and

80 · Contract law
B conclude a bilateral sales contract with delivery and payment seven days
from now), this is called executory consideration. In contrast, executed con-
sideration exists when a promise is made in exchange for an act and the
act is performed (the moment A delivers the goods to B, A’s consideration
becomes executed).
The above makes clear that the core of consideration lies in a bargain, an
Reciprocity element of reciprocity. This comes out in the classic definition in the case
Currie v Misa (1875): ‘a valuable consideration in the sense of the law may
consist either in some right, interest, profit or benefit accruing to one party,
or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other’. It does not require much imagination to see the link
with consideration as a good reason for being bound: the badge of enforce-
ability is given only if there is a quid pro quo and not in case of a gratuitous
promise. However, things are not that straightforward. Over the course of
centuries, English courts have developed a complex body of rules not all of
which easily match the picture of ‘only enforcement in case of counter perfor-
mance or a promise thereof ’: sometimes courts simply find or ‘invent’ con-
sideration only to reach a just result. It is impossible to give a full overview
of the whole consideration doctrine (its treatment in Chitty on Contracts,
the leading English contract law textbook, takes 150 pages), but it is useful
to have a closer look at some main points. These can be summarised in four
rules.
1. Consideration must be sufficient but it need not be adequate

It was seen above that in a simple sales contract the price paid by the buyer
is the consideration for the seller’s promise to deliver, while delivery by the
seller is the consideration for the buyer’s promise to pay. The question is
whether it makes any difference that the buyer pays ‘too little’, for example
only £1 for a house worth £190,000. The answer is that this is irrelevant to
the law. Consideration must be ‘sufficient’, meaning that it must consist of
‘something of value in the eye of the law’, but this something does not have to
be ‘adequate’: its economic value is not taken into account. That a party pays
too much or too little is not relevant as long as something is given in return
for the promise. This view that a nominal consideration is enough is some-
Peppercorn times referred to as the ‘peppercorn theory’. A peppercorn worth less than a
penny is just as good consideration as £1 million.

2. Past consideration is not good consideration

As consideration needs to be given in return for a promise or performance
by the other party, so-called past consideration is not good consideration. If
Ranomi saves Pieter from drowning and Pieter promises to pay her £1,000
as a reward to show his gratitude, Ranomi cannot claim the money from
Pieter. Pieter’s promise was not made in return for anything, but was subse-
quent and independent of him being rescued. So any act carried out before a
promise is given is not given in exchange for the promise and does therefore
not qualify as consideration to support it.
3. An existing duty does not amount to valid consideration

An important rule, although controversial in practice, is that if a promisee is
already under an obligation to perform (the promise), to perform this duty
does not amount to valid consideration. This seems logical: if the promisee
does something that he is already obliged to do he suffers no detriment,
while the promisor only obtains what he was already entitled to and therefore
obtains no benefit from the ‘extra’ promise.
Existing public The rule applies both to cases in which there is an existing public duty and
duty
to cases in which there is a contractual duty. A case in which a public duty
existed is Glasbrook Brothers v Glamorgan County Council (1925). When
the employees of a coal mine went on strike, the owners of the mine asked
the authorities for protection by quartering police officers on the premises
of the mine. When the police refused and said that visiting patrols were suf-
ficient, the coal mine owners offered to pay the police £2,200, which they
accepted. When the strike was over the police requested payment. The
owners, however, refused to pay arguing that there was no consideration for
the promise to pay for the police protection as there was already an existing
duty to protect the mine. The House of Lords reasoned that the police had
provided an extra service that went beyond the normal public duty to main-
tain law and order. The police was therefore able to claim the £2,200 from the
mine owners.
More modern applications of the ‘existing duty’ rule are to be found in cases
in which the courts have to decide who has to pay for the costs of police
services in and around football stadiums. In line with the Glasbrook Brothers
case the courts then ask whether these are special police services provided
to football clubs, or mere existing duties to maintain law and order. Thus, in
Harris v Sheffield United Football Club Ltd (1988), it was found that the police
officers had to attend inside the stadium itself, clearly a special service at the

82 · Contract law
request of the club. But law and order sometimes also need to be maintained
in the direct vicinity of the stadium. In Leeds United Football Club v The Chief
Constable of West Yorkshire Police (2013), the Court of Appeal held that police
authorities can only charge for the costs of policing in areas owned, leased or
controlled by the football club. In public areas the policing also benefits local
residents whose properties may otherwise be vandalised: the existing duty
of the police towards the general public to keep the peace prevents the police
from claiming back the costs from the club.
Existing An existing duty does not necessarily follow from public law. Consideration
contractual is also absent if the duty already follows from a pre-existing contract. The
duty
classic case is Stilk v Myrick (1809). On a trip from London to the Baltic and
back, two sailors deserted their ship in Kronstadt. The captain failed to find
replacements for them and promised the eight remaining seamen that the
wages of their two disappeared colleagues would be divided between them
if they worked the ship back to London. However, after the ship had safely
arrived in England the captain refused to pay the sailors the extra salary.
The court agreed, arguing that the sailors had not provided any considera-
tion for the promise the captain had made: they had only done what they
had already promised to do in the initial contract, namely sail back the ship.
There is much to be said in favour of this outcome. A different decision
would open the door for ‘contractual blackmail’: a party could threaten not
to perform the contract, and make unreasonable demands, in every case in
which the other party is in distress (which could be a reason for invalidation
of the contract on basis of threat). On the other hand, it is debated whether
this outcome should be reached on basis of the consideration doctrine. This
seems misplaced as in fact there was a benefit to the promisor (it allowed
Myrick to have the ship sailed home) and a detriment to the promisees (who
had to work a bit harder than otherwise). This explains why the ‘existing
duty’ rule has been under heavy attack.
The most important inroad on it was made in the landmark case Williams
Williams v
v Roffey Bros & Nicholls (Contractors) Ltd, decided by the Court of Appeal
Roffey Bros in 1990. Building contractors Roffey entered into a contract with a housing
association to refurbish a block of 27 flats. The contract contained a so-called
damages clause (see Chapter 12): if Roffey did not complete the work on time,
they were liable to pay a fixed amount in damages. Roffey sub-contracted the
carpentry work to Williams for a price of £20,000. When Williams ran into
financial difficulties because he had under-priced the job and had trouble
supervising his employees, a meeting was held with Roffey, who was obvi-
ously concerned about completing the contract on time. Roffey agreed to pay
Williams an additional £575 per completed flat. Williams managed to finish

eight more flats, but was then refused the promised extra money by Roffey
who argued that he had not provided consideration for the promise of extra
payment. However, the Court of Appeal did find good consideration for
Roffey’s promise in a decision that is generally seen as pragmatic and aimed
at reaching a just result, rather than being a proper application of the ‘existing
duty’ rule. The court found that Roffey had obtained a practical extra benefit
by Williams’s promise to complete the work on time against extra pay. This
practical benefit consisted of Roffey avoiding having to pay a penalty in their
contract with the housing association and of having to go through the trouble
of finding an alternative carpenter to finish the job. English contract layers
have spilt much ink on how to reconcile this case with Stilk v Myrick, but it
seems now clear that an additional practical benefit makes good considera-
tion. This is generally seen as a clear example of the ‘watering-down’ of the
consideration doctrine.
4. There is no good consideration for the promise to accept part payment

of a debt as discharge of the entire debt
If someone owes another person money, it often happens that the debtor
offers to pay a smaller sum than the entire debt in return for the creditor
accepting this as full discharge. Based on the very old Pinnel’s case (1602)
English law does not regard the creditor’s promise to accept this part payment
as valid consideration. If you agree to discharge me of the £250 I owe you in
return for me paying you £200, you can always go back on your promise as
I have not provided you with consideration for it: I am already obliged to
repay the entire debt. However, this is different if I add some extra element.
What I could promise, for example, is to pay back the debt at an earlier date,
providing you with a clear benefit and therefore with consideration for your
promise.
Having set out the main rules of the consideration doctrine, a further ques-
Circumventing
tion arises: is consideration always needed as a requirement for the valid
consideration formation of a contract? English law indeed recognises two techniques to set
consideration aside. One method is to put the agreement in a deed, some-
thing that is possible with any agreement. The other method is to invoke the
doctrine of promissory estoppel, which is only available in a limited number
of cases.
1. Agreement by deed
Parties can escape from the requirement of consideration by putting their
agreement in a so-called deed. Unlike a ‘simple’ contract, a contract made up

84 · Contract law
in the form of a deed is a formal contract. The requirements a deed must meet
are laid down in section 1 of the Law of Property (Miscellaneous Provisions)
Act 1989. The written document must indicate that it is a ‘deed’, be signed by
the maker, and the signing must be attested by a witness (which means that
the witness watches the maker sign the document and signs his own name as
a witness of this). Although since 1989 a deed no longer needs to be sealed
(which originally took place with real wax and later by simply adding the
letters LS for loco sigilli, ‘place of the seal’), it will in practice often still contain
the traditional words ‘signed, sealed and delivered’. A deed provides an easy
way for a party to make a gratuitous promise enforceable. If Bill wishes to
donate £10 million to the London Wildlife Trust, the law must make this
possible even in the absence of consideration. One way to realise this would
of course be to make a binding contract by having the charity do or give
something in return (such as create a ‘Bill Fund’ or give Bill £1 in return for
his promise), but to make a deed would be another possibility.
2. Promissory estoppel
A principle accepted in any legal system is that no one is allowed to act in
a manner contrary to one’s own previous conduct, particularly not when
another person has acted in reliance on this. German law calls this the pro-
hibition of venire contra factum proprium (literally ‘to go against one’s own
behaviour’). In English law, the principle is reflected in the doctrine of estop-
pel that is often described as providing a legal bar to alleging or denying a fact
in contradiction of one’s own previous conduct. If a municipality enters into
a contract and tells the other party that the contract is approved of by the city
council, the city is usually ‘estopped’ from claiming that the contract is invalid
if it turns out that the council made all kinds of reservations. Estoppel thus
prevents a party from going back on what it said or did. However, English law
lacks one uniform principle of estoppel: its exact conditions are dependent
on the field to which it is applied (property law, procedural law, etc.). In the
context of contract law we must examine the doctrine of promissory estoppel
that was developed in equity (see Chapter 2).
The question to be answered here is whether promissory estoppel can make

High Trees case
a promise binding even if there is no consideration for it. The seminal case on
this question, and one of the most famous English court decisions of the last
century, is Central London Property Trust Ltd v High Trees House Ltd (1947).
In 1937 Central London leased a block of flats in Clapham, London, to High
Trees for a period of 99 years at a rent of £2,500 per year. The outbreak of
World War II, and people leaving London as a result thereof, made it impossi-
ble for High Trees to sublet the flats to individual tenants who would actually

occupy the building. In 1940 Central London therefore agreed to reduce the
rent to £1,250. In 1945 the London property market was again in full swing
and Central London demanded that High Trees resume payment of the full
rent. This was not a problem for the period from 1945 onwards as the waiver
by Central London was assumed to only cover the period in which the flats
were unlettable as a result of the war. But it was not clear that the same was
true for the period between 1940 and 1945. A sound application of the con-
sideration doctrine (more in particular of Pinnel’s case) would have meant
that the claim by Central London to be paid the full rent had to succeed: its
promise to accept a lower yearly amount was not supported by consideration.
Nevertheless Denning J made clear that if Central London had claimed the
rent for 1940–45 its claim would have been rejected. After a survey of old
judicial decisions that most lawyers had long forgotten about, he stated:
They are cases in which a promise was made which was intended to create legal
relations and which, to the knowledge of the person making the promise, was
going to be acted on by the person to whom it was made and which was in fact so
acted on. In such cases, the courts have said that the promise must be honoured.
(…) The courts have not gone so far as to give a cause of action in damages for the
breach of such a promise, but they have refused to allow the party making it to act
inconsistently with it. It is in that sense, and that sense only, that such a promise
gives rise to an estoppel. (…) In my opinion, the time has now come for the
validity of such a promise to be recognized. The logical consequence, no doubt is
that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is
binding notwithstanding the absence of consideration (…).
The revolutionary aspect of this High Court decision is that it recognises that
a promise lacking consideration (and not laid down in a deed) can still be
binding on basis of promissory estoppel. The doctrine can only be applied if
strict requirements are met:
z There must be a pre-existing contractual relationship between the

parties. This was clearly the case in High Trees as the parties had already
concluded a lease contract before Central London made its promise;
z A clear promise must have been made that the promisor will not enforce
his legal rights against the promisee. In High Trees Central London’s
promise to reduce the rent was not contested: it had even been put in
writing;
z The promisee must have acted in reliance on the promise, preferably to
its own detriment (sometimes called detrimental reliance). High Trees
continued to let the flats to its tenants and lowered the rent the tenants
had to pay in order to attract more tenants to the building;

86 · Contract law
z It must be inequitable for the promisor to go back on its promise. If the

promisee has acted in reliance on it, this requirement is usually met;
z Promissory estoppel is ‘a shield but not a sword’. This important limita-
tion of promissory estoppel means that it can only prevent the enforce-
ment of an existing right and cannot create a new right. High Trees did
not claim it had acquired a new contractual right (using its reliance as a
‘sword’), it only defended itself against the claim by Central London to
pay the full rent (as a ‘shield’). One must realise that this severely restricts
the field of application of promissory estoppel. If detrimental reliance
could be used to create a new right for the promisee (as a so-called ‘cause
of action’), much of the doctrine of consideration would be abolished
through the backdoor. This is the course that for example American and
Australian law have taken: there, any promise without consideration can
be binding if the promisee reasonably relied on that promise.
That English law refuses to follow the example of other common
law jurisdictions became even more clear in the case of Baird Textile
Holdings Ltd v Marks & Spencer plc (2001). When in the 1990s Marks &
Spencer decided to trade in its traditional English suppliers for cheaper
manufacturers abroad, one of these suppliers (Baird) brought a court
action. Baird had been making clothes for M&S for over 70 years and
claimed that M&S should be estopped from ending their business rela-
tionship (that was not based on a formal contract) without reasonable
notice. To substantiate this claim (so not a defence against any claim
from M&S, but a new action) Baird argued that M&S had made them
believe they had a long-term relationship with them and that over the
years they had invested heavily to meet the needs of M&S. However,
the Court of Appeal confirmed that promissory estoppel cannot be
used to create a legal right and the claim of Baird therefore had to be
rejected.
The difficulties caused by the complexity of consideration and the inroads

Abolitionism
that have been made on it in Williams v Roffey Bros and through the doctrine
of promissory estoppel have led some English authors to argue that the doc-
trine is a confusing element of English law. Others have said that the absence
of consideration in the CISG, PECL, PICC and DCFR shows that a legal
system can very well do without it. This is not a recent view. In the 1936
volume of the Harvard Law Review Lord Wright wrote:
[Consideration has no] place in the laws of France, Italy, Spain, Germany,
Switzerland and Japan. These are all civilised countries with a highly developed
system of law; how then is it possible to regard the common law of consideration as
axiomatic or as an inevitable element in any code of law? (. . .) I cannot resist the

conclusion that the doctrine is a mere incumbrance. A scientific or logical theory of

contract would in my opinion take as the test of contractual intention the answer to
the overriding question whether there was a deliberate and serious intention, free
from illegality, immorality, mistake, fraud or duress, to make a binding contract.
Despite these forceful attacks it is not very likely that the English courts will
be willing to eradicate an age-old doctrine like consideration. But the conclu-
sion that probably anyone can agree with is that in the course of the last three
centuries, the consideration requirement has moved away from its original
function of providing a good enough motive for why a promisor must be
bound.
C. Causa in French law

As explained in subsection A above, not only consideration in English law but
also the requirement of ‘causa’ initially stood for a proper reason to be bound
Two types of to a promise (well expressed by the Latin term causa obligationis). Although
‘causa’ in the French-based legal systems this function of causa is now mostly taken
over by the requirement of the intention to be legally bound, its historical
origins can still be recognised in the two functions that causa has today. Before
we get to these two functions, we need to define what causa means in French-
based jurisdictions such as Italy, Spain, Romania and Belgium and, outside of
the EU, Quebec. They usually define causa as the goal (cause finale) that the
parties pursue with the contract. This in itself is not a clear definition as the
goal of a contract can be defined at both an abstract level and at a more con-
crete one. At the abstract level (the so-called objective causa) the goal of the
parties with a certain type of contract is always identical. In a sales contract
it is for the seller to obtain a price and for the buyer to be delivered a good,
in a contract of employment for the employer to pay a salary and for the
employee to carry out the work. So in bilateral contracts the objective causa
is the counter performance (or promise thereof) by the other party, similar to
consideration under English law. At the concrete level (subjective causa) the
goal differs from one party to another. The seller is perhaps in need of cash to
play in the nearby casino while the buyer intends to give the good as a present
to her lover. The subjective causa is therefore the individual motive of a party
to bind itself. Both meanings can be found in the case law.
The first function of causa is that it allows courts to prevent contracts from
Objective causa
taking effect if the goal that the parties pursue cannot be realised. A text-
book example of a missing (objective) causa in a sales contract is if the good
in reality does not exist: the contract then misses the essential element of
the counter performance. At a time when causa was still a cornerstone of

88 · Contract law
French law, the Cour de Cassation applied this reasoning for example in the
Chronopost cases (1996 and 2006). Here, the courier service Chronopost
failed to deliver on time an important letter containing a bid in a tender pro-
cedure, despite Chronopost marketing itself as a specialist in swift transport
and guaranteeing the reliability of its service to customers. The courier tried
to escape from liability by invoking an exemption clause in the contract, but
to no avail. The court saw a speedy and reliable service as a fundamental obli-
gation (une obligation essentielle) under the contract and therefore the exemp-
tion clause could not be invoked as this would have deprived the contract
of causa. Put differently: in a contract like this the counter performance of
paying the price lies in a quick and reliable delivery of a letter. A clause limit-
ing liability would obstruct this and leave the contract without causa.
A contract could also lack the subjective causa. In the case Vidéo-club (1996),
Subjective
a couple rented 200 videocassettes at a price of FF40,000 (€6,100) for a
causa period of eight months with a view to starting a videoshop in their little village
of only 1,300 inhabitants. When the rental company asked for payment the
couple invoked the nullity of the contract for lack of causa. Interestingly, the
Cour de Cassation agreed and held that ‘the performance of the contract on
the economic scale envisioned by the parties was impossible’. This is a clear
example of a search for the subjective goals that the parties envisioned with
their contract – even though the outcome can be criticised for being at odds
with legal certainty. The only way to rationalise the decision is to assume that
the rental company knew about the plans of the couple, but failed to warn
them as a professional and experienced party that exploitation was not eco-
nomically viable. A final example of a missing causa is where a party believes
it has a debt towards another person, which turns out to be untrue. In the
case Manuela (1985) someone maintained a child on the assumption that
he was the father; when he found out that the statements made to this effect
by the child’s mother were incorrect, the court held that his payments were
made without causa.
The field of application of causa does not end with these types of cases.
In reality French courts applied causa in very diverse circumstances.
Unfortunately, this did not help in finding a proper place for the doctrine.
Despite fierce resistance of French lawyers who hailed causa as a unique
characteristic of the French legal tradition, it was abolished with the grand
reform of French contract law in 2016. The argument for this was that the
exact function of causa was not very clear and overlapped with other doc-
trines, such as formation and mistake. Indeed, in all the cases mentioned
above, it would have been possible for the court to decide the case in the
same way using other rules. In addition, the French lawmaker reasoned that

causa is absent in the Principles of European Contract Law (PECL) and the
Draft Common Frame of Reference (DCFR).
The second function of causa in French-based jurisdictions is that it prevents

Prohibited
contracts against public policy or good morals from being valid. To this end,
contracts the old Art. 1133 Code Civil stated: ‘A cause is unlawful when it is prohib-
ited by law, when it is contrary to good morals or to public policy.’ The new
French law no longer needs causa to realise this; Art. 1162 CC now simply
states that a contract cannot derogate from public policy. Prohibited con-
tracts are discussed in Chapter 10.
TOPICS FOR REVIEW
Intention to create legal relations

Types of dissensus of intention and declaration
Objective approach to agreement
Factors relevant in applying the objective approach
Theories of contractual liability
Intention in commercial agreements
Intention in social and domestic agreements
Intention in gratuitous and disadvantageous transactions
Agreements subject to contract
The politics behind Balfour v Balfour
The common roots of consideration and causa
Consideration in English law
Adequacy of consideration
Past consideration
The current state of the ‘existing duty’ rule
Part payment of debts
Deed
Promissory estoppel
Functions of causa in the French legal tradition
Objective and subjective causa
FURTHER READING
– John Austin, How to do Things with Words?, Cambridge Mass. (Harvard University Press) 1962.
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapters 10 and 11.
– Hugh Beale (ed.), Chitty on Contracts, 33rd ed., London (Sweet & Maxwell) 2020, Chapter 3.
– Andrew Burrows, A Restatement of the English Law of Contract, Oxford (Oxford University
Press) 2016, Art. 8.
– Charles Fried, Contract as Promise: A Theory of Contractual Obligation, Cambridge Mass.
(Harvard University Press) 1981.
– James Gordley, The Philosophical Origins of Modern Contract Doctrine, Oxford (Oxford
University Press) 1991.
– James Gordley (ed.), The Enforceability of Promises in European Contract Law, Cambridge
(Cambridge University Press) 2001.

90 · Contract law
– Steve Hedley, ‘Keeping Contract in its place’, Oxford Journal of Legal Studies 5 (1985), 391.
– Hein Kötz, European Contract Law (translated by Gill Mertens and Tony Weir), 2nd ed.,
Oxford (Oxford University Press) 2017, Chapter 4.
– Law Commission, Matrimonial Property, Needs and Agreements, 26 February 2014, Law Com
No. 343.
– Ewan McKendrick, Contract Law, 12th ed., Basingstoke (Palgrave Macmillan) 2017.
– Jörg Neuner, Larenz-Neuner, Allgemeiner Teil des Bürgerlichen Rechts, 12th ed., München
(Beck) 2020.
– Edwin Peel, Treitel on The Law of Contract, 15th ed., London (Sweet & Maxwell) 2020.
– Richard A. Posner, Economic Analysis of Law, 9th ed., (Wolters Kluwer) 2014.
– Stephen A. Smith, Atiyah’s Introduction to the Law of Contract, 6th ed., Oxford (Oxford
University Press) 2006, Chapter VI.
– Francois Terré et al, Droit civil: les obligations, 12th ed., Paris (Dalloz) 2019, Book 1, Title 1
– Robert Wright, ‘Ought the Doctrine of Consideration to be Abolished from the Common
Law?, Harvard Law Review 49 (1936), 1125 ff.
– Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition,
Cape Town ( Juta) 1990 (paperback edition with Oxford University Press, Oxford 1996),
Chapter 18.

5
Legal capacity of the parties
CHAPTER OVERVIEW
A contract (or any other juridical act) can only be validly concluded by
someone who has the legal capacity to do so. The law does not consider
everyone fit to have this capacity. Two categories of people qualify for not
being legally capable: certain minors (in particular young children) and
people with mental disorders. This chapter examines both categories.
It was seen in Chapter 4 that a party can only be bound to a contract if it

has expressed its (apparent) intention to enter into a legal relationship with
somebody else. This assumes that people have control over what they intend
and are able to assess what is in their best interest. If someone buys a house,
opens a restaurant or decides to participate in the local Beauty Queen elec-
tion, everyone will assume that these are rational decisions taken by people
having full cognitive ability. Luckily the great majority of people indeed have
this so-called legal capacity (the ability of a natural person to enter into a valid
legal transaction), but this is not true for everyone. In the eye of the law some
people lack the necessary understanding, judgement or experience to enter
into juridical acts, including the ability to bind themselves by contract. Two
categories of people qualify for this: certain minors (in particular young chil-
dren) and people with mental disorders. If these persons conclude a contract
with somebody else, most jurisdictions allow the legal representative of the
incapacitated person (such as a parent in case of a child) to have this contract
invalidated.
It is important to realise which conflicting interests are at stake here. Legal

Protection
incapacity (incapacité de contracter, Geschäftsunfähigkeit, handelingsonbe-
kwaamheid) is an instrument to protect parties who are presumed not to be
able to take care of their own interests. It could cause a psychiatric patient,
unable to oversee the consequences of his actions, great trouble if he were
able to validly buy anything being offered for sale. And a nine-year old would
have a bad start in life if its parents were not able to invalidate the €25,000
online loan it obtained from BNP Paribas. But this interest to receive legal
protection may conflict with two other interests.

92 · Contract law
First, it would be odd if all transactions of a minor or a mentally ill person

Policy reasons
could be invalidated. Nothing seems to be wrong with a 15-year old buying
a copy of Richard Dawkins’ book The God Delusion, which is clearly in the
interest of the child’s upbringing. This argument is even more acute for
adults: to declare them incapable means that they are no longer allowed to
be responsible for their own acts, presenting a grave violation of their right to
determine which life they want to lead.
Second, the law has to balance the interests of the incapacitated person with
those with whom they deal. In particular in the case of mentally ill persons,
it is not always apparent to the outside world that a party is not capable of
making a rational decision. If Mac, on his weekly trip to the town close to
the mental institution in which he lives, buys a new car, it may not be clear
to the local Mercedes dealer that he is dealing with a patient suffering from a
psychiatric disorder. The question then is whether the dealer’s reliance that
Mac was perfectly able to form his own will should prevail over the need to
protect Mac against himself. As we saw before, the law tends to protect the
objective reliance of a party: should this reliance be made subordinate to the
protection of the mentally weak?
Each jurisdiction balances these interests in its own way, but the starting
point is the same everywhere: every natural person has the legal capacity to
perform legal transactions. Article 1145 of the French Code Civil, a provi-
sion practically unchanged since 1804, well reflects this universal princi-
ple by saying: ‘Any person may enter into a contract, unless he has been
declared incapable of it by law.’ It is also generally accepted that the two
categories of persons mentioned before may lack legal capacity for their
incapability of rational decision-making. But the extent to which minors
and adults in need of protection are indeed unable to enter into valid trans-
actions differs from one country to another. This chapter looks at these
different approaches.
Minors
All European jurisdictions set the age of legal capacity at 18. But this does not
mean that a transaction entered into by someone below that age is necessar-
ily invalid. Although in principle the contract of a minor is not binding upon
him (meaning that the adult other party cannot claim enforcement), each
jurisdiction allows exceptions to this rule.
English law allows a minor to validly enter into a ‘contract for necessaries.’
English law According to section 3 (3) of the Sale of Goods Act 1979, which reproduces

Legal capacity of the parties · 93
the case law on this issue, necessaries are ‘goods suitable to the condition in
life of the minor or other person concerned and to his actual requirements
at the time of the sale and delivery’. This includes food, clothing, accom-
modation and anything else that the minor requires at the relevant certain
point in time and that is reasonable to acquire in view of his ‘condition in
life’. The latter means that this particular minor’s income and position need
to be taken into account. If a 17-year-old student orders ten pairs of Jimmy
Choo handmade shoes, this may be suitable to her position in life (as she is
the daughter of a Lincoln’s Inn barrister), but it is not in conformity with her
actual requirements as she already has 25 pairs of shoes in her wardrobe. In
case the contract for necessaries would be binding, the minor is only bound
to pay a reasonable price (Sale of Goods Act 1979, s. 3 (2)).
English law also considers employment, apprenticeship and training con-

tracts as binding on the minor provided that they are on the whole to the
minor’s benefit. Football player Wayne Rooney therefore concluded a valid
training contract with Everton FC at age 17, but the ‘representation contract’
he made with a sports management company at age 15 was not binding upon
him as Proform did not give any training to Rooney and it was not com-
pulsory for a football player to enter into such a contract (Proform Sports
Management Ltd v Proactive Sports Management Ltd, 2006).
English law lacks the institution of a statutory representative who can repre-
sent a minor when making a contract. The only relevant question is whether
the contract meets the requirements that were just discussed. In so far as an
English parent does act in the name of his or her children (for example in
litigation), this is usually not because a statute says so, but because the court
has appointed the parent for this specific purpose (while it could also have
appointed another person as a so-called ‘next friend’). In civil law jurisdic-
tions on the other hand, parents do have the general power to represent their
children, which also means that they are able to ‘consent’ to the contract that
a minor entered into. This clearly influences the way civil law countries deal
with contracts made by minors.
French law French law does not differ from English law in accepting as a main principle
that contracts entered into by minors can be invalidated (Arts. 388, 1145 and
1146 Code Civil). However, instead of the minor themself, it is the administra-
teur légal (usually a parent) who acts on behalf of the minor. Article 388-1-1
Code Civil states: ‘The statutory administrator acts as an agent for the minor
in all civil transactions, except cases where the law or usage authorises minors
to act for themselves. (…)’

94 · Contract law
There are two important exceptions to the main rule that contracts by minors
are invalid. First, as Art. 1148 CC indicates, minors do have capacity if law
or usage says so (capacité usuelle). This is the case in normal transactions of
which it is customary that a minor of a certain age performs them alone. One
must think of contracts of daily life that pose no risk to the minor’s financial
position and are in line with the lifestyle the minor is used to. Purchasing a car
surely does not qualify, but buying a CD surely does. This is confirmed in Art.
1149: even a day-to-day act can be annulled in case it brings an economic dis-
advantage (lésion) to the minor. Second, in the nineteenth century the Cour
de Cassation had already decided that the ratio behind legal incapacity is not
that the minor is not allowed to contract, but that he is not allowed to damage
his own position. The minor (or his statutory representative) can therefore
only invalidate the contract if he proves that he would otherwise suffer an
economic disadvantage (lésion). This rule can now also be found in Art. 1151
Code Civil, which states that: ‘A contract cannot be invalidated if it was useful
to the minor and he did not suffer any economic disadvantage from it, or
profit from it.’ As a result of this French courts will have to ask themselves the
same question as their English colleagues when they have to decide about a
minor’s demand to invalidate the contract: is it beneficial to the minor or not?
Unlike English and French law, which ultimately attach great importance
German law
to how beneficial the contract is for the minor of whatever age, German law
(and the same is true for other countries in the German legal tradition such
as Austria and Greece) adopts a different approach. It puts much greater
emphasis on the consent of the parents as a necessary requirement for a valid
contract. In addition, it distinguishes between two different age categories.
These are the relevant provisions of the German BGB:
§ 104: ‘A person is incapable of contracting if:

1. he is not yet seven years old,
2. he is in a state of pathological mental disturbance, which prevents the free
exercise of will, unless the state by its nature is a temporary one.’
§ 105: ‘(1) The declaration of intent of a person incapable of contracting is void.

(2) Also void is a declaration of intent that is made in a state of unconsciousness or
temporary mental disturbance.’
§ 106: ‘A minor (Minderjähriger) who has reached the age of seven has limited
capacity to contract under §§ 107 to 113.’
§ 107: ‘For a declaration of intent as a result of which he does not receive only a
legal benefit, a minor requires the consent (Einwilligung) of his legal representative.’

§ 108 (1): ‘If the minor enters into a contract without the necessary consent of the
legal representative, the effectiveness of the contract is subject to the ratification
(Genehmigung) by the legal representative.’
§ 110: ‘A contract entered into by the minor without the approval of the legal
representative is deemed effective from the beginning if the minor effects
performance under the contract with means that were given to him for this
purpose or for free disposal by the legal representative, or by a third party with the
ratification of the representative.’
§ 113(1): ‘If the legal representative authorises the minor to enter service or
employment, the minor has unlimited capacity to enter into juridical acts that
relate to entering or leaving service or employment of the permitted nature or
performing the duties arising from such a relationship. (…)’
The German code here distinguishes between minors below seven years old
(§ 104 (1)), who are deemed wholly incapable of making rational decisions
(§ 105 (1)), and minors from the age of seven to the age of 18 who still have
some possibilities to enter into a valid contract by themselves (§ 106–113).
But these possibilities are limited. The first is mentioned, somewhat hidden
in § 107: if the minor obtains ‘only a legal benefit’ from the contract it is valid
without consent of a parent. However, German law applies this exception in a
very strict way: the minor must not incur any obligation. This severely limits
the scope of application of the provision. Even if a plot of land is donated to a
minor, German courts tend to hold that this is a void contract because obliga-
tions will follow from this (such as the duty to pay property tax). The second
possibility is provided by § 110. A contract entered into thanks to the money
that a minor has received from a parent for a specific purpose or for free dis-
posal (for example weekly pocket money, or money to buy a return ticket to
Lloret de Mar) is also valid.
This means that German law puts much emphasis on the consent of a parent
or other legal representative. Without this consent, either given before
(Einwilligung: § 107) or after (Genehmigung: § 108), the transaction can be
invalidated.
Dutch law Article 1:234 of the Dutch Civil Code combines the English-French and the
German approach. It states:
1. In so far as the law does not provide otherwise, minors have the legal capacity
to perform juridical acts, provided they are acting with the consent of their legal
representative.

96 · Contract law
2. Consent may be granted only permission for a specific juridical act or for a
specific purpose.
3. Consent is presumed to have been granted to a minor if it relates to a juridical
act of which it is generally accepted practice that it is performed independently by
minors of his age.
On the one hand, Dutch law adopts the German approach that a minor needs
parental consent in order to perform a valid juridical act. It even goes further
than German law by requiring consent under all circumstances (sections 1
and 2). On the other hand, consent is presumed to have been granted (a
presumption that cannot be rebutted by the parents) if a minor performs a
juridical act ‘of which it is generally accepted practice that it is performed
independently by minors of his age’. This is reminiscent of the French-
English approach because the potential benefits of the juridical act will be an
important factor in assessing what the societal norms (‘accepted practice’)
bring with them. The innovative aspect of the Dutch approach is that the
Code explicitly allows for taking into account what is customary for minors
of the same age as the minor who performed the juridical act. One can very
well argue that a six-year old who buys the latest issue of Donald Duck at a
nearby store is presumed to have been granted consent by his parents. This
is because it is generally accepted in Dutch society that children of this age
can buy a €2 comic book. There is even less doubt in case a 15-year old buys
books to be used at school or clothing at H&M. But the younger the child,
the bigger the financial burden, and the less the contract facilitates necessar-
ies, the less likely it is that societal norms allow a minor to act independently.
A 17-year old living 20 km from school buying a second-hand scooter is dif-
ferent from a 15-year old ordering a road bike to be handmade by Pegoretti.
Adults in need of protection

A. Legally incapacitated adults
In several countries, including France and the Netherlands, the second cat-
egory of people lacking legal capacity are adults in need of protection. They
usually suffer from a mental disability (either because of a psychiatric illness
or because of a mental handicap) and are therefore formally declared incapa-
ble of entering into valid legal transactions. This so-called curatelle (curatele,
Curatelle sometimes translated as wardship) is clearly a far-reaching measure: although
there may be a need to protect the vulnerable against exploitation by mali-
cious others, it does prevent full participation in legal life and is thereby
a grave intrusion on someone’s personal autonomy. This explains why the
decision to declare someone incapable (Art. 428, 440 CC and Art. 1:378

BW) can only be taken by an independent court and must meet strict require-
ments in order not to violate the right to respect for private and family life as
protected by Art. 8 of the European Convention on Human Rights (ECHR).
In civil law jurisdictions the court will also appoint a legal representative who
is able to perform juridical acts for the protected person (curateur, curator).
The severe consequences of legal incapacity of adults have led several coun-
Betreuung
tries to develop less intrusive regimes to protect the vulnerable. German
law does so by way of Betreuung (§ 1896 BGB), meaning that a custodian
(Betreuer) is appointed by the court to take care of the affairs of the person
in so far as this is necessary. The court can decide that a person can validly
perform certain types of juridical acts with the consent of the custodian (the
so-called Einwilligungsvorbehalt, reservation of consent). But if the person
binds himself to a transaction that only confers a legal advantage or concerns
a trivial matter, he is bound anyway. § 1903 BGB states to this effect:
(1) To the extent that this is necessary to prevent a substantial danger for the
person or the property of the person under custodianship, the custodianship court
orders that the person under custodianship requires the consent of the custodian
for a declaration of intention that relates to the group of tasks of the custodian
(reservation of consent). (…)
(3) Where a reservation of consent is ordered, the person under custodianship
nevertheless does not require the consent of his custodian if the declaration of
intention merely confers a legal advantage on the person under custodianship.
To the extent that the court does not order otherwise, this also applies if the
declaration of intention relates to a trivial matter of everyday life.
English law also shies away from declaring someone completely incapable of
participating in legal life and has adopted special legislation (in particular the
Mental Health Act 1983 and the Mental Capacity Act 2005) to reflect this.
Next to the regime of legal incapacity France also developed less intrusive
Sauvegarde de protective measures to safeguard the interests of adults (such as the tempo-
justice rary measure of sauvegarde de justice that has existed since the 1960s: it does
not take away the legal capacity, but it allows a court to invalidate lesionary
transactions).
Legal incapacity of an adult in France and the Netherlands and custodianship

in Germany in principle lead to the same result as incapacity of a minor: the
contract entered into can be avoided (set aside) by the legal representative
or is even regarded as void. There are certain exceptions to this rule in cases
where the transaction is beneficial to the adult or concerns contracts of daily
life (as we just saw with § 1903 BGB; see also Art. 1148 CC and Art. 1:381

98 · Contract law
(3) BW), but usually the other party is bound: the rationale behind the pro-
tection of an incapacitated person means that only he can avoid the contract.
The argument of the other party that it had no reason to doubt its counter-
part’s age (‘he had a beard and drove a car’) or medical condition (‘she looked
as healthy as Sophie Dahl’) plays no role. In case of legal incapacity, the law
sacrifices legal certainty and the objective approach in order to protect people
not able to exercise their free will. The shop owner who is close to selling a
BeoSound 5 audio system to a young looking customer can always ask for an
ID. Court decisions incapacitating adults are usually published in a national
public register that in some countries is even available online for a quick and
easy check.
B. Other adults
Contracts can obviously also be concluded by people who are not formally
declared incapable or in need of a custodian by a court decision, but who
Interests do suffer from some mental disorder. In particular if this disorder is only
of a temporary nature (depression) or not yet diagnosed (Alzheimer), it is
not likely that the patient is formally incapacitated. In addition, people can
also be prevented from making a rational decision as a result of a psychosis
or blackout, using too much alcohol or drugs, or simply by being stressed or
tired. An important question is whether they deserve the same protection
as their legally incapacitated partners in misfortune discussed in section A
above. A positive answer is clearly not as self-evident as in case of formal legal
capacity: in the cases dealt with here, the other party is not able to check a
public register. This implies that the interest of the other party relying ‘in
good faith’ on the valid formation of a contract and the interest of the disor-
dered person in need of protection may have to be weighed in a different way.
The German solution is clearly stated in § 105 (2) BGB: ‘Also void is a decla-
Germany
ration of intent that is made in a state of unconsciousness or temporary mental
disturbance.’ The text implies that any reliance of the other party is not rele-
vant: German law protects any person who suffers from a disorder against the
other party even if they have no reason to doubt that person’s mental abilities.
But there is a strict requirement, developed in case law, that the disorder must
be so serious that it fully negates the ability to form one’s will. Court prac-
tice is that the adult, who has to prove that his will was affected by a mental
disorder, will provide the judge with expert opinions on his state of mind at
the time of contracting. If the person of unsound mind can indeed prove he
was prevented from rational decision-making, he can choose whether or not
to keep the contract in place. But there is a similar exception as in cases of
Betreuung, making an everyday transaction perfectly valid:

§ 105a BGB: ‘If a person of full age incapable of contracting enters into an everyday
transaction that can be effected with funds of low value, the contract he enters
into is regarded as effective with regard to performance and, if agreed, counter
performance, as soon as performance has been effected and counter performance
rendered. Sentence 1 above does not apply in the case of considerable danger to
the person or the property of the person incapable of contracting.’
France French law starts from a similar assumption as the German § 105(2) BGB.
Article 414-1 Code Civil states:
In order to enter into a valid transaction, it is necessary to be of sound mind. But it

is for those who seek annulment on that ground to prove the existence of a mental
disorder at the time of the transaction.
The French courts take this provision quite literally and usually do not find
a valid transaction in case of a mental disorder (trouble mental). Again, as in
German law, it is not relevant if the other party relied on any intention: the
proof of mental disorder is enough to invalidate the contract.
English law is more generous in protecting the other party ‘in good faith’.
England
Only if the other party knew that its counterpart was not able to appreciate
the nature and effect of the transaction (she saw him drink ten malt whiskies
in one hour), the latter can decide not to be bound by it (Hart v O’Connor,
1985). This is clearly different from how minors are treated: they can escape
the contract even if the other party was not aware of the young age. This may
sound harsh on the mentally disabled – who as a result are left unprotected in
most cases – but this can be explained from the overall desire of English law
to protect reasonable reliance in a contractual relationship. In addition, the
rule mentioned before on necessaries is not only applicable to a minor, but
also to a person who by reason of mental incapacity (in English law the term
is used for anyone having a disturbance in the mind or brain) or drunkenness
is incompetent to contract: irrespective of whether the other party knew of
the disability, a contract for necessaries is valid and will be converted into a
contract for a reasonable price – if needed (Sale of Goods Act 1979, s. 3 and
Mental Capacity Act 2005, s. 7).
This generosity on the other party ‘in good faith’ in case of a not formally
Netherlands
incapacitated person can also be found in Dutch law. On the one hand, the
Dutch legislator has made it easy on a person of unsound mind to prove that
he did not intend to be bound. To this end, Art. 3:34 of the Dutch Civil Code
states that in cases where the juridical act is disadvantageous for the mentally
disturbed person, he is presumed to have acted under the influence of the

100 · Contract law
mental disturbance. On the other hand, the other party can always invoke his
reasonable reliance on basis of Art. 3:35 BW. If A feels haunted by demons
that tell him to sell his mansion as soon as possible and B accepts A’s offer
to buy the house for €300,000, A cannot invalidate the contract if B did not
know, nor had to know, about A’s mental inability.
TOPICS FOR REVIEW
The ratio behind legal incapacity

Contracts binding on a minor in English, French, German and Dutch law
The role of age in legal incapacity of minors
Contracts binding on adults with a mental disability
The role of reliance of the other party
The role of statutory representatives of incapacitated persons
FURTHER READING
– Hein Kötz, European Contract Law Vol. 1 (translated by Tony Weir), Oxford (Oxford University
Press) 1997, Chapter 6.
– Ewan McKendrick, Contract Law, 12th ed., Basingstoke (Palgrave Macmillan) 2017, Chapter
16.
– Basil S. Markesinis, Hannes Unberath and Angus Johnston, The German Law of Contract: A
Comparative Treatise, 2nd ed., Oxford (Hart) 2006.

6
Formalities
CHAPTER OVERVIEW
One of the four main principles of contract law is the principle of infor-
mality: contracts can be concluded in any form. However, some contracts
do require a certain form in order to be valid or to prove their existence.
In other contracts there is a duty on the professional party to give the
consumer all kinds of information before entering into the contract. This
chapter discusses:
• reasons for formalities;

• types of formalities (notarial deed and common law deed, contracts to
be made in writing and contracts to be evidenced in writing, contracts
requiring pre-contractual information duties);
• the sanction if a contract lacks the required form.
Chapter 1 showed that one of the main principles of contract law is that con-
Informality
tracts do not require any form. It was explained that this principle of infor-
mality is the end result of a long historical process. By the nineteenth century
the principle had become so self-evident that the French Code Civil and
German BGB have not even codified the principle. The Dutch Civil Code
put it in Art. 3:37 (1), which states: ‘Unless provided otherwise, declarations,
including communications, can be made in any form and can be inferred
from conduct.’ However, this does not mean that contracts, or certain parts
thereof, can always do without formalities. It has always been the case that
some contracts need to be put in writing (such as gratuitous contracts in the
common law), need to be laid down in a notarial deed (such as donation in
the civil law), or are to be preceded by giving notice to the outside world, fol-
lowed by speaking solemn words in the presence of witnesses and of a public
official (marriage). What is more, formalities are on the rise again as a result
of the wish of legislators to balance unequal bargaining strength between
parties by requiring one of them (the professional party) to provide informa-
tion to the other (the consumer).

102 · Contract law
Reasons for formalities

There is a very good reason for the principle of informality: it makes it easy
to conclude a contract. It would be extremely cumbersome if I were to sign,
or even draft, a form every time I buy a cup of coffee or my company wants to
do business. This means that there must be a very good reason for the law to
introduce a formality. In the field of contract law formalities can be grounded
on three different rationales. A specific formal requirement is usually based
on a combination of these.
First, requiring some kind of formality can be useful to warn a party (or
Warning
both parties) that it is entering into an important or financially dangerous
function transaction. This can be called the cautionary (or warning) function.It aims to
prevent a party from inconsiderate action: mere consensus of the parties is
not seen as sufficient because this would bind them too easily. Good exam-
ples are consumer credit and consumer suretyship, in most jurisdictions both
require a written contract before they become binding on the consumer.
Consumer credit is seen as dangerous because the usually high interest rate
could burden the debtor and his family for a long period of time. In case of
suretyship, also known as ‘guarantee’ or ‘personal security’, a party promises
to pay a creditor if somebody else does not meet its obligations, for example
a mother can stand surety for the debts of her child against a bank. Here too,
the debtor is inclined to overestimate its own solvency and what is more, it is
often difficult for the debtor to refuse a family member to stand surety. The
obligation to put things on paper will offer a party a final chance to reflect on
the transaction.
Second, a formality can be motivated by the wish to provide a party with legal
Information
advice or information before it is bound. This is the information function. A
function good example is the notarial deed that a civil law notary must draft in case of
transfer of immovable property. The notary must warn the parties of the legal
consequences of their action. Other examples are the extensive information
duties on professional parties that follow from European directives. In cases
of consumer credit and distance contracts, for example, the credit supplier
and the seller must give extensive information to the consumer at various
stages of the contracting process.
Third, a form can be required to secure evidence of the contract. This is

Evidentiary
called the evidentiary function. In particular by putting the contract into
function writing certainty is provided about the existence and the contents of the
parties’ obligations. This may avoid future disputes about what the parties
actually intended (even though in practice the words of a written contract

Formalities · 103
can still be interpreted differently by the parties; see Chapter 7). An example
from English law is suretyship (in England usually called ‘guarantee’). Under
the English Statute of Frauds 1677 a guarantee must be ‘evidenced in writing’,
meaning that the contract itself does not have to be written but the claimant
must be able to prove the existence of the contract through written evidence
(such as a letter signed by the defendant or an e-mail in which the surety-
ship is mentioned). This means that in the absence of written material even
a CEO of a large company, who promises over lunch to guarantee another’s
debt, will not be bound despite the availability of three witnesses present at
the restaurant table. As we will see, German, French and Dutch law do not
require the written form for the validity or proof of a commercial suretyship.
Another example of the need to put things into writing is the so-called ‘holo-
graphic testament’. In civil law countries (see e.g. Art. 970 CC, 2247 BGB,
Art. 4:94 ff. BW) the testator is able to dispose of at least some of his goods
(which goods exactly differs from one country to another) by way of a com-
pletely handwritten document. This ‘do it yourself ’ testament is only valid
if handwritten to ensure that it is really the testator’s well-considered last
will. The Guinness Book of World Records reports as the shortest will ever
written: ‘Vse zene’ (Czech for ‘all to my wife’), written on the bedroom wall
of a man realising his imminent death. English law regards such a holographic
will as invalid if not made in the presence of two witnesses who have signed
the document.
Even if the written form is not legally required, many parties will still put
their contract into writing. This forces them to think through the conse-
quences of the contract and will make it easier to provide evidence of the
binding agreement if necessary. In the English case of Hadley v Kemp (1999),
three members of the pop group Spandau Ballet took the band’s songwriter
Gary Kemp to court claiming that they should receive part of the royalties on
the band’s music. Their claim was that they had orally agreed upon sharing
these royalties, but were not able to prove the existence of such a contract in
the absence of any written agreement.
Types of formalities
A. Contracts to be made by notarial deed
French, German and Dutch law require certain contracts to be made by
notarial deed (acte authentique, Beurkundung, authentieke akte). This can be
seen as the most strict formality available in the civil law. It requires not only
that a deed is drafted by the notary and signed by the parties, but also that

104 · Contract law
the notary establishes that the parties indeed intend to be bound after having
been warned about the legal consequences of their action (see Box 6.1). Civil
law countries typically require intervention of a notary in case of donation
(also known as the promise to make a gift: Art. 931 CC, § 518 BGB), creat-
Gift ing a mortgage (Art. 2416 CC, § 873 BGB, Art. 3:260 BW), matrimonial
contracts (Art. 1394 CC, § 1410, Art. 1:115 BW), the making of a public
testament (Art. 971 CC, § 2232 BGB) and the establishing of a corporation
(§ 23 Aktiengesetz, Art. 2:64 (2) BW).
But the requirement of a notarial deed should not frustrate daily life. One can
readily see the importance of notarial intervention in the types of transac-
tions mentioned above: they almost all concern complicated acts that people
tend to make only once or twice in their life and therefore require careful
consideration and advice. There is one possible exception to this: giving
something away on the spot. If one presents someone with a birthday present
or hands over goods with the intention to benefit the donee, this is a binding
contract despite the absence of a notarial deed. This is after all not a promise
to make a gift, but the actual giving (Art. H.-1:104 DCFR speaks of an ‘imme-
diate donation’, French law of a don manuel, German law of Handschenkung
and Dutch law of a gift van hand tot hand). § 518 BGB makes this explicitly
clear in section 2:
(1) For a contract by which performance is promised as a donation to be valid,

notarial recording of the promise is required. (…)
(2) A defect of form is cured by rendering the performance promised.
There is a good reason for this relaxation of the notarial requirement: it is

much easier to promise to give something away than to actually carry out this
promise. The law recognises this by equating a party’s seriousness apparent
from a notarial act to a party’s seriousness apparent from actually handing
over a good.
The sale and transfer of land and immovables are often also subject to notarial
Immovables
requirements. For most people these are the most expensive transactions they
ever enter into during their life. Thus, German law requires that both the sale
of a plot of land (§ 311b BGB) and the later separate transfer of ownership (§
925 BGB) take place through intervention of a notary. Dutch law on the other
hand only requires the actual transfer of ownership in immovables to be made
by a notarial deed (Art. 3:89 BW). Only the previous purchase of a residential
house or apartment is to be made in writing (see subsection B below). French
law in this respect offers the least protection to the buyer. In Chapter 3 the point
was made that under French law (Art. 1583 CC) ownership of a good passes as

Formalities · 105
BOX 6.1
CIVIL LAW NOTARY AND NOTARY PUBLIC:

A WORLD OF DIFFERENCE
The civil law or ‘Latin’ notary (in short: Congo) and Asia (for example in China,
notary) is a typical product of the civil law Indonesia and Japan). Most countries that
tradition. He or she is a full-time legal pro- have a civil law notary are members of the
fessional with (usually) a law degree and International Union of Notaries (UINL).
licensed by the State to draft and record The common law lacks an official
legal documents. The main activity of a assigned with the tasks of a civil law notary.
notary as a public (and therefore independ- This explains why the common law does not
ent) official lies in conveyancing (such as require notarial documents to make a valid
transferring property and creating servitudes donation or transfer immovable property.
and mortgages) and in drafting matrimo- However, England does have a group of
nial contracts, testaments and corporate legal professionals called notaries public (or
charters. Their public function comes out public notaries). These are qualified lawyers
in their task of not only facilitating parties, who certify documents and transactions for
but also protecting them against the conse- use outside the UK. While a solicitor attests
quences of their acts. § 17 of the German and authenticates normal documents for
Beurkundungsgesetz 1969 nicely illustrates use within the UK, a notary is addressed if
this. If the notary is to draft an authentic act one needs a document drafted or authenti-
(as in case of transfer of immovable prop- cated for use in a foreign country. This can
erty or donation), he is required ‘to ascer- range from birth certificates to taking evi-
tain the intention of the parties, explain dence for use by a foreign court. A notary
the content of the transaction, inform the public typically has strong foreign language
parties about the legal consequences of the skills and knowledge of foreign laws. There
transaction, and record their statements in a are about 1,000 of such notaries, most of
clear and unequivocal way’. whom work as a solicitor as well. They are
Although notaries are public officials, organised in the Notaries Society.
they do work in private practice and are The American legal system also rec-
paid by the parties on a fee basis. The ognises a profession called notary public.
access to the notarial profession (and in There are no less than 4,5 million of such
some countries also the fee system) is regu- notaries. They are typically laypeople
lated by the State. In practice most nota- without legal training and are not allowed
ries do not only carry out the public tasks to give any legal advice. Their main task
assigned to them by law, but also provide is to act as an impartial witness, to record
specialist legal advice, in particular in the sworn statements and to certify signatures.
field of family law and estate planning. They There are several organisations of nota-
are normally not allowed to litigate. Civil ries that aim to serve the interests of their
law notaries can naturally be found on the members (including the National Notary
European continent, but also in South and Association). The ‘notarius publicus’ in
Central America, most French-speaking Nordic countries plays a similar role as the
countries in Africa (including Morocco and American notary public.

106 · Contract law
soon as the contract is concluded. The making of a notary deed and the subse-
quent registration of this deed in the land register is therefore no requirement
for the contract to be valid or for the transfer of the property. The reason why
a notary deed is made in French law is therefore a different one: only after reg-
istration of such a deed is it apparent to third parties who is the owner of the
immovable. If registration did not take place, the owner could therefore not
enforce his rights against a third party who, not in bad faith, also bought the
land from the seller and filed for registration first. So if the seller decides to sell
the house a second time to somebody else, or mortgages the property, the first
buyer needs to have registered his notarial deed in order to prevail against the
second buyer or moneylender. This effect of registration is so important that in
French practice notarial deeds for the sale of immovables are always made and
registered, but the rationale of protection of the seller and purchaser against
their own inconsiderate action does not apply: between seller and buyer the
property of the immovable is transferred even without a notarial deed.
B. Contracts to be made in writing

There is a whole range of contracts (or clauses therein) that need to be made
EU law
in writing in order to be valid (usually meaning that the obligor’s signature
must be put on the document). It is mostly the cautionary function of for-
malities that makes legislatures adopt this requirement: it should make a
party think twice before agreeing to the contract. This motive is particularly
clear in European directives that aim to protect the consumer by requiring
a contract to be in writing. The two best examples of this are the contract
of consumer credit and of timeshare. Thus, Art. 10 (1) of the Directive on
Credit Agreements for Consumers states that: ‘Credit agreements shall be
drawn up on paper or on another durable medium. (…)’, while Art. 5 (1) of
Directive 2008/122 on Timeshare declares: ‘Member States shall ensure that
the contract is in writing, on paper or on another durable medium (…).’
But many national laws also require a contract to be in writing. When exactly
this is the case differs from one country to another and anyone who aims to give
a complete list will rapidly lose its readers. Examples include the following:
z It was seen in Chapter 4 that under English law a gratuitous promise can
English law
be made binding by way of a deed (a document signed by the maker and
attested by a witness). English law also requires a deed in case of a lease
for three years or more (Law of Property Act 1925, ss 52, 54). Contracts
for the sale of land (or other dispositions of an interest in land) do not
require a deed (as in case of a gift), but they must be made in writing
and signed by each party (Law of Property (Miscellaneous Provisions)

Formalities · 107
Act 1989, s. 2). The contract is void if the document does not state all
the terms to which the parties have explicitly agreed. As in many other
jurisdictions English law also requires the written form in case of a so-
called hire purchase contract (Consumer Credit Act 1974, s. 60). If a
buyer cannot afford to pay the asked price for a product at the moment
of concluding the contract, but can afford to pay a monthly percentage,
hire purchase allows the buyer to still conclude the contract. The hirer
purchaser becomes the owner of the good when the monthly instalments
equal the total price (naturally plus interest). This type of contract is
often used to buy (‘lease’) a new car.
z German law requires the written form (Schriftform) for example in case of
German law
consumer suretyship (Bürgschaft: § 766 BGB and § 350 Handelsgesetzbu
ch), lease (Mietvertrag) for a specified period of more than one year
(§ 550 BGB) and in case of ending an employment contract (§ 623
BGB) or lease (§ 568 BGB).
z In French law writing (écrit ordinaire) is not only required in cases of
French law
an employment contract for a definite period (Art. L 1242-12 Code du
Travail), but also – to give just a few examples – in case of a contract to
build a residential house (Art. L 231-1/2 and 232-1 Code de la construc-
tion et de l’habitation), to obtain life insurance (Art. L 132-5 Code des
assurances) and to engage a real estate agent (Act of 2 January 1970, Art.
6) or a marriage agency (Art. L224-90 Consumer Code). Interestingly
neither French nor Dutch law requires the written form for the validity
of a contract of consumer suretyship. French courts consider the rel-
evant Arts 1376 and 2292 of the Code Civil only as rules of proof, while
Art. 7:859 Dutch Civil Code explicitly says that suretyship can only be
proved against the guarantor by a document signed by him, unless the
guarantor already performed (part of) his obligations.
z The Dutch Civil Code requires the written form (akte) for a range of poten-
Dutch law
tially ‘dangerous’ transactions, including hire purchase (huurkoop: Art.
7:86 and 7:102 BW), ending a residential lease (Art. 7:271 (3) BW), the
contract to build a residential house (Art. 7:766 BW) and several clauses
that can be part of an employment contract, such as the non-compete
(‘restraint of trade’) clause (Art. 7:653 BW), on which, more in Chapter
10. In 2003 the Dutch legislator also introduced protection for the buyer
of a residential house by requiring the contract to be made in writing and
giving the consumer-buyer a three-day period within which he can with-
draw from the contract without giving any reason. Article 7:2 BW states to
this effect:
1. The purchase of an immovable good or a part thereof that is intended to be used

as a residence, has to be concluded in writing if the buyer is a natural person who,

108 · Contract law
when entering into the agreement, does not act in the course of his professional
practice or business.
2. The document, drawn up for this purpose between the parties, or a copy of it
must be handed over to the buyer against issuance, if the seller desires so, of a dated
receipt. During three days after the document or its copy has been handed over
to the buyer, the buyer has the right to terminate the purchase. When within six
months after the buyer has used this right, the same parties enter again into a new
sale agreement related to the same immovable thing or part of it, then this right of
termination does not arise again.’
Taking stock of these contracts to be made in writing, one may be inclined

to say that for most of these contracts legislative intervention is superfluous
as they would normally be made in writing anyway. But this overlooks that
the law has an interest in general rules that can be uniformly applied by the
courts – in particular if these rules have the function of preventing a party
against inconsiderate action.
C. Contracts to be evidenced in writing

A formality is not always a requirement for the validity of the contract. It
could also be that the legislator introduces a formality (in particular the
written form) as a form of evidence. One speaks of contracts that need to be
evidenced in writing, or of a form that is required probationis causa (with
an eye to proof), as contrary to forms that are required in order to make
the contract valid (solemnitatis causa). The main category of contracts that
need to be evidenced in writing under English law has already been encoun-
tered above: a suretyship (personal security) does not have to be made in
writing, but the claimant must be able to prove the existence of the contract
by referring to written evidence. The still applicable section 4 of the Statute
of Frauds 1677 puts it like this:
Noe Action shall be brought (…) whereby to charge the Defendant upon any
speciall promise to answere for the debt default or miscarriages of another person
(…) unlesse the Agreement upon which such Action shall be brought or some
Memorandum or Note thereof shall be in Writeing and signed by the partie to be
charged therewith or some other person thereunto by him lawfully authorized.
This evidence can be derived from any written document, for example from
a correspondence (including e-mails) that mentions the oral agreement,
even if only in passing. It is essential, however, that the writing is clearly from
the party against whom the claim is brought (which is easy in cases where its
name is on the document).

Formalities · 109
It is not only English law that requires certain contracts to be evidenced in

writing. Although both German and Dutch law allow the court the freedom
to decide about proof and therefore about whether a binding contract exists
or not, there are exceptions to this rule (consumer suretyship in Dutch law is
one, as was seen above).
French law is in theory much more restrictive in allowing the parties to prove
Evidentiary
the existence of a contract. Some even speak of ‘evidentiary formalism’. This
formalism is because the French civil code clearly prioritises written evidence over any
other type (such as proof by witnesses or experts). The two main provisions
of the Code Civil are the following:
Art. 1359 CC: ‘A juridical act relating to a sum of money or value in excess of an
amount fixed by decree [€1500] must be proved by evidence in writing, whether
privately signed or authenticated.
No proof may be brought beyond or contrary to evidence in writing establishing
a juridical act, even if the sum of money or value does not exceed this amount,
except by other written evidence which is signed or contained in privately signed
or authenticated writing.
A person whose contractual right exceeds the threshold mentioned in the previous
paragraph may not be dispensed from proving it by evidence in writing by reducing
his claim.
The same rule applies to a person whose claim, even if lower than this amount,
concerns the balance of a sum or a part of a right higher than this amount.’
Art. 1361 CC: ‘Evidence in writing may be supplemented by an admission in

court, by a decisive oath, or by a beginning of proof by writing which is supported
by another means of proof.’
Although perhaps difficult to read for non-specialists, Art. 1359 simply states
that all transactions exceeding the value of €800 and not made in writing (by
a notary or by the parties themselves) cannot be proved by witnesses, but
only in writing. This is a far-reaching provision that would seriously restrict
the binding force of contracts if it were strictly applied. However, two impor-
tant restrictions exist. First, the provision does not apply to commercial
transactions (Art. L 110-3 Code de Commerce). And second, Art. 1361 allows
that proof by witnesses is allowed if there is so-called ‘prima facie’ written
evidence. This means that if some document can be produced (not the con-
tract itself, but – as in English law – for example an e-mail or a document
from which it can be inferred that an oral contract was concluded), further
evidence by witnesses is possible. The courts easily find this ‘commencement
de preuve’, almost turning Art. 1359 into a dead letter. This does of course not

110 · Contract law
keep knowledgeable parties from writing down their agreement – as they will
also do in any other jurisdiction.
D. Contracts requiring pre-contractual information duties

In particular as a result of European directives still one other type of ‘for-
mality’ must be mentioned: the duty of a professional seller or service pro-
vider to supply information to the consumer. The classic picture of two equal
parties who are able to collect all necessary information themselves in order
to conclude a contract based on informed consent has long ceased to be
reality. It must, at least when it comes to B2C-contracts, be replaced by a view
of contract that requires compliance with pre-contractual information duties
in order to restore the balance of power among the parties. Such duties exist
for timeshare, package travel, doorstep sales, distance selling and consumer
credit. These are usually accompanied by a withdrawal right, allowing the
consumer to withdraw from the contract within a set period of usually seven
or 14 days.
The information to be provided typically relates to the characteristics of the

EU law
goods or services, the characteristics of the trader and the rights of the con-
sumer under the contract. There are clear indications that with each new
European directive the number of information duties grows. A good example
of this is Directive 2008/48 on Consumer Credit. It requires the creditor to
include six items in the advertising, to mention 19 items in the written offer
it makes to the consumer, and to inform the consumer about no less than 22
items in the credit agreement itself. The European legislator justifies the need
to give information in the stage of advertising in the following way in the
preamble to the directive:
In order to enable consumers to make their decisions in full knowledge of the facts,
they should receive adequate information, which the consumer may take away
and consider, prior to the conclusion of the credit agreement, on the conditions
and cost of the credit and on their obligations. To ensure the fullest possible
transparency and comparability of offers, such information should, in particular,
include the annual percentage rate of charge applicable to the credit, determined
in the same way throughout the Union. As the annual percentage rate of charge
can at this stage be indicated only through an example, such example should be
representative.
It is important to ask what is the sanction for breach of an information duty

Sanctions
following from a European directive. Interestingly, European directives typi-
cally leave this to the Member States and only require that the imposed sanc-

Formalities · 111
tion is effective, proportionate and dissuasive. The sanctions therefore differ

widely from one Member State to another. The Directive on Consumer
Credit again offers a good example. Even though this is one of the rare exam-
ples of a maximum-harmonisation directive (meaning that the Member
States cannot offer more protection than the directive does), Art. 23 states:
Member States shall lay down the rules on penalties applicable to infringements
of the national provisions adopted pursuant to this Directive and shall take all
measures necessary to ensure that they are implemented. The penalties provided
for must be effective, proportionate and dissuasive.
The highly diverse consequences of infringing an information duty under the

consumer credit directive can be illustrated in the following way. In Austria
not mentioning the interest rate leads to the applicability of the statutory
interest (no doubt lower than the rate the lender envisaged). In Greece not
giving the necessary information gives the consumer the right to terminate
the contract. In Germany § 494 BGB provides a whole list of different sanc-
tions, including that the contract is void unless the borrower in fact receives
the loan. In the latter case, the interest rate is reduced to the statutory rate.
In Poland and France (Art. L 341-3 Consumer Code) not complying with
the information duties leads to a free loan (meaning: an interest rate of 0
per cent). Under Polish law failing to inform the consumer can even be a
criminal offence, while in Italy administrative sanctions can be taken (such
as suspending the license of the credit institution). Section 127 of the UK
Consumer Credit Act allows the court to enforce the disclosure of infor-
mation if it considers this reasonable on the facts of the case. In Dutch law,
finally, non-compliance with the information requirement is regarded as
an unfair commercial practice (Art. 7:60 (3) BW), creating a liability in
tort. Although this varied picture surely has the charm that each European
Member State can decide how to fit in the directive with its own preferences
of how to enforce it, it is difficult to see how this varied picture can contribute
to one, harmonised, level playing field for European business.
Meanwhile, a crucial question is to what extent extensive information

Effective?
requirements are effective: do they really put consumers at a higher level of
information or do they lead to information overload?
What type of writing is required? On internet shopping

Many of the laws that require a contract to be in writing were made at a time
when it was clear what ‘writing’ meant. This has changed with the rise of
the internet. Most of today’s non-oral communication no longer takes place

112 · Contract law
by writing letters, sending faxes or signing forms, but by e-mail and instant
messaging services such as WhatsApp. The question relevant to the law is
whether these means of communication in electronic form also satisfy the
need for ‘writing’. There seem to be two problems with this. The first is that
the warning function of having to sign a piece of paper may be watered down
if it is just as easy to obtain consumer credit by clicking a few buttons on a
website, or text one’s grandmother with the question if she could stand surety
for your debt against a friend. The second problem is that a paper signature
is still seen as more reliable than an e-mail containing one’s name. While a
written signature is unique to a person, a typed name is not.
It will come as no surprise that the EU has a great interest in this matter.
Online
It regards contracts concluded over the internet as the jewel in the crown
contracts of cross-border shopping, and therefore of the European internal market.
Electronic contracts are not hampered by physical borders: presumably it
is just as easy for an e-trader in Hungary to sell to his fellow countrymen as
it is to sell to any other European. This explains why the European legisla-
ture issued two directives particularly aimed at facilitating online contracts.
Directive 2000/31 on Electronic Commerce states in Art. 9 (1):
Member States shall ensure that their legal system allows contracts to be concluded
by electronic means. Member States shall in particular ensure that the legal
requirements applicable to the contractual process neither create obstacles for
the use of electronic contracts nor result in such contracts being deprived of legal
effectiveness and validity on account of their having been made by electronic
means.
Article 5 (1) of Directive 1999/31 on Electronic Signatures states:
1. Member States shall ensure that advanced electronic signatures which are based
on a qualified certificate and which are created by a secure-signature-creation
device:
(a) satisfy the legal requirements of a signature in relation to data in electronic
form in the same manner as a handwritten signature satisfies those requirements in
relation to paper-based data; and
(b) are admissible as evidence in legal proceedings.
Article 9 (2)-(3) of the Directive on Electronic Commerce allows an excep-

tion for contracts that create or transfer rights in real estate, notary deeds,
consumer suretyship and contracts in the field of family law and succession,
but Art. 9 (1) makes clear that the validity of any other contract cannot be
affected only because it was made through electronic means.

Formalities · 113
The Member States have implemented these provisions in their national laws
(see e.g. Arts. 1125 ff. CC, § 126 ff. BGB and the UK Electronic Commerce
(EC Directive) Regulations 2002). When doing so, some countries took the
opportunity to further clarify which requirements internet shopping should
meet, just to make it even more reliable for the consumer. An interesting
provision in this respect is Art. 6:227a Dutch Civil Code; it mentions four
advantages of putting a contract on paper and then goes on to state that if
these four points are also met by electronic communication the contract is
just as valid:
1. If a statutory provision implies that a contract can only be formed validly in

writing, then this formal requirement is also met if the contract is entered into by
electronic means and:
a. the contract is and remains accessible for the parties;
b. the authenticity of the contract is sufficiently guaranteed;
c. the moment at which the contract was formed, can be determined with sufficient
certainty; and
d. the identity of the parties can be established with sufficient certainty.  
2. Paragraph 1 does not apply to contracts for which the law requires the
intervention of a court, a public authority or a person whose profession it is to
exercise a public responsibility.
There is one important aspect of electronic contracts that has not yet been
mentioned. As said before, the quoted provisions do not solve the problem
that electronic communication may not ‘warn’ an interested party of the
dangers of the transaction. This is exactly the reason why, as a counterweight
to facilitating e-commerce, the European legislature requires e-sellers to give
information to the consumer. Directive 2011/83 on Consumer Rights states
Information that in case of ‘distance contracts’ (such as contracts concluded over the inter-
duties net) the trader must provide information, for example on the main character-
istics of the goods or services, the identity and address of the trader, the price
and the mode of delivery (Art. 6). In addition, the trader must provide the
consumer with a confirmation of the contract on a durable medium (accord-
ing to the preamble of the directive not only paper, but also ‘USB sticks,
CD-ROMs, DVDs, memory cards or the hard disks of computers as well as
e-mails’) at the latest at the time of delivery of the goods (Art. 8 (7)). After
delivery the consumer has 14 days to withdraw from the contract without
giving any reason (Art. 9 (1)). The directive contains a model withdrawal
form that can be used by the consumer. The combination of these require-
ments probably provides the consumer with better protection than the old-
fashioned written form.

114 · Contract law
BOX 6.2
RIGHTS OF WITHDRAWAL
The right of a consumer to withdraw from consumer to acquire the information she
a contract has become a prominent feature needs by inspecting the product before
of European contract law. The most impor- being definitively bound or by assessing
tant contracts in which the right exists are the risks involved in the transaction (as
distance contracts (such as those concluded in consumer credit). To see a photo on a
over the internet), off-premises contracts website is different from being able to actu-
(such as doorstep selling), consumer credit ally touch and feel the product. Withdrawal
and timeshare. In each of these contracts rights thus help consumers to better exer-
the consumer has 14 days after delivery or cise their freedom of contract: their consent
the day of conclusion to end the contract is presumably more free and informed.
without giving any reason. In case the These statutory rights of withdrawal
trader failed to inform the consumer about must be distinguished from so-called rights
the right of withdrawal, the period expires to return. Many retail shops throughout
14 days after the consumer was informed. the world have adopted the policy that
Two different motives exist to allow the customers can return goods at will and
consumer this ‘cooling off-period’ in which receive back the contract price or at least a
she can reconsider her assent to the con- credit note with which they can buy a dif-
tract. The first is that a consumer sometimes ferent product in the same shop. This return
needs to be protected against a lack of psy- policy is often laid down in the general
chological strength. This is a good reason conditions of the retailer. These contrac-
for a withdrawal right if the other party tual rights are even so common that the
makes use of aggressive sales techniques, general public sometimes thinks that there
takes the consumer by surprise or intrudes is a ‘general right to return goods’. But this
into the privacy of her home (as in case of is not the case: the existence of these con-
doorstep sales and timeshare). The second tractual rights is entirely dependent on the
possible motive is when a lack of informa- retailer’s willingness to provide these to its
tional strength prevents the consumer from customers, thus allowing it to distinguish
forming an accurate picture of the product itself from its competitors. This explains why
being sold or of the nature of the transac- different shops use different return periods:
tion (which is typically the case in distance while some shops offer 14 days, others
contracts and consumer credit). A with- allow 90 days, 180 days or even an indefi-
drawal right can then be used to remedy nite period.
the information asymmetry: it allows the

Formalities · 115
Sanctions if a contract lacks the required form

A. Voidness and avoidability of the contract
An important question is what are the consequences of the failure to
comply with a formality. We have already seen that when it comes to a vio-
lation of a European information requirement each Member State decides
for itself how it wants to sanction this. It is also clear that this question does
not arise for contracts to be evidenced in writing: these are normally valid,
albeit that it is up to the claimant to prove the existence of the contract by
reference to written documents. But if the written form (either a notarial
deed, a deed under English law or the requirement of a contract being ‘in
writing’) is not met, does this mean that the contract is not valid? This
indeed seems to be the starting point of both the German and the Dutch
Civil Code:
§ 125 BGB: ‘A juridical act that lacks the form prescribed by statute is void. In case
of doubt, lack of the form specified by juridical act also results in voidness.’
Art. 3:39 BW: ‘Unless the law provides otherwise, a juridical act that is not
performed in accordance with formal requirements, is null and void.’
English law adopts practically the same approach by holding the contract
Aim of the rule
‘unenforceable’. But things are not that straightforward. In practice much
depends on the ratio of the formality. It is indeed justified to hold the con-
tract void if the formality not complied with serves the interest of both
parties, or some general interest such as the legal certainty that third parties
must be able to rely on. If for example no notarial deed was made for the
transfer of immovable property in German or Dutch law, it is wholly rea-
sonable to hold the transfer void. The court must note this out of its own
motion. This is different in cases where the formality only aims to protect
one party to the contract. So in case of suretyship, residential lease, employ-
ment and consumer contracts – all contracts where the formality exists only
to protect one party against the other, or against itself – it is often sufficient
to hold the contract only avoidable. This means that the protected party
can decide if it wants to keep the contract in place or not. This approach of
making it dependent on the purpose of the formality whether the contract
should be void or avoidable is not only adopted in France, but also in any
other jurisdiction – even though the text of § 125 BGB seems to suggest
otherwise.

116 · Contract law
B. Curing a lack of form

But this is not the end of the story. Even in cases where a formality was not
observed one could think of circumstances under which the defect is cured.
There are three basic situations in which this can be the case.
First, it could be that the statute itself indicates that an invalid contract is
converted into a valid one in the interest of the party for whose protection
the formality was introduced. If a residential lease concluded for a period of
more than one year is not made in writing, § 550 BGB simply converts it into
a contract for an indeterminate time. The formal requirement solely exists in
the interest of the lessee and this justifies that the defect of form is cured to
his benefit.
Second, it may happen that one party or both parties actually carry out the
intended contract without worrying about any formalities. In such a case the
performance itself could cure the defect. Sometimes the law explicitly states
this. If the guarantor in a consumer suretyship simply performs (meaning
that he pays the creditor) the contract is valid, despite the fact that the guar-
antee was only made orally (Art. 7:859 BW and § 766 BGB explicitly say so).
The ‘immediate donation’ as discussed above is another example: the gift is
valid despite the absence of a notarial deed.
Third, one party could make its counterpart intentionally or negligently

believe that no formalities are needed while in fact this is not true. If the other
party justifiedly relies on such statements by acting upon them, courts are
inclined to disallow the first party claiming that the contract is invalid for lack
of formalities. In Germany and the Netherlands the basis for this is usually
found in the principle of good faith (reasonableness and fairness, discussed in
detail in Chapter 8), in England in the doctrine of proprietary estoppel, while
in France such behaviour could amount to abus de droit (abuse of right).
Most case law is about the practically important promise to transfer land or a
house without satisfying the requirement of a notarial deed (in Germany) or
of writing (in England).
An example of reliance making good the defect of form in such a case is pro-
vided by a decision of the Bundesgerichtshof in 1967 (Kaufmannsehrenwort).
The buyer of a plot of land was given a document signed by the director
of the selling company containing the details of the sale. The buyer was a
former employee of the seller. In response to the buyer’s request to have a
notary make a deed (as required by § 311b BGB) the seller said that he was
‘used to respect his obligations, no matter whether they were made orally,

Formalities · 117
in writing or in notarial form’. When the buyer insisted, the seller replied
that ‘the contract was equivalent to a notarial contract’. When the seller later
argued that no valid contract had been formed for lack of a notarial deed,
the court found that he could not invoke this defect, in particular not now
that the buyer had acted in reliance on the seller’s promises. This is another
application of the principle that one is not allowed to go against one’s own
previous behaviour, as encountered before in Chapter 4. This can also be
seen in the English case Pascoe v Turner (1979). Mr. Pascoe owned a house
in Cornwall and Mrs. Turner moved in as his housekeeper, later his mistress.
Mr. Pascoe repeatedly told Mrs. Turner that the house was hers. When he
started seeing another woman, he asked her to leave the house, in which she
had invested all her savings to repair and redecorate it. Despite the absence
of consideration or the promise being put in a deed, the court found that
the house should be conveyed to Mrs. Turner. His assurances, her detriment
in reliance thereon, and the fact that he saw her spend her money on the
house without protesting against this, were sufficient to estop Mr. Pascoe
from claiming the house was his. This so-called proprietary estoppel was
thus used to found a cause of action (unlike promissory estoppel discussed
in Chapter 4).
TOPICS FOR REVIEW
The principle of informality

Different reasons for formalities
Contracts to be made by notarial deed
Civil law notary and Notary Public
Contracts to be made by deed
Contracts to be made in writing
Contracts to be evidenced in writing
Donation
Consumer credit
Suretyship
Contracts requiring pre-contractual information duties
Form in electronic contracts
Withdrawal rights in distance contracts
Sanctions for lack of form
Curing a lack of form
FURTHER READING
– Sjef van Erp and Bram Akkermans (eds.), Cases, Materials and Text on Property Law, Ius
Commune Casebooks for the Common Law of Europe, Oxford (Hart) 2012, Chapter 8.
– Lon Fuller, ‘Consideration and Form’, 41 Columbia Law Review (1941), 799.

118 · Contract law
– Peter Rott, ‘Information obligations and withdrawal rights’, in: Christian Twigg-Flesner (ed.),
The Cambridge Companion to European Union Private Law, Cambridge (Cambridge University
Press) 2010, 187–200.

Part Three
The contents of the contract

Once the contract is validly concluded, the second stage of its life begins: the
parties have to perform in conformity with what they promised. Fortunately,
this does not pose a problem in the great majority of cases. However, some-
times problems do arise. It could happen that the parties quarrel about
what they actually agreed upon, prompting the need for interpretation of
the party agreement. In addition, more often than not the parties have not
spoken about all the eventualities that might occur. This calls for gap filling
(supplementation) of the agreement. Both interpretation and gap filling
are discussed in Chapter 7. Finally, it could happen that a party claims that
one or more terms of the contract are unfair. Although this is not a claim
that is likely to succeed, the law does control some types of unfair terms
(Chapter 8).

7
The party agreement:
Interpretation and gap
filling
CHAPTER OVERVIEW
The party agreement consists of the contractual terms that the parties
have explicitly agreed upon. This agreement can be unclear, which calls for
interpretation in order to give one meaning to the used terms. The agree-
ment can also be incomplete, calling for gap filling (also known as supple-
mentation of the party agreement). This chapter examines:
• interpretation of the party agreement;

• the various methods that legislators and courts use to fill gaps in the
party agreement.
A validly concluded contract obliges the parties to perform their contractual

Interpretation
obligations. This is not as straightforward as it may sound. Practice shows
that parties frequently dispute what it is that they actually agreed upon. The
most important reason for this is that words are never clear in and of them-
selves. They are acts of communication that require both a sender and a
receiver who, given their different background, knowledge and experience,
may not understand each other in the way they think they do. The law there-
fore shares with literature and theology the characteristic that it is an inter-
pretative discipline: just like poetry, the Bible and the Quran, statutes, treaties
and contracts need to be given a meaning by the reader or listener. This often
takes place implicitly, without the interpreter realising it. However, it may
also happen that parties differ explicitly about the contents of their agree-
ment. If Newcom Ltd agrees that its customer Agri Gmbh is allowed to ‘give
back’ the machine it purchased within three months after delivery, it could
well be that seller Newcom intended Agri to be allowed to terminate the con-
tract only in the event of a defect with the machine, while buyer Agri under-
stood the term as allowing it to simply end the contract at its own will. This
process of establishing one single meaning to the words explicity used in the

122 · Contract law
party agreement is called interpretation (interprétation, Auslegung, uitleg). Its

aim is to establish one meaning for all parties affected by the contract.
The mere interpretation of the party agreement is almost never enough to

Three reasons
establish what the parties need to do under the contract. Parties often only
agree on a few main points (‘eight sofas as seen by the buyer, €300 each,
payment upon delivery on 20 May’) and do not bother about agreeing on
anything else (such as the place of delivery and the rights of buyer and seller
in case of non-performance). This is perfectly sensible behaviour. First,
because the great majority of parties cannot conceive of all possible contin-
gencies that could happen during the course of the contract. This is particu-
larly true if the contract is intended to last for a long time, as for example in
case of residential lease or franchise. Second, because in most cases it is not
efficient to negotiate and draft contracts that aim to foresee all possible con-
tingencies. The contract would have to represent a high value to invest the
time and money to make this worthwhile (although it may be cost-effective
if the terms are to become applicable to many future contracts, as in case of
general conditions). Third, because the law provides solutions to deal with
incomplete contracts. In each jurisdiction this so-called gap filling or supple-
mentation of the party agreement takes place in two different ways.
First, it can happen that parties did not provide for a certain contingency
because it is such an obvious part of the contract that they did not believe it
necessary to spell it out. If I rent a car from Hertz, the rental company will
have to provide me with the car keys, even though one will not find anything
on this in the contract or in Hertz’s general conditions. If necessary the court
fills this gap in the party agreement by speaking for the parties: although
they did not consider the matter, the court construes what they would have
said. In several jurisdictions this is regarded as a type of interpretation, called
supplementary or constructive interpretation. This is true for Germany (where
it is called ergänzende Vertragsauslegung) and France (interprétation créatrice).
Ad hoc gap English law is a bit more candid by speaking of terms implied in fact. The
filling overall term used in this book for these techniques is ad hoc gap filling: the
party agreement is supplemented with terms that follow from the hypotheti-
cal will of the parties in the circumstances of the case.
Second, it frequently happens that interpretation of the party agreement and

Gap filling
supplementation by way of ad hoc gap filling are not sufficient to establish
through default all the rights and obligations of the contracting parties. If Mika has his car
rules repaired by Sophie, they usually do not provide for inspection by Mika of the
material to be used, for return of the car before the repair is finished, or for
who carries the risk of the car being destroyed by fire in Sophie’s garage. This

The party agreement: Interpretation and gap filling · 123
is where the second type of gap filling comes in, namely gap filling through
default rules. As was already hinted at in Chapter 2, the gaps in the contract
left by the parties are filled by the default (or ‘facilitative’) rules that are auto-
matically applicable in so far as the parties did not deviate from them. These
default rules (règles supplétives, dispositives Recht, aanvullend recht) provide
standard solutions for problems that typically arise in certain types of con-
tracts. In civil law jurisdictions they can be found in the national civil code.
In English law they are called terms implied in law and are more frequently
developed by the courts.
This chapter discusses all three aspects of establishing the contents of the
contract: interpretation of the party agreement, ad hoc gap filling, and gap
filling through default rules.
Interpretation of the party agreement

A. Subjective and objective interpretation
Interpretation, aimed at establishing the meaning of the words used by the
parties, is not an exercise that takes place in a vacuum. The core of a contract
as an act of exercising party autonomy is that it is made by the parties. This
means that interpretation must be directed at ascertaining what parties have
intended with it, not at what the court or anyone else finds the most ‘fair’,
suitable or efficient interpretation. In other words, interpretation of a con-
tract is to search for the common intention of the parties. This search can take
Subjective place starting from two fundamentally different positions. One method (sub-
jective interpretation) is to give preference to the ‘real’ intention of the parties.
Since the words the parties used are only an expression of their intention, it is
this intention that should prevail. The obvious difficulty with this approach,
as we saw before in Chapter 4 when the consensus of parties was discussed,
is that the ‘actual’ intention of a party can never be established: even a psy-
chological or neuroscientific investigation into a party’s mind is not likely to
uncover the historical intention as it existed at the time of concluding the
contract. The opposite view is to give priority to the declaration and there-
fore to the external expression of the intention, this being the only thing that
Objective can be apparent to the other party. This objective interpretation thus protects
a party’s reliance on the words actually used. The most famous formulation
of the objective approach was given by the American judge Learned Hand. In
Hotchkiss v National City Bank of New York (1911), he states:
A contract has, strictly speaking, nothing to do with the personal, or individual,

intent of the parties. A contract is an obligation attached by the mere force of

124 · Contract law
law to certain acts of the parties, usually words, which ordinarily accompany and
represent a known intent. If, however, it were proved by twenty bishops that either
party when he used the words intended something else than the usual meaning
which the law imposes on them, he would still be held (…).
The tension between giving priority to a party’s (subjective) intention and

to its (objective) declaration is clearly visible in the great codifications of
private law. Article 1188 of the French Code Civil requires the court to find
the ‘common intention of the parties’, but it also prescribes that if the inten-
tion cannot be discerned, the contract must be interpreted in the sense
which a reasonable person placed in the same situation would give to it. The
German BGB states in §133 that the aim of interpretation must be ‘to ascer-
tain the real intention’, but continues in §157 with the rule that interpretation
should take place ‘in accordance with fairness and reasonableness taking into
account general practice’.
The same tension between verba (words) and voluntas (intention) can be
found in English law. The traditional starting point of English law in case
of doubt about the meaning of contractual terms was not to look for the
common intention of the parties, but an extreme version of the objective
approach, namely to interpret a contract according to its literal meaning. In
the case of Lovell & Christmas Ltd v Wall (1911), for example, it was held
that ‘it is the duty of the court (…) to construe the document according to
the ordinary grammatical meaning of the words used therein’. This approach
has been abandoned. According to the authoritative formulation of Lord
Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building
Society (1998), interpretation is ‘the ascertainment of the meaning which the
document would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in the
situation which they were at the time of the contract’.
This makes clear that all European jurisdictions adopt a compromise

between attaching importance to the intention and the expression thereof.
This compromise does not fundamentally differ in civil law and common
law. Interpretation is always directed at finding the common intention of the
parties; if parties differ about what their common intention is, the reasonable
meaning to be given to the words in the circumstances of the case prevails.
The only practical difference is that in civil law jurisdictions this reasonable
meaning is primarily found by taking the understanding of the contracting
Reasonable parties as the starting point, while English law adopts the perspective of a rea-
meaning sonable person in the position of the contracting parties. These traces of respec-
tively the subjective and objective approach come out nicely in the f ollowing

two quotes. The first is taken from the seminal case Haviltex (1981) in which
the Hoge Raad formulated the main rule for interpretation in Dutch law:
The question how a written contract regulates the relationship between parties,
and whether this contract leaves a gap that must be supplemented, cannot be
answered on basis of only a purely literal interpretation of the provisions of the
contract. To answer that question, it is decisive what is the meaning that parties in
the circumstances of the case could mutually reasonably attach to these provisions
and what they could in that respect reasonably expect from each other. In this
process, it is inter alia of relevance what the parties societal position is and what
knowledge of the law can be expected of such parties.
The second quote is from Lord Steyn in the English case Lord Napier and
Ettrick v R F Kershaw Ltd (1999). It explains further why Lord Hoffmann
(see above) put so much emphasis on interpretation by a reasonable person:
Loyalty to the text of a commercial contract, instrument, or document read in its

contextual setting is the paramount principle of interpretation. But in the process
of interpreting the meaning of the language of a commercial document the court
ought generally to favour a commercially sensible construction. The reason for this
approach is that a commercial construction is likely to give effect to the intention
of the parties. Words ought therefore to be interpreted in the way in which a
reasonable commercial person would construe them.
It must be emphasised that this difference is one of perspective. It is merely

a matter of in which position the court places itself to interpret the words
of the contract: that of the reasonable parties or that of a reasonable third
person in a similar position as the parties. Different practical results are not
likely to follow from this difference. This is why all international instruments
were able to draft a convincing provision on interpretation that both civil law
and common law lawyers are eager to accept. Thus, Arts 8 CISG, 4.1 PICC
and II-8:101 DCFR convey the same message as Art. 5:101 PECL:
(1) A contract is to be interpreted according to the common intention of the

parties even if this differs from the literal meaning of the words.
(2) If it is established that one party intended the contract to have a particular
meaning, and at the time of the conclusion of the contract the other party could
not have been unaware of the first party’s intention, the contract is to be interpreted
in the way intended by the first party.
(3) If an intention cannot be established according to (1) or (2), the contract is to
be interpreted according to the meaning that reasonable persons of the same kind
as the parties would give to it in the same circumstances.

126 · Contract law
B. Factors relevant to interpretation

Now that it is established that the main criterion for interpretation is the
common intention of the parties and how a reasonable party would interpret
the used words, the next question is how a court applies these criteria.
There is no problem in cases where both parties are mistaken about what
a term means. To give an old example that is now highly politically incor-
rect: if both seller and buyer use the word Haakjöringsköd because they both
believe this means whale meat, while it is actually Norwegian for shark meat,
it is whale meat that needs to be delivered because this is what both parties
had in mind when concluding the contract. The buyer can claim damages if
he only received shark meat, as the German highest court decided in 1920.
This is simply a matter of having the common intention of the parties (one
Falsa
could say: their shared subjective understanding) prevail over the objective
demonstratio meaning of the contract. Lawyers qualify this type of case as falsa demonstra-
tio non nocet (‘a wrong description does no harm’); it would fall under section
1 of the just quoted Art. 5:101 PECL.
Common
Equally simple is the case in which parties are not mistaken about the
understanding meaning of a term (as above), but in which their common understanding of
a word differs from its usual meaning. If a motorcycle fan has always referred
to her Harley Davidson motorbike as her ‘little trike’, and then sells ‘my trike’
for €3,000 to her uncle who knows of this odd habit, the uncle can protest if
he is delivered a child’s tricycle. Article 5:101 s. 2 PECL reflects this.
Ambiguous
Things become more difficult if parties use truly ambiguous clauses. Civil
clauses law jurisdictions allow the court to look at a range of different circumstances
in interpreting such clauses. This is well reflected in Art. 5:102 PECL, which
states:
In interpreting the contract, regard shall be had, in particular, to:

a. the circumstances in which it was concluded, including the preliminary
negotiations;
b. the conduct of the parties, even subsequent to the conclusion of the contract;
c. the nature and purpose of the contract;
d. the interpretation which has already been given to similar clauses by the parties
and the practices they have established between themselves;
e. the meaning commonly given to terms and expressions in the branch of activity
concerned and the interpretation similar clauses may already have received;
f. usages; and
g. good faith and fair dealing.

How to apply these factors can be exemplified by reference to a German case

about a so-called ‘first demand guarantee’ (Bürgschaft auf erstes Anfordern,
1992). Such a – very perilous – guarantee allows the creditor to obtain imme-
diately from the surety the promised sum; any defences that the debtor is not
obliged to pay are postponed to a later stage and could at best lead to a claim
for restitution if the surety paid without a valid ground. In the case decided by
the Bundesgerichtshof the surety was the wife of a man whose business partner
had borrowed money from the plaintiff. Her husband had talked her into
giving the guarantee. She was a layperson who believed that she had given
only a ‘normal’ guarantee. When the plaintiff brought a claim for payment she
pleaded that she did not mean to be bound to a demand guarantee, prompt-
ing the court to interpret the declaration she had made. The court found deci-
sive how the creditor had to understand this declaration according to good
faith and commercial practice. It then continued in the following way:
Even if the plaintiff, when it formulated its terms, deliberately chose wording
that banks regularly use for first demand guarantees, it could not assume, on that
ground alone, that the defendant intended to be bound to such a guarantee. From
the point of view of the creditor, who initiated and formulated the guarantee,
the intention of the guarantor can only have been in accordance with what she
understood the wording submitted to her to mean. This is why the plaintiff
must accept the declaration of guarantee as having the meaning which she can
objectively derive from it in the circumstances of the case.
However, the wording of the agreement in question (‘The guaranteed sum shall
become immediately payable upon demand or upon this deed being first produced
…’) corresponds to the standard formulation as it has come to be used in banking
transactions for demand guarantees. Such circumstances lying outside of the
declaration itself can be taken into account in the interpretation, in so far as they
allow the recipient of the declaration to draw a conclusion as to its meaning. (…)
That is not the case here, as the plaintiff could not assume that the defendant
knew or should have known the meaning of the wording of the agreement in
banking operations. (…) A demand guarantee is a typical banking transaction.
It is little known outside of banking circles. The plaintiff has not argued that the
defendant had experience with respect to credit securities in general or about
demand guarantees in particular; nor did the plaintiff argue that the defendant was
informed of the specificities of a demand guarantee.
The proper interpretation of the guarantee was therefore that it was only a
‘simple’ guarantee and not a demand guarantee. This meant that the surety
could validly invoke the reasons why she did not want to pay the creditor. It
is not difficult to see various elements of Art. 5:102 sub a PECL coming back
in the decision:

128 · Contract law
a: ‘the circumstances in which the contract was concluded’: the defendant was
talked into the guarantee by her husband;
b: ‘the conduct of the parties’: the creditor did not inform the defendant about the
risks of the guarantee and used only a standard formulation in the contract;
c: ‘the nature and purpose of the contract’: a demand guarantee is a dangerous
transaction that can be very burdensome for the debtor; (…)
e: ‘the meaning commonly given to terms and expressions’: there is a specific
meaning given to a demand guarantee, but only in banking circles. The specific
meaning of the term was not known to the defendant.
A relevant factor not mentioned in Art. 5:102 PECL, but highly relevant in
Expertise
most jurisdictions, is the position of the parties and what knowledge and
experience can be expected of them. This element was mentioned in the
Dutch Haviltex case (see above) and is also relevant for the German court:
the defendant was an inexperienced layperson who did not have to know
about the true meaning of the guarantee and who did not have an expert
present when the contract was made.
Although the English approach to interpreting ambiguous clauses is not fun-

Parol evidence
damentally different, courts are bound by the so-called parol evidence rule.
This rule of evidence entails that in a written contract evidence extrinsic
to the express terms of the contract cannot be taken into account. Draft
contracts, letters, statements by witnesses or documentation from the pre-
contractual negotiations between the parties cannot play a role in ascertain-
ing what the contract terms ‘actually’ say. If Abimbola rents office space from
Cherida and the contract contains an ambiguous clause about the time of
payment of the rent, Abimbola cannot point at a prior oral agreement that
he was allowed to pay only at the end of each three-month period instead of
at the beginning. This means that English lawyers would have difficulty in
accepting points a. and b. of Art. 5:102 PECL as relevant factors for interpre-
tation (and for reasons set out later in this chapter the same is true for point
g. on good faith and fair dealing).
C. Maxims of interpretation; contra proferentem rule

Civil codes in the French legal tradition typically provide rules of thumb to
help interpret contracts. In the French Civil Code these maxims of interpre-
tation are for example laid down in the Arts. 1189-1192, but they can also
be found in the Italian and Spanish Codes. Although two hundred years of
experience show that these rules are not of too much practical use, the draft-
ers of some new codifications still chose to adopt them (notable examples
are the Arts. 1425–1432 of the new Civil Code of Quebec of 1994 and Art.

BOX 7.1
UNAMBIGUOUS CLAUSES: CLAUSES CLAIRES ET

PRÉCISES
Interpretation is a highly factual exercise. the same is true for the Italian Corte di
This explains why the highest courts in Cassazione) is able to exercise some control
Europe have difficulty in providing lower over interpretation. A recent example is the
courts with guidance on how to interpret case Emil Cioran (2012). A few years before
– other than that interpretation needs to his death in 1995 the French-Romanian
be objective. This is also true for the French writer Emil Cioran had written a holographic
Cour de Cassation, that refuses to review testament leaving his property to his partner.
the interpretation of contracts in decisions The testament read: ‘I, the undersigned Emil
of lower courts. But there is one interesting Cioran, holding residence in (…), name as
exception to this. Constantly, since 1872, in my heir for all my goods Ms. (…), holding
case law the French court has held that if a residence in (…). In case Ms. (…) dies earlier,
clause in a written contract is unambiguous I name as my heir for all my goods Mr. (…),
(a clause claire et précise), the court is not my brother, holding residence in (…).’ After
allowed to interpret it. If the lower court give not only Cioran himself, but also his partner
it a meaning other than the ‘clear’ objective had died, a brocanteuse was hired by the
one, the Cour de Cassation can quash the partner’s brother to empty the house. She
decision for distorting the intention of the found a great many unpublished manu-
parties. For much the same reason – fear scripts in the cellar. Cioran’s partner had
that the court would get too much discre- donated all manuscripts to the University
tionary power in striking down the parties’ of Paris who therefore claimed to be their
agreement – the old Dutch Civil Code of owner. Although this was not a contract but
1838 contained the provision (Art. 1378) a testament, the Cour de Cassation applied
that: ‘If words of a contract are clear, one the doctrine of clauses claires et précises
can not deviate from these through interpre- and held that interpretation of the testa-
tation.’ This is of course a highly question- ment was not allowed as it was clear in
able approach: a clause is never clear as such itself. Despite its questionable meaning, the
and always need to be interpreted before French lawmaker decided in 2016 to codify
one can say that it is ‘clear’. But through the doctrine in Art. 1192 CC.
this technique the Cour de Cassation (and
1268 of the new Romanian Civil Code of 2011). Thus, the interpretation is
preferred that gives an ambiguous clause some effect rather than none at all
(Art. 1191 CC). Clauses must also be interpreted in the light of the entire
contract (Art. 1189). Some of these rules can also be found in the PECL, that
adds the provision that individually negotiated terms take preference over
those which are not (Art. 5:104) and that in case of a discrepancy between
two language versions of one contract the interpretation that accords to the
original version of the contract prevails (Art. 5:107).

130 · Contract law
The best-known rule of interpretation, and one that is important in practice,

Contra
is the so-called contra proferentem rule. This rule entails that an ambiguity
proferentem in a written contract must be interpreted against the person who drafted it.
This gives a clear incentive to the drafter to put the contract in clear terms,
providing deterrence against sloppy drafting. The rule cannot only be found
in some national codes (e.g. Arts. 1190 and 1602 Code Civil), but is also laid
down in European Directive 93/13 on Unfair Terms in Consumer Contracts.
Article 5 (2) states:
In the case of contracts where all or certain terms offered to the consumer are in
writing, these terms must always be drafted in plain, intelligible language. Where
there is doubt about the meaning of a term, the interpretation most favourable to
the consumer shall prevail.
As a result, all European Member States have adopted the contra profer-
entem rule in any event for general conditions in consumer contracts (see
for example § 305c (2) BGB, Art. L 211-1 French Consumer Code, s. 69
Consumer Rights Act 2015 and Art. 6:238 (2) BW). Some of these jurisdic-
tions also apply the rule to commercial contracts (as is also possible under
Art. 5:103 PECL).
Ad hoc gap filling

Once it is established what is the proper meaning of the words explicitly
used by the parties, the contract can still be incomplete. This is because a
contract can never provide for all eventualities. The court then has to sup-
plement the interpreted party agreement through gap filling. As was seen in
the introduction to this chapter, this can take place on an ad hoc basis and
by use of default rules. The first method – ad hoc gap filling – means that
a lacuna in a specific contract of the two specific parties is filled with terms
that are necessary for the working of the contract and that the parties would
have agreed upon if they had thought about it. The presumed intention of
the parties (their ‘hypothetical will’) serves as the basis for this – admittedly
speculative – exercise. Art. II-9:101 DCFR puts it like this (Arts. 6:102 PECL
and 4.8 PICC provide similar provisions):
(1) The terms of a contract may be derived from the express or tacit agreement of
the parties, from rules of law or from practices established between the parties or
usages.
(2) Where it is necessary to provide for a matter which the parties have not
foreseen or provided for, a court may imply an additional term, having regard in
particular to:

(a) the nature and purpose of the contract;

(b) the circumstances in which the contract was concluded; and
(c) the requirements of good faith and fair dealing.
(3) Any term implied under paragraph (2) should, where possible, be such as to
give effect to what the parties, had they provided for the matter, would probably
have agreed.(…)
All jurisdictions accept this ad hoc gap filling to give meaning to the contract,
Germany
albeit under different names. It is applied in much less obvious cases than
the car keys example mentioned before. In German law this is ergänzende
Vertragsauslegung (supplementing interpretation of the contract, based on the
general provision on interpretation of § 157 BGB). It entails that in case the
parties have omitted to say something, the court must – in the wording of
the Bundesgerichtshof – ‘discover and take into account what, in the light of the
whole purpose of the contract, they would have said if they had dealt with
the point in question, acting pursuant to the requirements of good faith and
sound business practice’ (Swapping doctors, 1954). In that case, a doctor who
had swapped practices with a colleague was barred from opening a new prac-
tice in the vicinity of his old one for a reasonable period of two to three years.
The French speak of interprétation créatrice (constructive interpretation),

France
which they base on Art. 1194 Code Civil. This provision states: ‘Contracts
are binding not only as to what is therein expressed, but also as to all the
consequences which equity, usage or statute give to the contract.’ There is
a huge amount of case law based on this article that obliges parties to
comply with all kinds of pre-contractual duties to inform, advise and warn
their counterpart (see Chapter 8). But the article is also applied in other
cases. In one decision, a radio station had commissioned an author to
write a radio play, had accepted the play without objections and had paid
for it, but subsequently refused to broadcast the play on the radio. The
court held that broadcasting was part of the agreement even though parties
had not explicitly discussed this at the time of contracting (Radio play,
1974).
In civil law jurisdictions there is a close relationship between interpretation,

ad hoc gap filling and the so-called principle of good faith (reasonableness and
fairness). This principle will be discussed in more detail in Chapter 8, but
what interests us here is that the principle obliges parties to a contract to
take into account each other’s interests. In civil law the duty to interpret the
contract in a reasonable way and to fill lacunae are seen as following from
this principle. This is even explicitly laid down in Art. 6:248 (1) of the Dutch
Civil Code, which states: ‘A contract not only has the effects agreed upon

132 · Contract law
by the parties, but also those which, according to the nature of the contract,
result from statute, usage or the requirements of good faith (reasonableness
and fairness).’
English law does not regard ad hoc gap filling as a means of interpretation.
England
Instead it speaks of terms implied in fact. Again, these are terms that are not
explicitly laid down in the contract, but of which it is assumed that parties
Tests would have included them if they had directed their minds to it. English
courts have developed two tests to find this unexpressed intention. The
first one is often called the ‘officious bystander’ test and was formulated by
MacKinnon LJ in Shirlaw v Southern Foundries (1939):
Prima facie that which in any contract is left to be implied and need not be
expressed is something so obvious that it goes without saying; so that, if while the
parties were making their bargain, an officious bystander were to suggest some
express provision for it in the agreement, they would testily suppress him with a
common, “Oh, of course!”
The second test is called the ‘business efficacy’ test. The leading case is The
Moorcock (1889). Parties had entered into a contract that allowed the plaintiff
to unload his boat The Moorcock at the wharf of the defendant. The boat was
damaged when the unloading took place at low tide and hit the hard ground
of the riverbed. It was not explicitly stated in the contract that the boat had
to be moored safely, but the Court of Appeal implied such a term arguing
that this ‘must be necessary to give the transaction such business efficacy as
the parties must have intended’. In other words: the defendant should have
warned the plaintiff of the unevenness of the riverbed. Any other view would
have meant that the plaintiff had only bought ‘an opportunity of danger’.
Consequently the boat owner could claim damages for breach of contract.
Both tests largely overlap. They concur in only allowing the court to imply a
term if the contract is ineffective without it, and if the term is so obvious that
it goes without saying that it must be part of the contract. These are strict
criteria that only lead to inclusion of terms in fact if really necessary. Not just
any ‘reasonable’ term can be implied with the argument that it is a term that a
reasonable person would have agreed to; instead it is about the hypothetical
intention of these parties.
Gap filling through default rules

While ad hoc gap filling provides solutions that are tailor-made for the spe-
cific contract of the parties, the second method of gap filling provides stand-

ard solutions for problems typical to a certain type of contract. These default
rules exist for all contracts regulated in civil codes, such as contracts of sale,
employment and lease. In the common law comparable standards exist under
the heading of terms implied in law. These sometimes flow from statutes (in
particular the Sale of Goods Act 1979), but are more often developed by
the courts. The different terminology used in English law reveals a deeper
truth: while civil law jurisdictions are happy to say that these rules are simply
imposed by the legislator, English law finds this public interference with the
contract more problematic and prefers to say that they are implied with the
contract. English law thus gives pride of place to the parties.
By providing default rules the legislator or court offers a service to the con-
Ratio
tracting parties. It saves them the expense of time and money to n egotiate
about terms that most probably will not have to be invoked anyway.
Instead they can rely on rules that balance the parties’ interests in a just
way. However, if parties prefer to make their own terms the default law
will yield to this contrary agreement. It is thus extremely useful for parties
to be able to rely on provisions such as: sold goods must be of satisfac-
tory quality (e.g. Sale of Goods Act 1979, s. 14 (2) and Consumer Rights
Act 2015, s. 9); any sold good must be suitable for normal use (e.g. § 434
BGB); the rent is due at the beginning of the lease period (e.g. § 556b (1)
BGB); the employee is entitled to a reference at the end of the employment
(e.g. Art. 7:656 BW and Spring v Guardian Assurance plc, 1994); and the
lender of a thing must tell the borrower about defects that may cause harm
to the person who uses it if he knows of the defects (e.g. Art. 1891 CC).
Each system of national contract law typically has hundreds of such default
provisions.
The difference between statutory default terms typical to civil law jurisdic-
Liverpool City
tions and terms implied in law by the English courts can be illustrated by
Council v Irwin reference to the case of Liverpool City Council v Irwin (1977). Mr. and Mrs.
Irwin were the tenants of a flat on the ninth floor of a 15-storey, high-rise
block in Liverpool. The common parts of the building were constantly van-
dalised with the result that the stair lights failed, lifts did not work and the
garbage chute was usually blocked. Together with other tenants Mr. and Mrs.
Irwin withheld their rent. When the landlord (the city of Liverpool) brought
an action to evict them, they counterclaimed that there was a duty on the part
of the landlord to keep the common parts of the building in a decent state
and properly lit. The City Council denied the existence of such a duty: there
was no contract that listed such an obligation on the landlord. The House
of Lords, however, held that the landlord had ‘an obligation to take reason-
able care to keep the common parts of the block in reasonable repair and

134 · Contract law
u sability’. This obligation is implied in any relationship between landlord and

tenant, or as Lord Wilberforce put it:
such obligation should be read into the contract as the nature of the contract
itself implicitly requires, no more, no less: a test in other words of necessity. The
relationship accepted by the Corporation is that of landlord and tenant: the tenant
accepts obligations accordingly, in relation inter alia to the stairs, the lifts and the
chutes. All these are not just facilities, or conveniences provided at discretion:
they are essentials of the tenancy without which life in the dwellings, as a tenant,
is not possible. To leave the landlord free of contractual obligation as regards these
matters, and subject only to administrative or political pressure, is, in my opinion,
inconsistent totally with the nature of this relationship. The subject matter of the
lease (high-rise blocks) and the relationship created by the tenancy demands, of its
nature, some contractual obligation on the landlord.
This does not mean that this obliges the landlord to achieve the actual
result that the common parts are always in a state of repair. Damage done
by vandals and possibly by (the children of) the tenants themselves cannot
be prevented at all times or repaired every day. It is therefore sufficient if all
reasonable care is taken (in this case the court found that the City Council
had indeed exercised all necessary care). French lawyers would speak of an
obligation de moyens (in contrast to an obligation de résultat).
Civil law jurisdictions reach the same result by applying statutory default
provisions. These are the provisions that French, German and Dutch courts
would probably use to decide a similar case in their jurisdiction:
Art. 1719 CC: ‘A lessor is bound, by the nature of the contract, and without need
of any particular stipulation:
1° To deliver the thing leased to the lessee and, where the main dwelling of the
latter is concerned, a decent lodging. In case a residential dwelling is not fit for this
use, the lessor cannot claim the nullity of the lease or its termination in order to
evict the resident;
2° To maintain that thing in order so that it can serve the use for which it has been
let;
3° To secure to the lessee a peaceful enjoyment for the duration of the lease;
4° To secure also the permanence and quality of plantings.’
§ 536 (1) BGB: ‘If the leased property at the time of putting it at the disposal of
the lessee has a defect which removes its suitability for the contractually agreed use,
or if such a defect arises during the lease period, then the lessee is exempted for the
period when suitability is removed from paying the rent. (…)’

Art. 7:204 (2) Dutch Civil Code: ‘A defect is a quality or characteristic of the
leased property or another circumstance not attributable to the lessee, as a result of
which the leased property cannot provide the lessee the enjoyment which a lessee,
at the moment on which the lease agreement was concluded, can expect of a well
maintained property of the kind to which the lease agreement relates.’
Art. 7:206 (1) Dutch Civil Code: ‘If the lessee desires so, the lessor must cure a
defect, unless this is impossible or would require expenditures which in the given
circumstances cannot reasonably be expected to be made by the lessor.’
TOPICS FOR REVIEW
Contents of the contract

Incomplete contracts
Interpretation
Subjective interpretation
Objective interpretation
Factors relevant to interpretation of a contract
Parol evidence rule
Doctrine of unambiguous clauses
Maxims of interpretation
Contra proferentem rule
Ad hoc gap filling
Hypothetical will of parties
Terms implied in fact
Default rules
Terms implied in law
Landlord’s duty to keep a building in a reasonable state of repair
FURTHER READING
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapter 18–20.
– Claus-Wilhelm Canaris and Hans Christoph Grigoleit, ‘Interpretation of Contracts, in: Arthur
Hartkamp et al (eds.), Towards a European Civil Code, 4th ed. Nijmegen (Ars Aequi) 2011,
Chapter 26.
– Jacques Herbots, ‘Interpretation of Contracts,’ in: Jan M. Smits (ed.), Elgar Encyclopedia of
Comparative Law, 2nd ed., Cheltenham, UK; Northampton, MA, USA (Edward Elgar) 2012,
Chapter 35.
– Nicole Kornet, Contract Interpretation and Gap-filling: Comparative and Theoretical Perspectives,
Antwerp (Intersentia) 2006.
– Hein Kötz, European Contract Law (translated by Gill Mertens and Tony Weir), Oxford
(Oxford University Press) 2017, Chapter 6.

8
The principle of good faith
and policing unfair contract
terms
CHAPTER OVERVIEW
This chapter discusses two main topics:
• the central role of the principle of good faith (reasonableness and fair-
ness) in civil law jurisdictions and its absence in English law;
• the legal techniques to restrict the use of unfair contract terms, in par-
ticular with a view to policing exemption clauses and unfair terms in
general conditions in consumer contracts.
The principle of good faith

It is self-evident to continental lawyers that the principle of good faith (bonne
foi, Treu und Glauben, redelijkheid en billijkheid) has a central role to play in
the law of contract. All civil codes adopt this principle. In chronology of their
being enacted, the French, German and Dutch Codes state the following:
Art. 1104 (1) CC: ‘Contracts must be negotiated, formed and performed in good
faith.’
§ 242 BGB: ‘The debtor is obliged to perform in such a manner as good faith
requires, regard being had to general practice.’
Art. 6:248 BW: ‘1. A contract not only has the effects agreed upon by the parties,
but also those which, according to the nature of the contract, result from statute,
usage or the requirements of reasonableness and fairness.
2. A rule binding upon the parties as a result of the contract does not apply to the
extent that, in the given circumstances, this would be unacceptable according to
criteria of reasonableness and fairness.’

The principle of good faith and policing unfair contract terms · 137
Civil law courts have given these articles a wide application, sometimes going
far beyond the original intent of the legislator. Good faith plays a role in the
entire life of the contract, from the very first negotiations until the very last
part of the performance, and is seen by many civil lawyers as the highest
norm of contract law, described by some even as the ‘queen of rules’. The
importance of good faith as a ‘super-provision’ is already more clear in the
Dutch provision, but is best grasped by the PECL that declares good faith
the immediate counter principle of the freedom to contract and dictates that
each contracting party must mandatory respect it across the board:
Art. 1:102 (1) PECL: ‘Parties are free to enter into a contract and to determine
its contents, subject to the requirements of good faith and fair dealing, and the
mandatory rules established by these Principles.’
Art. 1:201 PECL: ‘(1) Each party must act in accordance with good faith and fair
dealing.
(2) The parties may not exclude or limit this duty.’
Standing opposite civil law jurisdictions and the PECL is English law that
does not recognise a general principle of good faith. In this chapter the role of
good faith will first be examined in the civil law (A), followed by an analysis
of why it is much less important in England (B).
A. Understanding good faith in the civil law

It probably takes an outsider to best describe what good faith in civil law
means. The English judge Lord Bingham describes it as follows in Interfoto
Library Ltd v Stiletto Ltd (1988):
In many civil law systems, and perhaps in most legal systems outside the common
law world, the law of obligations recognises and enforces an overriding principle
that in making and carrying out contracts parties should act in good faith. This
does not simply mean that they should not deceive each other, a principle which
any legal system must recognise; its effect is perhaps most aptly conveyed by such
metaphorical colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards
face upwards on the table’. It is in essence a principle of fair and open dealing
(…).
What Bingham describes here is so-called ‘objective’ good faith. At various

places in this book we encountered a different type, namely subjective good
faith which refers to a subjective state of mind of a person who does not know
nor has reason to know of a certain fact, and therefore acts ‘in good faith’

138 · Contract law
(or ‘not in bad faith’), as in the case where he relies on the apparent inten-
tion of the other party to be legally bound. Objective good faith is some-
thing else, which is exactly the reason why the German Code refers to it
with the different term ‘Treu und Glauben’ and the Dutch Code with the
term ‘reasonableness and fairness’. Unlike subjective good faith, reasonable-
Norm ness and fairness is a norm for the contracting parties: it sets a standard of
conduct that requires each party to take the interests of the other party into
account. This sounds rather vague and thus immediately reveals an impor-
Open-ended tant characteristic of good faith: the norm is open-ended. This means that it
depends on the circumstances of the case how the norm is applied, giving
much discretionary power to the courts. Civil law courts have often used
the good faith provision to ‘break open’ contracts the enforcement of which
they deemed grossly unfair. They have even used the provision as a vehicle to
develop whole new fields of law, such as pre-contractual duties to inform the
other party in French law, rules on hardship (‘unforeseen circumstances’) in
German law, and control of general conditions in both French and German
law and various other jurisdictions. The legislator is never able to foresee all
situations that end up in the courts – and when it is able to, it is seldom on
time or even willing to enact a new statute. Courts can then use the good
faith provision to keep the law in sync with societal developments.
The freedom that the courts allow themselves can of course be seen as being
Danger
at odds with the constitutional separation of powers, and therefore as a threat
to legal certainty and predictability (for which there is no better word than
the German term Einzelfallgerechigkeit, justice in each individual case). In
1933, for example, the German jurist Justus Wilhelm Hedemann launched
an attack on the German § 242 BGB in a famous booklet called Die Flucht in
die Generalklauseln: eine Gefahr für Recht und Staat (‘The escape into general
clauses: a danger for law and state’). This did not prevent the German courts
from using the good faith provision whenever they felt the need for it. At
the risk of generalising too much, courts in Central and Eastern Europe are
more reluctant to lead the way in developing private law through open-ended
norms, perhaps caused by the socialist heritage of a strong administration
and legislator.
Until now nothing has been said about the actual application of good faith.
Three functions
The best way to describe the substantive law is by identifying the three func-
tions that good faith has in civil law jurisdictions: the supplementing func-
tion, the interpretative function and the restrictive function.
Supplementation The supplementing function (fonction complétive, Ergänzungsfunktion,

aanvullende werking) allows a court to fill gaps in the party agreement. We

encountered this function already in Chapter 7 under the heading of ad hoc

gap filling. It was seen that good faith can give rise to a great variety of sup-
plementary duties that arise under the contract: duties of information, co-
operation, protection, loyalty, disclosure, etc. These obligations may already
exist in the pre-contractual stage and often extend until after the contract was
performed. Sometimes there is a more specific statutory provision on which
these duties can be based (such as § 157 BGB in Germany), but even if such
a provision is missing civil law jurisdictions are still willing to accept this
function. The underlying rationale is that parties are in the same boat when
they conclude a contract, calling for reasonable behaviour from them both.
In 1931 the French author René Demogue put it like this: ‘The contracting
parties form some kind of microcosm; it is a small society in which each of
them must work towards a common goal that is the sum of the individual
goals pursued by each.’ Art. 1:202 PECL provides a good example of what
such a microcosm entails. It states: ‘Each party owes to the other a duty to
co-operate in order to give full effect to the contract.’ This duty to co-operate
naturally exists in long-term contracts, but also in other cases. If contractor
A is to build an office building for B and A is unable to proceed with the
works because B refuses to apply for a building permit or does not give the
information necessary to obtain this permit, B violates his duty to co-operate.
In the same vein it is true that if the building is to be erected in Yemen, and
B accidentally hears that a terrorist group is planning to kidnap foreigners in
the place where the work is to be performed, he should immediately inform
A about this.
In particular French and German courts have developed extensive systems of

collateral duties on the basis of good faith that exist next to the explicit con-
tractual obligations that follow from the party agreement. In both jurisdic-
tions one speaks of protective duties (obligations de sécurité, Schutzpflichte),
an obligation to protect the other party, for example against physical damage
from slipping over a vegetable leaf in a supermarket (see Box 14.1), and
of duties to inform (obligations d’information, obligations de renseignement,
Auskunftspflichten, Aufklärungspflichten) that should allow the other party to
carry out the contract (e.g. provide a manual for the sold machine) or to help
a party make up its mind about entering into the contract at all (e.g. advise a
patient that silicone implants need regular replacement). The recently intro-
duced French Art. 1112-1 CC takes this duty to extremes by imposing a
general obligation to give information. It reads:
‘The party who has information which is of decisive importance for the consent of
the other, must inform the other of it where the latter legitimately does not know
the information or relies on his fellow contracting party.’

140 · Contract law
Second, parties are also bound by the principle of good faith when they inter-
Interpretation
pret their contract (fonction interprétative, Auslegung nach Treu und Glauben).
Interpretation is not something that only the courts engage in: it is primar-
ily a duty of the parties to give a meaning to the contractual terms that fit
their common goal. The rule that interpretation must be line with how rea-
sonable parties would construe the contract, as was discussed in Chapter
7, also follows from the standard of good faith that parties are obliged to
apply towards each other. If an insurance contract covers theft in case of ‘ille-
gitimate entry’ into the house of the insured, and a thief enters the house by
claiming that he is a telephone repairman, the insurer cannot claim that the
thief was let into the house by the insured and therefore does not have to pay.
The third function of good faith is to restrict the exercise of contractual

Restriction
rights. This restrictive or limiting function (fonction limitative, unzulässige
Rechtsausübung, beperkende werking) is the most spectacular application
because it allows a party to escape from a binding contract. But to sacrifice
the binding force of contracts for the sake of doing justice in the circum-
stances of the case is not something that a court would do light heartedly.
The Dutch Art. 6:248 (2) BW therefore rightly states that good faith can
only restrict a right if it would be ‘unacceptable’ for a party to invoke this
right. The court will only intervene in extreme cases. The situation that one
must primarily think of is that of abuse of rights: although a party has a con-
tractual or statutory right, it is prevented from exercising this right because
of its own previous behaviour. In a seminal Dutch case the bank of Mr.
Saladin told him that they had a special opportunity for him. As a faithful
client he could buy shares in the Waterman Pen Company. He was told by
the bank that buying these shares would be without risk. When this turned
out to be untrue, and the shares dropped in value, Mr. Saladin claimed the
losses he had suffered to a total of fl80,000 (€36,000). The bank subse-
quently invoked an exemption clause in the contract, stating that ‘we cannot
assume any responsibility for this transaction’. The Dutch Hoge Raad held
that whether it could be contrary to good faith for the bank to invoke the
clause depended on the assessment of several factors, such as ‘the gravity of
the fault, the nature and other contents of the contract, the societal position
of the parties and their mutual relationship, the way in which the term came
into existence, and the extent to which the other party was aware of the aim
of the term’. This is an outcome that most, if not all, civil jurisdictions would
accept, albeit not necessarily on the basis of the good faith provision. Thus,
French law no doubt accepts that good faith can also restrict a contractual
right, but it finds the basis for this in the liability for tort of Arts 1240–1241
Code Civil, under which the rules on abuse of right (abus de droit) were
developed.

The restrictive function of good faith can also come into play in cases other
Hardship
than abuse of rights. The best-known example concerns the doctrine of unfore-
seen circumstances or hardship (imprévision, Wegfall der Geschäftsgrundlage,
onvoorziene omstandigheden), discussed in more detail in Chapter 11. Each
contract is based on the assumption of the contracting parties that the cir-
cumstances under which the contract is concluded will not change too much.
If I buy a quantity of crude oil, I assume that the price at which I can resell
it remains within certain margins. I also expect that transport of the oil will
remain possible and will not be hindered by an unexpected outbreak of war
in the Middle East. However, even if these expectations are not met, it follows
from the principle of binding force of contract that I am still bound to the con-
tract. Only in highly exceptional circumstances do some jurisdictions allow
a party to escape from the contract in cases where its performance would be
excessively onerous because of an unforeseen and unforeseeable change of cir-
cumstances. Although these legal systems now have a statutory basis for this
(see e.g. Art. 1195 CC, § 313 BGB and Art. 6:258 BW), the underlying moti-
vation is again the good faith principle: in case of a truly fundamental change
of circumstances, a reasonable party cannot hold the other to the concluded
contract.
The most famous applications of the doctrine of unforeseen circumstances

can be found in Germany in the 1920s, when inflation was proverbially high
(at one point in time it took 4 billion German Mark to buy one American
dollar). The highest German court of that time (the Reichsgericht) had to
decide on various occasions whether a debtor should be allowed to pay only
the nominal value of a debt that had originated before the First World War
– which would have meant that he would have received the counter perfor-
mance practically for free. The court refused to allow this principle of ‘Mark
equals Mark’ and even fixed new exchange rates, basing these revolution-
ary decisions on § 242 BGB. In the case Luderitzbucht Mortgage (1923), for
example, the owner of a mortgaged property was obliged by the court to pay
the mortgagee an additional sum above the nominal value of the mortgage,
reasoning that:
The legal possibility of a revalorisation of debts out of mortgage is to be recognised

according to present German law, especially according to § 242 BGB. In particular
in the case of mortgage debts it must be taken into account that normally the
debtor has received a corresponding compensation having regard to the much
increased value of the land (…).
Despite the fact that the doctrine of unforeseen circumstances is not accepted
as such in English contract law (see further Chapter 11), Art. 6:111 PECL

142 · Contract law
adopts it as a ‘European’ principle. This lengthy provision well reflects that

the doctrine can only be applied in exceptional cases and that the result is not
that the contract is invalid, but that it must be adapted to meet the changed
circumstances. This adaptation is primarily left to the parties themselves;
the court is only allowed to step in if they do not reach agreement about new
conditions:
(1) A party is bound to fulfill its obligations even if performance has become more
onerous, whether because the cost of performance has increased or because the
value of the performance it receives has diminished.
(2) If, however, performance of the contract becomes excessively onerous because
of a change of circumstances, the parties are bound to enter into negotiations with
a view to adapting the contract or terminating it, provided that:
(a) the change of circumstances occurred after the time of conclusion of the
contract,
(b) the possibility of a change of circumstances was not one which could
reasonably have been taken into account at the time of conclusion of the
contract, and
(c) the risk of the change of circumstances is not one which, according to the
contract, the party affected should be required to bear.
(3) If the parties fail to reach agreement within a reasonable period, the court may:
(a) end the contract at a date and on terms to be determined by the court; or
(b) adapt the contract in order to distribute between the parties in a just
and equitable manner the losses and gains resulting from the change of
circumstances.
In either case, the court may award damages for the loss suffered through a party
refusing to negotiate or breaking off negotiations contrary to good faith and fair
dealing.
B. English law: no general principle of good faith

English law does not accept a general principle of good faith. Unlike most
other common law jurisdictions and unlike Scots law, English law regards the
need to take into account the interests of the other party in any type of contract
as contrary to the very nature of contracting. The most famous formulation of
this position can be found in the decision of the House of Lords in Walford v
Miles (1992). Although the following quote from Lord Ackner in that case
is restricted to pre-contractual negotiations, it can be seen as evidence of the
reluctance of English law to accept a general principle of good faith:
the concept of a duty to carry on negotiations in good faith is inherently repugnant

to the adversarial position of the parties when involved in negotiations. Each

party to the negotiations is entitled to pursue his (or her) own interest, so long
as he avoids making misrepresentations. A duty to negotiate in good faith is as
unworkable in practice as it is inherently inconsistent with the position of the
negotiating parties. (…)
Contracting parties, in particular if they are involved in commercial transac-

Policy reasons
tions, are generally considered to contract ‘at arm’s length’. It is therefore not
surprising that English law also lacks a theory of abuse of rights: if a party has
a right, it must be able to exercise it at all times. As Pearson LJ put it in the
case Chapman v Honig (1963), ‘ a person who has a right under a contract or
other instrument is entitled to exercise it and can effectively exercise it for
a good reason or a bad reason or no reason at all’. It may not be honourable
if the landlord gives notice to his tenant only because the tenant has given
evidence against him in a dispute with another tenant, but this is not a matter
that should influence the landlord’s exercise of rights.
So why does English law not recognise a general principle of good faith? The
usual explanation given is that English law is more morally insensitive than
civil law jurisdictions. English law is designed in the interests of economic
efficiency, while the civil law ranks solidarity higher. This purportedly makes
English law a better law for commercial parties. The comparative lawyer Kahn-
Freund famously said: ‘It certainly seems that the English law of contract was
designed for a nation of shopkeepers. If that be so, the common lawyer might
retort, then the French system was made for a race of peasants.’ This is reiter-
ated in the following quote of the English commercial lawyer Roy Goode:
The predictability of the legal outcome of a case is more important than absolute
justice. It is necessary in a commercial setting that businessmen at least should
know where they stand. (…) The last thing that we want to do is to drive business
away by vague concepts of fairness which make judicial decisions unpredictable,
and if that means that the outcome of disputes is sometimes hard on a party we
regard that as an acceptable price to pay in the interest of the great majority of
business litigants.
English law professor Roger Brownsword sums up the various arguments

against a general principle of good faith that have been brought forward over
the years, including the ones just mentioned. First, good faith requires the
parties to take into account the legitimate interests of one another, which
would go against the individualistic and liberal ethic of English contract law
that is based on adversarial self-interested dealing. Second, good faith would
be too vague: it is not clear how far the restrictions on the pursuit of this
self-interest should go. This threatens legal certainty. Third, even objective
good faith sometimes still requires an inquiry into the state of mind of the

144 · Contract law
BOX 8.1
AN ALTERNATIVE EXPLANATION FOR THE

ABSENCE OF A GENERAL PRINCIPLE OF GOOD
FAITH IN ENGLISH LAW
The Australian professor Fred Ellinghaus understand or unwilling to accept is the world-
(1989) gives an alternative explanation for wide importance of the English commercial
the absence of a general principle of good court, of English commercial arbitration and
faith in English law. He does not seek the of English commercial law. Yet this is a fact of
explanation in deep-rooted values about a life. (…) I here refer not so much to London as
country’s society and economy, but claims a financial centre, but to London as the centre
that the outlook of a country’s contract law of the world’s shipping, the centre of nearly all
depends to a large extent on the types of the world’s commodity trades, and the centre
cases decided by the highest courts. In com- of the world’s insurance. One result of this is
paring Australian and English contract law, that more commercial arbitrations are held
Ellinghaus argues that a: each year in London than in the rest of Europe
put together (. . .). Yet another is, of course,
law of contract devised by a court most often
the English Commercial Court itself (. . .) which
confronted with one type of contract will
must, I imagine, be by far the most important
differ from that devised by a court most often
court in the world for the resolution of inter-
confronted with another type of contract. A
national commercial disputes. Certainly there
court of ultimate appeal which draws on its
is nothing like it anywhere else in Europe.
own precedents in the development of a par-
You can judge its international character by
ticular body of doctrine will naturally be influ-
the fact that, in one year during which I had
enced by the data most often placed before it.
the honour to preside over the court, in every
Most cases litigated before the UK Supreme single case tried in the court either one or both
Court (and previously the House of Lords) are parties came from overseas.
about carriage of goods, contracts of insur-
It is not difficult to contrast this with the
ance and charter parties. The then judge in
cases that come before the highest courts
the House of Lords Lord Goff once said:
in France and Germany that are much more
One feature of our legal system which I find often purely domestic and typically involve
many of our continental friends are unable to consumers.
parties because it is dependent on the reasons why a party acted in a certain

way. Fourth, good faith impinges on the autonomy of the contracting parties.
If it regulates the behaviour of the parties, it restricts their autonomy and
this is inconsistent with the fundamental philosophy of freedom of contract.
Finally, English law has little sympathy for good faith because it fails to recog-
nise that contracting contexts are not all alike. Contract law must be sensitive
to context, and therefore also to different types of contracts: a commercial
contract on commodity sales is different from a consumer contract.

Much can be said against these arguments. It is, for example, not clear at
all that a liberal ethic is best for a well-functioning economy: trust and co-
operation may be of equal importance. The legal certainty argument can also
be turned upside down: the good faith principle can also provide security
against opportunism and unfair dealing, making a party more willing to enter
into a contract with someone it does not know. Finally, it is not true that good
faith must be applied regardless of context, but rather it equips courts with an
instrument to respond to the different circumstances of the case.
The absence of a general principle of good faith does not mean that good
faith plays no role at all in English law. There are three different ways through
which good faith enters English contract law.
First, English law adopts several doctrines that may not be called ‘good faith’,
Functional
but that comparative lawyers are eager to recognise as fulfilling a similar func-
equivalents tion as in the civil law. The interpretation of a contract in line with how rea-
sonable parties would understand it is one example. Another example is gap
filling through terms implied in fact (see Chapter 7).
Second, good faith is explicitly recognised as an important norm in some

Contracts
special contracts and relationships. Certain contracts are considered to be con-
uberrimae fidei tracts ‘uberrimae fidei’ (Latin for ‘of the utmost good faith’). This is for example
the case for contracts of insurance, suretyship, partnership and employment.
The main consequence of this is that parties must disclose information to their
counterpart. Thus, in an insurance contract a person taking out insurance must
inform the insurance company of any fact it considers relevant for the insurer’s
decision to accept her. This is a matter of trust among the parties. In the case of
International Management Group UK Ltd v Simmonds (2003), IMG acquired
the television rights for the matches of the Sahara Cup (a cricket tournament
between India and Pakistan). It insured against the risk of the matches being
cancelled without telling the insurer that it was aware of rumours that the Indian
Government would not allow the Indian team to participate. When India indeed
banned the tournament, IMG could not claim payment on the insurance policy
as it had breached its duty to inform the insurer in a contract that required the
utmost good faith. The importance of trust becomes even more evident if one
realises that an insurance company also need not pay out anything if the non-
disclosed fact is unrelated to the claim. If someone with a life insurance policy
does not tell the insurance company about a heart condition, the insurer can
invalidate the contract even if the insured dies in a plane crash.
Fiduciary
relationships
Next to these contracts of the utmost good faith, there are also certain rela-
tionships that are considered as being governed by good faith. These s o-called

146 · Contract law
BOX 8.2
A NEW ERA FOR GOOD FAITH IN ENGLISH LAW?

The present English approach is one in that the agreement contained an enforce-
which good faith is only accepted in some able implied obligation on the parties to
piecemeal contracts and relationships. act in good faith, and that the defendant
This does not mean that no pleas have breached this obligation by knowingly con-
been made in favour of a more principled cealing from the claimant the true situation
approach that recognises good faith as an concerning the defendant’s pricing arrange-
overriding principle for any contract. In the ments in a crucial distribution channel in
case of Yam Seng Pte Ltd v International Singapore. This breach justified the claim-
Trade Corp Ltd (2013) the High Court (in ant’s termination of the distributorship, and
a decision taken by Leggatt J) ruled that its subsequent damages claim.
any hostility of the English courts to a It is interesting to note that the court
general duty of good faith in contracts is found the basis for this duty of good faith
misplaced. The court found that a general in commercial dealings in the contract itself:
duty of good faith must be implied into a the duty of good faith was implied in fact
long-term distribution agreement. In this (see Chapter 7). This would in particular be
case, the parties entered into an agreement the case in long-term relational contracts
giving the claimant the exclusive rights to requiring extensive co-operation, such as
distribute eau de toilette, deodorant and joint ventures and franchise and distribu-
shower gel bearing the name ‘Manchester tion agreements. This gives the English duty
United’ in the Middle East, Asia, Africa of good faith a less fundamental character
and Australasia. After a year the claimant than its civil law counterpart. Leggatt J even
informed the defendant that it had termi- stated that parties would be able to exclude
nated the contract because of breach: the such a duty – something that would not
defendant shipped products too late and be possible in a civil law jurisdiction where
refused to supply all the ordered products. good faith provides a mandatory rule that
To substantiate his claim, the claimant the parties cannot deviate from. It remains
asserted that there was an implied term to be seen to what extent the decision of
in the agreement that the parties would Leggatt J is only an isolated case of a lower
deal with each other in good faith. The court or the beginning of a new era for
court followed this analysis, concluding good faith in English contract law.
fiduciary relationships exist between solicitor and client, doctor and patient
and principal and agent (as for example in case of financial intermediaries).
In each of these cases the fiduciary owes a duty to disclose important infor-
mation to the other party.
Third, as a result of the European Directive on Unfair Terms in Consumer

Unfair terms Contracts (on which more below), the UK has adopted the notion of good

faith in consumer contracts. The Consumer Rights Act 2015 (which con-
tains the UK implementation of the directive) closely follows the directive
by prescribing that contractual terms, which ‘contrary to the requirement of
good faith’ cause a significant imbalance in the contract to the detriment of
the consumer, are not binding on the consumer, regardless of whether they
were individually negotiated or not. It is understandable that the English
courts have had difficulties in applying this provision which, in the words of
the House of Lords in Director General of Fair Trading v First National Bank
(2001), imports the ‘notion of fair and open dealing’ into English law. This
explains why the UK Competition and Markets Authority published a 140-
page document containing guidance on how to apply the unfair terms provi-
sions of the CRA 2015.
BOX 8.3
THE DOCTRINE OF IUSTUM PRETIUM

It has not always been the case that the exceptions, such as the contract cannot
substantive fairness of the contract was be invalidated by a commercial party, if a
irrelevant. Both in the Canon law of the party knew of the value of the good, or if
Middle Ages and later in Natural law, it it is impossible to establish its ‘real’ value.
was well accepted that there must be This still leaves some space for the applica-
some equivalence between the mutual tion of the rule. In a recent case decided by
performances of the parties. It was seen the Austrian court someone had bought a
as immoral not to pay a just price (usually second-hand car through eBay for €4,000
referred to with the Latin term iustum but the buyer found out later that the car
pretium). The consequence of this was had so many defects that its actual value
that a contract could be avoided for laesio was between €500 and €1,600. The buyer
enormis (literally ‘substantial impairment’, was therefore allowed to invalidate the pur-
a gross disproportion between the mutual chase. As § 934 ABGB prescribes an objec-
performances). The difficulty, however, was tive equivalence between performance and
to establish what exactly a ‘just’ price or a counter performance, it does not matter
‘gross’ disproportion were: it seems difficult whether the buyer had seen the car before
to decide upon this in the absence of an concluding the contract (Bastlerfahrzeug,
objective criterion. However, some of the 2007). Article 1674 of the French Code Civil
early Civil Codes did codify the doctrine. also allows the seller to avoid the contract,
Thus, § 934 of the Austrian ABGB (1812) but only in case of an immovable where
allows a party to invalidate the contract the seller suffers a loss greater than seven-
if the value of its performance is more twelfths of the price, and the immovable is
than half of the other party’s performance not meant to be a gift. This provision does
(Verkürzung über die Hälfte). This seem- not play a prominent role in practice.
ingly extreme rule is mitigated by several

148 · Contract law
Policing unfair contract terms

No legal system regards a contract as invalid simply because there is an imbal-
ance between performance and counter performance. A contract is never
unfair only because one party agrees to pay ‘too much’. To hold otherwise
would be paternalistic and a negation of the premise that people who are
sound of mind can very well look after themselves. It was seen in Chapter 1
that this is sometimes referred to as the irrelevance of so-called ‘substantive
fairness’. In order to invalidate a seemingly unfair contract, one always needs
something extra. This could be a party who is not competent to make up
its own mind (legal incapacity: Chapter 5) or a so-called ‘defect of consent’.
This means that a party was not able to form its intention in a sufficiently
free manner because it was deceived by its counterpart (see for this and other
defects of consent Chapter 9).
This explains why a party only very rarely argues that the entire contract
is unfair. It is much more frequent that someone seeks to invalidate a spe-
cific clause in the contract that is disadvantageous to him. If products are
delivered too late or not at all, the buyer may counter that his contract con-
Exemption tains a clause that limits or excludes the possibility to claim performance or
clauses damages. These so-called limitation or exemption clauses are typically found
in general conditions that the buyer probably did not read before entering
into the contract – and if he had, he would not have been able to change their
contents anyway. This buyer has no interest in the invalidation of the contract
as a whole because this would mean that he would have to return the goods
he was interested in. He only wants to be able to set aside the specific clause,
and subsequently enforce its rights under the contract. The question is to
what extent such a clause can indeed be invalidated. This section therefore
examines what techniques courts and legislators use to police unfair contract
terms. A distinction is made between the general doctrines of private law that
courts have available (A) and the specific controls that legislators have put in
place in the last few decades to police unfair contract terms (B).
A. General controls
General conditions are used in almost any consumer contract and are also
Three problems
very common in commercial transactions. It is not difficult to see why this
standard form contracting is so popular. It saves parties from having to nego-
tiate and draft contract conditions for every new contract. This lowers the
transaction costs, which is not only in the interest of the party using the
general conditions (the ‘user’), but also of the other party, who is subse-
quently able to (for example) buy the product or service at a lower price.

However, the use of general conditions is not without problems. There are
three problems in particular. First, it is not self-evident how a set of rules
drafted by one party can become part of an individual contract with some-
body else who was not involved in the drafting (the incorporation problem).
Second, interpretation of standard terms in line with the parties’ intentions is
difficult if one of the parties was not involved in the drafting of the terms. This
raises the question of how to interpret general conditions (the interpretation
problem). Third, the conditions may be unbalanced and unfairly favour the
party who drafted them (the fairness problem). The latter problem is par-
ticularly cumbersome in B2C-transactions as the standard contracts in those
cases are typically not negotiable and tend to be a take-it-or-leave-it type of
affair: the only alternative to accepting the contract, with all the conditions
attached to it, is to reject it. To speak of a contract of adhesion well reflects this
phenomenon.
A court can tackle the incorporation problem by holding that the general con-
Incorporation
ditions did not become part of the contract, and that the ensuing gap simply
has to be filled with the statutory and judicial default rules. This technique
offers a solution in cases where the other party is simply not aware of the fact
that general conditions are used. This is easy to establish if the user did not
say anything about this at the time of contracting. If Anna gets lost on her
way from Bucharest to Brasov, checks into a hotel, and finds a notice in the
room that the hotel accepts no liability for lost property, this is not a clause
on which the hotel can rely. If Anna finds out the next morning that her Furla
bag has disappeared, the court can easily establish that the exemption clause
did not become part of the contract, which was made at the reception desk
and not at any later stage. But also in less obvious cases courts have often been
willing to help a weaker party by holding that the general conditions did not
become part of the contract in cases where the reference to the general condi-
tions is obscure, e.g. is hidden on the back of a form, or is only in small print.
General contract law can also assist in addressing the interpretation and fair-
ness problems. As it is typical for general conditions to be unilaterally drafted
by one party, the court can choose to interpret the conditions to the detri-
Interpretation
ment of the drafter (contra proferentem, now laid down in Art. 5 (2) of the
Directive on Unfair Contract Terms, as seen in Chapter 7). If a car (that
normally has space for five persons) carries six people and is involved in an
accident, the insurance company cannot rely on the clause that it need not
pay out in case the car carries an ‘excessive load’. An English court interpreted
the term ‘load’ narrowly, only covering goods and not people (Houghton v
Trafalgar Insurance Co, 1954). And if an exemption clause unfairly benefits
Fairness the user, it could – under the restrictive function of good faith – be contrary

150 · Contract law
to reasonableness and fairness to invoke the clause. Art. 8:109 PECL reflects
this: ‘Remedies for non-performance may be excluded or restricted unless it
would be contrary to good faith and fair dealing to invoke the exclusion or
restriction.’
B. Specific controls
In the 1970s – when the use of general conditions in B2C transactions
boomed as a result of increasing consumption – it became clear that the
above-mentioned general controls were not sufficient to protect consum-
ers. This led in many jurisdictions to the introduction of specific leg-
islation to address the three identified problems of general conditions.
Thus, Germany introduced its Act on General Conditions (AGBG)
in 1976 (its provisions became part of the BGB in 2002), the UK its
Unfair Contract Terms Act (UCTA) in 1977 and Consumer Rights Act
in 2015, and France its Act on the Protection and Information of the
Consumer of Products and Services (‘Loi Scrivener’) in 1978 (now part
of the Consumer Code). The exact scope of these statutes differs from
one country to another: while the UCTA – the title which is a bit of a
misnomer – only applies to exemption clauses (in B2B and C2C con-
tracts and also if individually negotiated) and the CRA to consumer
contracts, the French statute covers any contractual clause, but is also
limited to consumer contracts. The German statute has the widest scope
of application as it deals with any possibly unfair term in both B2B- and
B2C-contracts.
The incorporation problem is addressed in German law by the rule that a

Incorporation
clause in general conditions which is ‘so unusual that the other party to the
contract need not expect to encounter it’ is not part of the contract (§ 305c
(1) BGB). Particularly for consumer contracts this is further specified in
section 2 of § 305 BGB:
Standard business terms only become a part of a contract if the user, when entering
into the contract,
1. refers the other party to the contract to them explicitly or, where explicit
reference, due to the way in which the contract is entered into, is possible only with
disproportionate difficulty, by posting a clearly visible notice at the place where the
contract is entered into, and
2. gives the other party to the contract, in an acceptable manner, which also takes
into reasonable account any physical handicap of the other party to the contract
that is discernible to the user, the opportunity to take notice of their contents,
and if the other party to the contract agrees to their applying.

This fits in with the English judicial approach of ‘reasonable notice’. English
courts require the user of general conditions to take reasonable steps to bring
them to the notice of the recipient. What is reasonable depends on the con-
tents of the terms: the more onerous or unusual they are, the greater the
Red hand rule degree of notice that is required. Lord Denning’s ‘red hand rule’, which he
defined in Spurling Ltd v Bradshaw (1956), states:
the more unreasonable a clause is, the greater the notice which must be given of it.
Some clauses which I have seen would need to be printed in red ink on the face of
the document with a red hand pointing to it before the notice could be held to be
sufficient.
A famous application of this rule is Interfoto Picture Library v Stiletto Ltd

(1988). Advertising agency Stiletto had borrowed photos from picture
library Interfoto with a view to establishing if they were fit to be used in an
advertising campaign. A fee would have to be paid if any of the pictures were
in fact used. When Stiletto received the 47 photos, a delivery note included
the condition that if the pictures were kept for more than 14 days, a holding
fee of £5 per photo per day had to be paid. Stiletto had not read the condi-
tions and only returned the photos after a month. It subsequently received
an invoice to pay almost £4,000. The Court of Appeal found that Stiletto was
not liable: the term was very onerous and therefore Interfoto should have
drawn Stiletto’s attention to it in an explicit way. Just assuming that the other
party reads the delivery note is not enough in a case like this, in which the
holding fee is very high.
When it comes to the fairness problem, an important policy question is who

Fairness
should address it. It may be that the fight against powerful parties imposing
onerous general conditions on their counterparts should not be left to indi-
vidual consumers: individual parties may simply not be willing to go through
the costs and efforts to address a court when being confronted with an
onerous clause. This may call for government intervention and this is exactly
the reason why the French statute of 1978 did not give a general mandate
to the court to strike down unreasonable terms, but introduced an admin-
istrative control instead. The Loi Scrivener created a government commit-
tee (Commission des clauses abusives) that is empowered to prohibit certain
unfair terms in B2C-contracts by decree (see now Art. L 212-1 Consumer
Code). Unfortunately, however, the only decree issued was in 1978 when
the committee prohibited both clauses in sales contracts which restrict the
buyer’s right to claim damages in case of breach by the seller, and clauses in
any type of contract which allow a professional party to unilaterally modify
the characteristics of the product or service. The subsequent inactivity of the

152 · Contract law
g overnment committee led the French Cour de Cassation in its famous Minit
France decision of 1991 to change the nature of the protection: in a rare case
of French judicial activism, the highest court allowed the lower courts to
declare unfair terms inapplicable out of their own motion. This is now also
codified in Art. 1171 CC.
In Germany the possibility of the court striking down an unfair term was
already accepted in the 1976 Act. § 307 (1) BGB states:
Provisions in general conditions are ineffective if, contrary to the requirement

of good faith, they unduly disadvantage the other party to the contract with the
user. An undue disadvantage may also arise from the provision not being clear and
comprehensible.
It is not clear from this provision when exactly there is an ‘undue’ disadvan-
Grey and black
tage. This is why §§ 308 and 309 BGB provide two lists of unfair terms that
list can be relied upon by consumers. § 308 – the so-called ‘grey list’ – lists terms
that are not binding if they contain disproportionate elements. Whether this
is the case or not still has to be decided upon by the court in an evaluation
(‘Wertung’) of the circumstances of the case. § 309 – the ‘black list’ – lists
terms that are considered not binding under any circumstances. For example,
a contract clause is not binding if it excludes or limits the liability for damage
from injury to life, body or health due to negligent breach by the user, or
liability for other damage arising from a grossly negligent breach by the user’
(§ 309, no. 7 BGB). This technique of using grey and black lists was taken
over by both the French (Arts. R 212-1 and R 212-2 Consumer Code) and
the Dutch legislator (Arts. 6:236 and 6:237 BW).
The UK Unfair Contract Terms Act 1977 gives courts wide powers to
Unfair Contract
control clauses that exclude or limit liability. Its exact scope of application
Terms Act is complicated, but the statute essentially distinguishes between exemp-
tion clauses that are ineffective as such, and clauses that are ineffective if
they do not meet the requirement of reasonableness in much the same
way as black and grey lists do. Ineffective as such are for example clauses
that limit the liability of a business for death or personal injury caused by
negligence (s. 2 (1)). Subject to the test of reasonableness are, for example,
clauses that exclude or limit liability for non-performance or for perfor-
mance which is substantially different from what was agreed upon, unless
it is reasonable to do so (s. 3). Since the entry into force of the Consumer
Rights Act 2015, the UCTA no longer applies to consumer contracts. S.
61-76 CRA 2015 now provide the relevant rules for unfair terms used in
these contracts.

In 1993 the European legislator decided to put a European layer on top of

EU law
these national measures. Directive 93/13 on Unfair Terms in Consumer
Contracts prohibits terms in general conditions that are unreasonably
onerous for the consumer. Its most important provisions are the following:
Art. 3: 1. ‘A contractual term which has not been individually negotiated shall
be regarded as unfair if, contrary to the requirement of good faith, it causes a
significant imbalance in the parties’ rights and obligations arising under the
contract, to the detriment of the consumer.’ (…)
3. ‘The Annex shall contain an indicative and non-exhaustive list of the terms
which may be regarded as unfair.’
Art. 4: ‘1. (…) the unfairness of a contractual term shall be assessed, taking into
account the nature of the goods or services for which the contract was concluded
and by referring, at the time of conclusion of the contract, to all the circumstances
attending the conclusion of the contract and to all the other terms of the contract
or of another contract on which it is dependent.
2. Assessment of the unfair nature of the terms shall relate neither to the definition
of the main subject matter of the contract nor to the adequacy of the price and
remuneration, on the one hand, as against the services or goods supplies in
exchange, on the other, in so far as these terms are in plain intelligible language.’
Art. 6 (1): ‘Member States shall lay down that unfair terms used in a contract
concluded with a consumer by a seller or supplier shall, as provided for under their
national law, not be binding on the consumer and that the contract shall continue
to bind the parties upon those terms if it is capable of continuing in existence
without the unfair terms.’
Inspired by the German example, the Annex to the directive contains a ‘grey’
list of 17 clauses ‘which may be regarded as unfair’ (see Art. 3 (3) of the
directive). It must be noted that the directive only offers minimum harmoni-
sation: Member States are allowed to grant consumers a higher level of pro-
tection if they deem this fit. This explains why the national implementations
of the directive widely differ. Some Member States (such as Germany, the
Netherlands and the Nordic countries) did not have to change much in their
pre-existing national law, while France was among the countries that had to
adopt a grey list of unfair terms. The UK implemented the directive in the
Consumer Rights Act 2015. Although largely based on European rules, this
Act is UK domestic law and therefore continues to apply after Brexit.
It has already been mentioned that judicial review may not be the most effec-
tive means of policing unfair terms. Consumers often lack the time, money

154 · Contract law
and energy to go to court over the relatively small amount of money involved
in the average consumer transaction. The same is true for a smaller company
that is confronted with a counterpart with more bargaining power. The
adverse effect of this is that companies may be inclined to continue to use
their onerous clauses, capitalising on the incapacity or unwillingness of the
weaker party to go to court. This explains why Art. 7 of Directive 93/13
obliges Member States to ensure the existence of ‘adequate and effective
means’ to prevent the continued use of unfair terms. As a result, Member
States have introduced various ‘public reviews’ that make the control of
unfair terms not dependent on an individual party taking action. Such public
reviews are for example exercised by the Commission on abusive clauses in
France (see above), the Competition and Markets Authority in the UK, the
Autoriteit Consument en Markt (ACM) in the Netherlands and by a Consumer
Ombudsman in Nordic countries. Such public bodies are usually allowed to
obtain the assurance of a company that it will no longer make use of unfair
terms, and impose fines or even initiate criminal proceedings if they continue
their unfair trade practices.
Next to action by public bodies, many jurisdictions also allow (private)

Collective
consumer associations to pursue a so-called ‘collective action’ (action col-
action lective, Verbandsklage, collectieve actie). In a collective action the consumer
association asks on behalf of the consumers it unites for an injunction to pro-
hibit the continued use of an abusive clause. This often-effective possibility
can for example be found in the German Unterlassungsklagengesetz (Act on
Actions for Injunctions), the French Consumer Code (Art. 621-7), the UK
Competition Act 1998 and in Art. 6:240 BW.
TOPICS FOR REVIEW
Objective and subjective good faith

Good faith as an open-ended norm
Functions of good faith
Unforeseen circumstances
The role of good faith in English law
Arguments in favour and against a general principle of good faith
Contracts of the utmost good faith
Fiduciary relationships
Unfair contract terms
Iustum pretium
Laesio enormis
Usefulness of general conditions
Three problems of general conditions
Exemption clauses
General and specific controls

Relevant factors for the scope of application of specific controls (consumer and non-consumer;
general conditions and negotiated terms; exemption clauses and other terms; B2B and B2C)
Reasonable notice
‘Red hand’ rule
Black and grey lists
EU directive on unfair contract terms
Public review
Collective action
FURTHER READING
– Roger Brownsword, Contract Law: Themes for the Twenty First Century, 2000, Chapter 5.
– M.P. Ellinghaus, ‘An Australian Contract Law?’, Journal of Contract Law 1 (1989), 13 ff.
– Roy Goode, ‘The Concept of Good Faith in English Law,’ in: Saggi, Conferenze e Seminari,
1992.
– Martijn W. Hesselink, Towards a European Civil Code, 4th ed. Nijmegen (Ars Aequi) 2011,
Chapter 27.
– Otto Kahn-Freund, Claude Lévy and Bernard Rudden, A Source-book on French Law, 1979.
– Hein Kötz, ‘Towards a European Civil Code: The Duty of Good Faith’, in: Peter Cane and Jane
Stapleton (eds.), The Law of Obligations: Essays in Celebration of John Fleming, Oxford 1998,
243 ff.
– Hans-W. Micklitz, Jules Stuyck and Evelyne Terryn (eds.), Cases, Materials and Text on Consumer
Law, Ius Commune Casebooks for the Common Law of Europe, Oxford (Hart Publishing) 2010.
– UK Competition & Markets Authority, Unfair Contract Terms Guidance, 31 July 2015, CMA
37.
– Thomas Wilhelmsson, Towards a European Civil Code, 4th ed. Nijmegen (Ars Aequi) 2011,
Chapter 25.
– Reinhard Zimmermann and Simon Whittaker (eds.), Good Faith in European Contract Law,
Cambridge (Cambridge University Press) 2000.

Part Four
Vitiating factors
Once it has been established that the contract is formed through offer and
acceptance, the parties agree on their obligations and it is clear what the con-
tents of the contract are, the contract may still not be binding. The law rec-
ognises two factors that vitiate (invalidate) the consent of the parties. These
vitiating factors are:
1. Factors that made a party form its intention in the wrong way. If someone
is threatened to conclude a contract or mistakenly believes that it buys a
valuable painting while it does not, this could be a reason for invalidation
of the contract. These defects of consent are examined in Chapter 9,
together with the English doctrine of misrepresentation;
2. Factors that make a contract prohibited because their formation or per-
formance is against the law or constitutes a violation of public policy or
good morals. These prohibited contracts are discussed in Chapter 10.
A vitiating factor makes a contract void or avoidable, depending on the vitiat-

ing factor in question and the jurisdiction involved. If it is void, no contract
has in retrospect come into being: if a party still needed to perform, it no
longer has to do so. In cases where performance has already taken place, it
will have to be reversed: the price and the delivered goods or services need
to be given back in so far as this is still possible. If the contract is avoidable,
the party not in breach can decide if it wants to end the contract or not. If it
decides to do so, the results are the same as in case of a void contract.

9
Defects of consent and
misrepresentation
CHAPTER OVERVIEW
A contract is always concluded on the basis of certain assumptions (for

example, the purchased painting is by Rembrandt, the hired musician is
able to play Mozart). If these assumptions prove wrong (the painting is
made in China, the musician only knows how to play the Birdie Song), this
usually comes at the risk of the disappointed party. But sometimes the law
gives relief, in particular if the misapprehension is induced by false state-
ments or unpermitted silence of the other party. This chapter examines the
grounds for avoidance of a contract in case of:
• a defect of consent (mistake, fraud, threat or undue influence);

• misrepresentation (in English law).
Anyone concluding a contract does so on the basis of certain assumptions,

Disappointment
motives and expectations. I can book a cruise to the North Pole, expecting
not only to see polar bears and killer whales, but also assuming I will be able
to party with like-minded people of my own age. And if I sell a painting for
only €100, it must be because I believe it is made by an unknown painter
and not by Van Gogh. These assumptions and expectations are in principle
of no relevance to the law: as long as they are not explicitly mentioned to
the other party as being vital for someone’s consent (through which they,
if the other party agrees, become part of the party agreement), they remain
in the realm of a party’s personal reasons to contract. However, sometimes
the law must intervene. In the example above it is possible that I made it
clear to the travel agency why I booked the trip: can I then avoid the con-
tract when I accidentally hear, just before the date of embarkation, that
all my fellow travellers are retired Russians who go to bed after dinner?
And what if the buyer of the painting is an expert in nineteenth century
art who was aware of its true value but understandably did not tell me?
Should I then be able to claim back the painting or should I have better
investigated what its true provenance was? These are questions that the

160 · Contract law
law discusses under the headings of defects of consent and (in English law)
misrepresentation.
The civil law usually approaches these questions from the perspective of
Civil law
the party in error. If the intention to be bound is the most essential element
in the formation of a contract, then his intention must be properly formed.
In cases where there is a ‘defect’ in the intention – because it is based on a
wrong assumption – this must affect the validity of the contract. A party must
therefore be able to invalidate the contract in cases where the defect is serious
enough. Civil law countries traditionally accept three defects of consent (vices
du consentement, Willensmängel, wilsgebreken): mistake, fraud and threat. Civil
codes usually group these three grounds for avoidance together in one section
(see for example Arts. 1130 ff. Code Civil and §§ 119 ff. BGB; see however
Arts. 3:44 and 6:228 Dutch BW). In addition to these three grounds, several
jurisdictions also allow avoidance of the contract for undue influence.
The starting point of English law is different. It does not begin with the
English law
(defective) intention of the party in error, but from the party who caused
the error. This party may have made false statements or – exceptionally –
remained silent while it ought to have spoken. English law therefore requires
a so-called misrepresentation in order for the contract to be avoided by the
innocent party. It was only in the nineteenth century that, under continen-
tal influence, English law also carved out a place for avoidance on the basis
of mistake not caused by a misrepresentation (a so-called self-induced mis-
apprehension), but the scope of this possibility has remained very limited.
As the English lawyer John Cartwright puts it: ‘English law rarely allows
a remedy for mistake’ (practically speaking only the ‘common mistake’,
explained below, is accepted). The underlying policy reason behind this dif-
ferent approach is – as we saw before – that English law puts great empha-
sis on protecting the reasonable reliance of the other party who believes an
agreement did come into being. Avoidance for mistake would frustrate this
reliance.
We will now look at these grounds for avoidance in more detail. This chapter
first examines mistake (A), fraud (B), threat (C) and undue influence (D),
and then continues to study misrepresentation under English law (E).
A. Mistake
Rules on the avoidance of a contract for mistake (erreur, Irrtum, dwaling) can
be found in any civil code and soft law instrument on contract law. Some of
these provisions are reproduced below.

Defects of consent and misrepresentation · 161
Art. 1130 (1) CC: ‘Mistake, fraud and duress vitiate the consent where they are of
such a nature that, without them, one of the parties would not have contracted or
would have contracted on substantially different terms.
Art. 1132 CC: ‘Mistake of law or of fact, as long as it is not inexcusable, is a

ground for avoidance of the contract where it bears on the essential qualities of the
performance owed or of the other contracting party.’
§ 119 BGB: ‘(1) A person who, when making a declaration of intent, was mistaken
about its contents or had no intention whatsoever of making a declaration with
this content, may avoid the declaration if it is to be assumed that he would not have
made the declaration with knowledge of the factual position and with a sensible
understanding of the case.
(2) A mistake about such characteristics of a person or a thing as are customarily
regarded as essential is also regarded as a mistake about the content of the
declaration.’
§ 122 BGB: ‘(1) If a declaration of intent is (…) avoided under §§ 119 and 120,
the person declaring must, if the declaration was to be made to another person,
pay damages to this person, or failing this to any third party, for the damage that
the other or the third party suffers as a result of his relying on the validity of the
declaration; but not in excess of the total amount of the interest which the other or
the third party has in the validity of the declaration.
(2) A duty to pay damages does not arise if the injured person knew the reason
for the voidness or the voidability or did not know it as a result of his negligence
(ought to have known it).’
Art. 6:228 BW: ‘1. A contract which has been entered into under the influence
of a mistake and which would not have been concluded had there been a correct
assessment of the facts, is avoidable:
a. if the mistake is caused by information given by the other party, unless this
party could assume that the contract would have been concluded even without
this information;
b. if the other party, in view of what it knew or ought to have known about the
mistake, should have informed the mistaken party;
c. if the other party, at the moment of concluding the contract, has based itself
on the same incorrect assumption as the mistaken party, unless the other party,
even if there had been a correct assessment of the facts, would not have had
reason to understand that the mistaken party would therefore be prevented
from entering into the contract.
2. The avoidance cannot be based on a mistake as to an exclusively future
fact, or on a mistake for which, given the nature of the contract, common

162 · Contract law
opinion or the circumstances of the case, the mistaken party should remain
accountable.’
Art. 4:103 PECL: ‘(1) A party may avoid a contract for mistake of fact or law
existing when the contract was concluded if:
(a) (i) the mistake was caused by information given by the other party; or
(ii) the other party knew or ought to have known of the mistake and it was
contrary to good faith and fair dealing to leave the mistaken party in error; or
(iii) the other party made the same mistake,
and
(b) the other party knew or ought to have known that the mistaken party, had
it known the truth, would not have entered the contract or would have done so
only on fundamentally different terms.
(2) However a party may not avoid the contract if:
(a) in the circumstances its mistake was inexcusable, or
(b) the risk of the mistake was assumed, or in the circumstances should be
borne, by it.’
Although these provisions show differences in the details, it is possible to

derive from them some common requirements that any legally relevant
mistake must meet.
The first requirement is that there must be a contract that can be avoided.
Contract
This is not as self-evident as it seems. It transpired in Chapter 4 that a mistake
sometimes prevents a meeting of the minds, namely if parties are the victim
of a misunderstanding as to what the terms of the contract actually mean.
There is, for example, a lack of consent (dissensus, sometimes also referred
to as a mutual mistake) if parties made a contract, but it is unclear who is the
buyer and who is the seller. Another example is if parties agree that goods
will be shipped on the vessel called Peerless, but each party refers to a dif-
ferent ship both named Peerless. Such a misunderstanding can prevent the
contract from coming into being at all, unlike the type of cases discussed here
in which a contract does exist, but can be invalidated by the party in error.
Second, there must be a misapprehension of the correct situation by one party

Misapprehension
or by both parties (the actual ‘mistake’). What matters in any jurisdiction is
that a party is mistaken about a fundamental (some jurisdictions would call
it an essential or material, but in any event a not trivial) characteristic of the
good (the purchased diamonds turn out to be ‘blood diamonds’; the used
car is a lemon) or about an essential quality of a person (a party mistakenly
believes its future employee will get a work permit; the recently contracted
professional cyclist turns out to have used EPO). A trivial mistake would for

example be to err about the fact that the bought painting used to hang in the
artist’s bedroom, a circumstance that is not likely to be of any relevance.
Third, the contract would not have been concluded under the same condi-
Causal link
tions on a correct assessment of the facts. In other words: there must be a
causal link between the mistake and the conclusion of the contract. So a
party paying €70,000 for a copy of Grotius’ On the Law of War and Peace pub-
lished in 1625 would surely not have paid this price if it had known that it was
not a first edition, but only a reprint from the nineteenth century.
Fourth, it must be clear to the other party that the mistaken party, had it
known the truth, would not have entered into the contract (or at least not
Apparent on the same terms). The other party need not know about the mistake itself,
importance but it must know, or ought to have known, that the mistaken party regarded
a certain quality as vital. If I buy a used car and the seller tells me that the
vehicle is still in good shape, I cannot avoid the contract on the basis of a
mistake if I bought the car with the intended purpose of street racing and
in the process of Tokyo-drifting the engine blows up. I should have told the
seller that I wanted to use the car for this purpose, in which case he may have
told me that the car was not fit for such extreme use. And if I do not tell my
landlord that I wish to use the leased premises to start a restaurant, I cannot
complain that she did not tell me that the property can only be used for resi-
dential purposes. This is simply a matter of protecting reasonable reliance: if
the other party is unaware of my wishes, it should not be confronted with a
claim for avoidance for mistake.
Fifth, the mistake must fall under one of three categories. These are explicitly
Situation
summed up in Art. 6:228 Dutch BW and Art. 4:103 PECL, but also aptly
reflect the law of other civil law jurisdictions.
a. The mistake is caused by incorrect information given by

the other party
This is probably the most important reason why a legally relevant mistake
occurs in a civil law jurisdiction. If Sylvia tells an antiques dealer that she is
interested in tableware made in Maastricht between 1860 and 1950 and she
subsequently buys a teapot depicting the Aw Brök because the dealer tells
her it was made by local ceramics manufacturer Sphinx, she can avoid the
contract for mistake if it turns out that the pot is a recent copy from China. It
does not matter that the dealer believed that the information he provided was
incorrect (but if he knew, this qualifies as fraud). Similarly, if Adela rents her
holiday home to Jiangqiu, telling him that it is at a very quiet spot, Jiangqiu

164 · Contract law
can avoid the contract for mistake if – unknown to both of them – it turns out
that the house is under the flight path of the recently opened landing strip of
the nearby airport.
A party cannot rely on just any information. A seller may recommend her
Puffs
products as ‘unique’, ‘the best’ and ‘the cheapest’, but such sales talk does
not usually contain statements from which rights will arise. However, more
concrete statements made by the other party can become part of the con-
tract itself: if a seller says that the product is fit for a certain use (‘the crane is
allowed to drive on public roads’) or has a certain quality (a ‘gold’ ring), there
is no reason to bring in the rules on mistake (and some jurisdictions even pro-
hibit this): the buyer can simply bring a contractual remedy, such as a claim
for performance, damages or termination (see on these remedies Part 5).
In English law a false statement as discussed here does not qualify as mistake,
but may constitute a case of misrepresentation (see below, sub-section E).
b. The mistake is caused by non-disclosure by the other party

In civil law countries a legally relevant mistake can also be caused by the
silence of the other party. This would not be the case if everyone were
allowed to contract at arm’s length and did not need to disclose any informa-
tion. However, as was seen in Chapter 8, the principle of good faith necessi-
tates that a party sometimes has to meet a pre-contractual duty of disclosure
(obligation de renseignement, Aufklärungspflicht, mededelingsplicht). It is deci-
sive as to whether a party can reasonably expect to be informed about certain
matters before entering into the contract, as is well captured by Art. II-3:101
(1) DCFR:
Before the conclusion of a contract for the supply of goods, other assets or
services by a business to another person, the business has a duty to disclose to
the other person such information concerning the goods, other assets or services
to be supplied as the other person can reasonably expect, taking into account
the standards of quality and performance which would be normal under the
circumstances.
Although it differs from one jurisdiction to another when exactly this crite-
rion is met, it is possible to list the factors that play a role here. Art. 4:107 (3)
PECL provides an illustrative list:
In determining whether good faith and fair dealing required that a party disclose
particular information, regard should be had to all the circumstances, including:

(a) whether the party had special expertise;

(b) the cost to it of acquiring the relevant information;
(c) whether the other party could reasonably acquire the information for itself; and
(d) the apparent importance of the information to the other party.
The starting point in any jurisdiction must be that people do not have to
share the information that they have on the qualities or saleability of a good
or service. Often this information is acquired through one’s own efforts, by
When to costly research, by training or by experience and the duty to give it away
disclose would gravely weaken the incentive of people to inform themselves before
entering into a contract. A society that values initiative and education cannot
be of a different view. This explains why a buyer in principle need not tell
the seller about a likely surge in the market for a certain product, and why
an art collector can usually remain silent if he discovers a valuable painting
at a flea market. But things may be different if the knowledge of a party is the
result of chance, in particular if it would be expensive for the other party to
obtain the same information. A car dealer is supposed to give information
about the state of the cars it is selling because it would be much more costly
for the non-professional buyer to inform himself. This is true in particular
if the information relates to the safety of the car. It can be expected from a
What to
professional seller that he investigates the safety of the car (do the brakes still
disclose work?) before he sells it to an average consumer. A layperson selling a car will
have to give such information if she knows about it, as she should also spon-
taneously disclose that the house she is selling suffers from damp – unless
this is easy to discover by the buyer himself. So if construction works are
going on next to the house at the time of concluding the contract, the buyer
cannot avoid the contract for mistake because the seller did not disclose that
a new motorway was being built. In the same vein, German and French case
law firmly hold that the seller of a house must tell the prospective buyer that
there is woodworm affecting the floors unless this is clearly visible to the
buyer.
Although English law does not allow a claim for mistake for non-disclosure,
it is exceptionally possible that non-disclosure qualifies as misrepresentation
(see below, subsection E).
c. Common mistake
In case of a common (or ‘shared’) mistake, both parties have the same mis-
apprehension of reality. It may be that seller and buyer mistakenly believe
the painting to be by Mondrian, or that landlord and tenant are wrong in
thinking that the apartment is not subject to rent control. The law also allows

166 · Contract law
the parties to avoid such a contract for mistake. This is explicitly laid down
in Art. 6:228 (1) sub c Dutch BW, but it is also true in other jurisdictions.
Practically speaking, common mistake is also the only type of mistake that is
recognised in English law.
The interesting thing about common mistake is that both parties are allowed
to avoid the contract. This calls for an assessment of who should bear the
risk of the wrong assumption. In the German Matchfixing case (1975) a foot-
ball club in the Bundesliga had transferred a player to a club in the lower
Regionalliga. Both parties were unaware of the fact that the player had accepted
a bribe when he played a match for the selling club against Arminia Bielefeld.
When the player confessed and was banned by the national German Football
Association, the buying club avoided the transfer agreement and claimed
back the transfer money. The court reasoned entirely on the basis of who
should bear the risk of the player no longer being allowed to participate in the
German competition. The court held that this risk fell on the selling club as
this was where the player worked at the time of the bribe. The buyer could
therefore invalidate the transfer and claim back the transfer fee.
The sixth, and the final common requirement to establish mistake, is that
the mistake must not come at the risk of the mistaken party. A seller may
Risk have explicitly stipulated that he is not liable for defects in the goods: this
will prevent the mistaken buyer from avoiding the contract (at least in so
far as the exemption clause is upheld by the court). But the mistake can also
come at a party’s risk because it is inexcusable. If it is the mistaken party’s
own fault that its expectations were not met, it has no relief. Whether or not
this is the case, again depends greatly on what can be expected from a party.
Should the seller of a painting first have investigated himself what its true
provenance was before selling it far below the market value? And should a
Duty to buyer of a house bring in an expert to discover any hidden defects such as
investigate a rotten floor? It is clear that the answer to these questions also depends on
whether the other party has a duty to disclose. If the seller must disclose
information about the characteristics of the good, this effectively means that
the buyer need not investigate. Whether a duty to investigate exists depends
on the relative expertise and experience of the parties, as well as on the costs
of the investigation.
The end result of this extensive survey of the requirements for a legally rel-
evant mistake must be that, although mistake has a prominent place in the
civil codes, its practical significance is fairly limited. Not only will a statement
about the quality of a good or a person often give rise to a claim for non-

performance – which is much easier to prove than mistake –, but the mistake
itself will have to meet strict requirements in order for the avoidance of the
contract to be successful.
B. Fraud
Mistake offers relief to a party who is under a misapprehension that is self-
induced or caused by the other party’s statement or silence. It does not
matter whether the other party knew it was not telling the truth. But some-
times the other party deliberately deceives its counterpart. A can sell a car to
B after having turned back the mileage on the car’s odometer from 200,000
km to 20,000 km. And C can sell a house to D after having repainted the walls
to conceal a rotten area. The law qualifies such wilful deception, regardless
of whether it comes in the form of an explicit lie or unpermitted silence,
as fraud (sometimes also called deceit). It regards such trickery as so much
against what is required from a contracting party that it adopts special rules
on this defect of consent. All civil codes and international instruments there-
fore make clear that fraud (dol, arglistige Täuschung, bedrog) is a ground for
avoidance of the contract or other juridical act:
Art. 1137 CC: ‘Fraud is an act of a party in obtaining the consent of the other by
scheming or lies.
The intentional concealment by one party of information, where he knows its
decisive character for the other party, is also fraud.’
§ 123 (1) BGB: ‘Whoever has been induced to make a declaration of will by fraud
or unlawfully by threats may rescind the declaration.’
Art. 3:44 BW: ‘1. A juridical act may be annulled when it has been entered into as
a result of threat, fraud or abuse of circumstances.
(…)
3. Fraud occurs when someone induces another person to execute a certain
juridical act by deliberately making an incorrect statement, by deliberately
concealing a fact that had to be disclosed, or by another artifice. Endorsements in
general terms, even if they are untrue, do not as such constitute fraud.’
Art. 4:107 PECL: ‘(1) A party may avoid a contract when it has been led to
conclude it by the other party’s fraudulent representation, whether by words or
conduct, or fraudulent non-disclosure of any information which in accordance
with good faith and fair dealing it should have disclosed.
(2) A party’s representation or non-disclosure is fraudulent if it was intended to
deceive.’

168 · Contract law
In practice a party who believes itself to be the victim of fraud will base its
Damages
claim on both mistake and fraud. If the victim can indeed prove that the
other party had the intention to deceive, this allows not only the avoidance of
the contract, but also a claim for damages (in tort, or based on some special
provision such as Art. 4:117 PECL). This is particularly useful if the deceived
party has incurred costs in reliance on the validity of the contract. If the seller
clocked the odometer to deceive the buyer about the age of the car and the
car breaks down shortly after delivery, the buyer can not only avoid the con-
tract (and therefore claim back the contract price), but also sue the seller for
the reasonable costs of a rental car. The situations that qualify as fraud in civil
law systems are likely to fall under fraudulent misrepresentation in English
law, but only if based on a party’s statement: keeping silent usually will not
qualify as misrepresentation (see below, subsection E).
C. Threat
A third reason for avoidance of a contract is threat. If Bonnie puts a gun to
Clyde’s head while telling him to sign a document, every jurisdiction would
allow Clyde to invalidate the contract at a later stage. The threat need not be
physical: if my boss increases my salary after I tell her that I might tell her
husband about her affair with the janitor, she can avoid my new employment
contract. Here the law intervenes to ensure that only truly, freely exercised
autonomy is a source of binding obligations. Threat (violence, widerrechtliche
Drohung, bedreiging) is not only recognised as a ground for avoidance of a
contract in English law (where it is often called duress), but is also accepted
as a defect of consent in civil codes and international instruments. The defect
lies not so much in a misapprehension of the correct situation, but in the fact
that a party concludes a contract out of fear of harm to itself, its property, its
honour, or its family members.
Art. 1140 CC: ‘There is duress if one party contracts under the influence of a
constraint which makes him fear that his person or his wealth, or those of his near
relatives, might be exposed to considerable harm.’
Art. 3:44 (2) BW: ‘Threat occurs when someone induces another person to
execute a certain juridical act by unlawfully threatening him or a third party
with harm to his person or property. The threat must be of such a nature that a
reasonable person would be influenced by it.’
Art. 4:108 PECL: ‘A party may avoid a contract when it has been led to conclude
it by the other party’s imminent and serious threat of an act:
(a) which is wrongful in itself, or

(b) which it is wrongful to use as a means to obtain the conclusion of the

contract, unless in the circumstances the first party had a reasonable alternative.’
There is a thin line between the illegitimate threat that allows a party to avoid
the contract and claim damages on the one hand, and legally accepted pres-
sure or acting in line with social and economic circumstances on the other.
In times of food shortage a seller is undoubtedly allowed to ask a higher price
than is normal. It is also perfectly legitimate if I threaten my car dealer that I
will go to his competitor if he does not lower the price of the car I am inter-
ested in buying. Conversely, it is always unlawful to threaten to do something
that is against the law, such as to threaten with physical violence or theft. But
things can be more difficult. Is it unlawful harassment if I tell my debtor, long
overdue with her payment, that if she does not accept a low price on a new
contract, I will file for her bankruptcy? And what if I happen to know about
her criminal past or that of her wife: can I threaten to report this to the police
in order to get a more favourable deal? Although the acts I threaten with
are not unlawful in themselves, the law does usually allow avoidance of the
contract in such cases. The reason for this is that the threat is unrelated to the
obligation of the other party. One is allowed to file for someone’s bankruptcy
or to report a crime to the police, but only to ensure a fair insolvency or
criminal prosecution, not to achieve a low price on a contract.
D. Undue influence
Next to the three traditional defects of consent mistake, fraud and threat,
some jurisdictions have in the course of the last century supplemented the
judge’s toolbox with a fourth ground for avoidance of the contract. This was
motivated by the wish to give relief to a vulnerable party that, to its great eco-
nomic disadvantage, is exploited by somebody else. It was seen in Chapter
8 that a disparity in the value of the mutual performances is in itself never
a reason for invalidity of the contract, but this fourth ground for avoidance
allows a party to escape the contract if an excessive disparity is caused by
undue influence. The exact requirements and names differ from one jurisdic-
tion to another. While French law classifies exploitation of a party’s weakness
as a special case of threat (Art. 1143 CC), German law introduced a separate
provision on usury (Wucher) in § 138 (2) BGB. This provision comes close
to the European model provided by the PECL:
§ 138 BGB: ‘(1) A juridical act which violates good morals is void.
(2) In particular, a juridical act is void by which a person, by exploiting the
predicament, inexperience, lack of sound judgement or considerable weakness
of will of another, causes himself or a third party, in exchange for an act of

170 · Contract law
performance, to be promised or granted pecuniary advantages which are strikingly

disproportionate to the performance.’
Art. 4:109 PECL: ‘(1) A party may avoid a contract if, at the time of the
conclusion of the contract:
(a) it was dependent on or had a relationship of trust with the other party,
was in economic distress or had urgent needs, was improvident, ignorant,
inexperienced or lacking in bargaining skill, and
(b) the other party knew or ought to have known of this and, given the
circumstances and purpose of the contract, took advantage of the first party’s
situation in a way which was grossly unfair or took an excessive benefit.
(2) Upon the request of the party entitled to avoidance, a court may if it is
appropriate adapt the contract in order to bring it into accordance with what
might have been agreed had the requirements of good faith and fair dealing been
followed.
(3) A court may similarly adapt the contract upon the request of a party receiving
notice of avoidance for excessive benefit or unfair advantage, provided that this
party informs the party who gave the notice promptly after receiving it and before
that party has acted in reliance on it.’
Both provisions require not only the deliberate exploitation of the vulner-
Double test
able position of one party, but also an excessive advantage resulting from this
for the other. The tests for procedural and substantive fairness (see Chapter
1) are thus combined. If I fancy the house next to mine and do the weekly
shopping for the aged and physically disabled couple living in it because they
have no one else to turn to, this is no doubt noble behaviour on my part.
However, if my neighbour’s husband dies after a marriage of 60 years and
I tell his grieving and lonely widow that I am only willing to continue the
shopping if she moves to a nearby flat and sells her house to me far below the
market value, she can avoid the contract (or claim its adaptation under Art.
4:109 (3) PECL). My conduct would not qualify as mistake, fraud or threat,
but surely it is wrongful exploitation. The same is true if you are involved in
a car accident while in Sardinia and your friend is seriously injured. If, in the
absence of any other means of transport, the only way to get to a good hospi-
tal is with the local taxi, but the driver charges you ten times as much as the
normal amount, your vulnerable position allows the taxi driver to obtain an
excessive benefit. You will almost certainly accept the price, but are allowed
to invalidate the contract in a later stage.
English law lacks a general doctrine of wrongful exploitation. Such a case

Undue may qualify as duress, but it is more likely that the court will avoid the con-
influence tract by applying the equitable doctrine of undue influence. This requires not

only a manifest disadvantage, but also that the parties have been in a special
relationship of trust (the same type of fiduciary relationship we encountered
before in Chapter 8). This should have allowed them to rely on the other
party’s expertise and advice. Examples are the relationships between child
and parent, patient and doctor, client and lawyer and husband and wife, but a
relationship of trust can also simply follow from the facts of the case. If such
trust is abused, it is open to the court to avoid the contract. An illustrative
case is Lloyd’s Bank Ltd v Bundy (1975). Bundy and his son were both clients
of Lloyd’s Bank. When the son ran into financial difficulties, he asked the
bank for a loan. The bank agreed to this on the condition that the father, who
was a small farmer, would put up his farm for security. The bank employee
did not say anything to the father about the financial problems of the son
and did not give him the opportunity to ask for independent advice. The
court found not only a manifestly disadvantageous transaction for the father,
but also a relationship of trust (on the facts of the case): the father had been
a client of the bank for a long time and could have expected to have been
duly informed. Lord Denning went even further and proposed to introduce a
general principle of English law of inequality of bargaining power. The courts
did not accept this proposal, but in his formulation we can clearly see the
same elements coming back as were encountered in the civil law approach:
The English law gives relief to one who, without independent advice, enters into
a contract on terms which are very unfair or transfers property for a consideration
which is grossly inadequate, when his bargaining power is grievously impaired by
reason of his own needs or desires, or by his own ignorance or infirmity, coupled
with undue influences or pressures brought to bear on him by or for the benefit of
the other.
Dutch law and the UNIDROIT Principles of International Commercial

PICC
Contracts proffer interesting variations on the common theme in two differ-
ent directions. While the Dutch Art. 3:44 (4) BW on abuse of circumstances
(misbruik van omstandigheden) does not require a disparity between the
mutual performances and is satisfied with mere abuse, the PICC, in contrast,
only requires an excessive disadvantage in its provision on gross disparity.
The way in which this disadvantage comes about is only one of the relevant
factors in deciding whether relief must be offered. With this, the PICC argu-
ably go furthest in accepting substantive unfairness as a ground for avoidance
of the contract – which may be surprising in view of their scope of applica-
tion (international commercial contracts).
Art. 3:44 (4) BW: ‘Abuse of circumstances occurs when someone knows or
should understand that another person is induced to execute a juridical act

172 · Contract law
as a result of special circumstances, such as a state of necessity, dependency,

wantonness, abnormal mental condition or inexperience, and promotes the
realisation of that juridical act, although what he knows or should understand
should lead him to refrain from doing so.’
Art. 3.2.7 PICC: ‘(1) A party may avoid the contract or an individual term of it if,
at the time of the conclusion of the contract, the contract or term unjustifiably gave
the other party an excessive advantage. Regard is to be had, among other factors, to
(a) the fact that the other party has taken unfair advantage of the first party’s
dependence, economic distress or urgent needs, or of its improvidence,
ignorance, inexperience or lack of bargaining skill, and
(b) the nature and purpose of the contract.
(2) Upon the request of the party entitled to avoidance, a court may adapt the
contract or term in order to make it accord with reasonable commercial standards
of fair dealing.
(3) A court may also adapt the contract or term upon the request of the party
receiving notice of avoidance, provided that that party informs the other party
of its request promptly after receiving such notice and before the other party has
reasonably acted in reliance on it. Article 3.2.10 (2) applies accordingly.’
E. Misrepresentation
a. No general duty to disclose information
As noted above, civil law jurisdictions are willing to accept a general duty to
disclose information to the other party. In cases where this leads a party to
conclude a contract under a misapprehension, that party can avoid the con-
tract for mistake. English law is different. Consistent case law since the nine-
teenth century holds that there is no general duty to disclose facts known
to one party but not to the other, at least not in commercial transactions.
The leading case is Smith v Hughes (1871) in which the seller knew that the
buyer (a racehorse trainer) wanted to buy a quantity of old oats, but still sold
him new ones (green oats that horses do not eat). The buyer was bound to
the contract. The court reasoned in the best English tradition of separating
morals from law. Blackburn, J held:
The buyer persuaded himself they were old oats, when they were not so; but the
seller neither said nor did anything to contribute to his deception. He has himself
to blame. The question is not what a man of scrupulous morality or nice honour
would do under such circumstances. (…) Whatever may be the case in a court of
morals, there is no legal obligation on the vendor to inform the purchaser that he is
under a mistake, not induced by the act of the vendor.

This view is traditionally recapped in the maxim caveat emptor (Latin for ‘let
Caveat emptor
the buyer beware’): a purchaser must ask questions, or investigate himself,
in the absence of a duty of the seller to volunteer information. The ratio for
this position is again related to the assumption in English law that it is a good
thing if commercial parties deal at arms’ length – next to the already men-
tioned argument that it would be a disincentive to the acquisition of informa-
tion if it is to be shared with one’s counterpart.
The absence of a general duty to give information does not mean that English
law does not accept the need to inform the other party in some well-defined
situations. It was seen in Chapter 8 that in contracts of the utmost good
faith and in fiduciary relationships, a sometimes far-reaching duty to disclose
could arise. This duty can also follow from statute or from a European rule
(as was seen in Chapter 6). Even more important than this is the effect the
law gives to not informing the other party about any matter that makes the
quality of the goods unsatisfactory. According to s. 14 of the Sale of Goods
Act 1979 (in B2B contracts) and s. 9 (1) Consumer Rights Act 2015 (in
B2C contracts), the uninformed buyer can assume that the supplied goods
are of satisfactory quality and can bring contractual remedies if they are not.
b. Misrepresentation
While mere silence is in principle no ground for avoidance of the contract
under English law, this is different in case of an untrue statement. The phrase
‘silence is golden’ seems to have been invented for English law: a party can
remain silent, but if it does speak it must make sure that it is telling the truth.
If it provides incorrect information, the other party may be able to avoid the
contract (rescission) or claim damages on the basis of misrepresentation.
Misrepresentation can be defined as a spoken or written untrue statement of

Types of
fact which induces a party to conclude a contract. Silence can only constitute
misrepresentation misrepresentation in the rare cases in which there is a duty to speak (see
above). English law distinguishes between three types of misrepresentation,
dependent on the mind of the party making it:
z Fraudulent misrepresentation exists if a party knows it is making a false

statement, of which we saw examples in subsection B above. In this case a
party has the deliberate intention to deceive, allowing the other party to
avoid the contract and claim damages on basis of the tort of deceit.
z Negligent misrepresentation exists if a party carelessly makes a represen-
tation while having no reasonable basis to believe it to be true. This party
does not lie, but is careless in saying what it says. If a real estate agent

174 · Contract law
BOX 9.1
TERMS, REPRESENTATIONS AND

MISREPRESENTATIONS
The conclusion of many contracts is pre- statement of fact (not a mere opinion) which
ceded by negotiations or at least by state- induces a party to conclude a contract.
ments of both parties. If Fatima wants to It is dependent on the parties’ intentions
have a garage built, the contractor may whether a statement is a term or a (mis)
say things about the price, the time it will representation. One practical rule is that if a
take, who will do the work, what exactly contract is put into writing, the written con-
is included in the contract price, how the tract is usually regarded as containing terms
electricity is supplied, and which colour while any previously made oral statements
the stones will be. Unlike civil law systems, are representations. Another rule of thumb
English law classifies such statements as is that a party with special knowledge or
either representations or terms. A term is a expertise is more likely to state terms. In
promise that becomes part of the contract, Dick Bentley Productions Ltd v Harold Smith
meaning that it allows an action for breach (Motors) Ltd (1965), for example, Bentley
of contract in case the promisor does not bought a car from car dealer Smith, relying
perform. A representation is a statement on Smith’s statement that the car had trav-
which asserts the truth of a given state of elled 20,000 miles after a new engine and
facts. It may encourage a party to make gearbox had been put in. Soon after the
the contract but is not part of the contract purchase it became clear that the car had
itself. In case the representation is false done much more and was in need of new
(it states facts that are untrue), it can give repairs. The court found that the profes-
rise to an action for misrepresentation. sional dealer’s statements were terms, allow-
Misrepresentation is therefore an untrue ing Bentley to claim damages.
states that the house it is trying to sell is very quiet, it is making a neg-
ligent misrepresentation if the house next door is in fact undergoing a
lengthy and noisy renovation. The agent did not know about this (oth-
erwise this would be a case of fraudulent misrepresentation), but the
statement is made in a careless way because he assumed something that
he should have investigated before saying anything. Negligent misrepre-
sentation allows the other party to avoid the contract and claim damages
under S. 2 (1) of the Misrepresentation Act 1967.
The question when exactly a statement is made in a negligent way can be
difficult to answer, but section 2 (1) of the Misrepresentation Act can be of
great help to the disadvantaged party. The provision reverses the burden of
proof by stating that if a party is induced to conclude a contract by another
party’s misrepresentation, it can claim damages unless the other party can
prove that at the time of concluding the contract it believed its statement to

be true and had reasonable grounds to believe this. This provision proved
helpful in the illustrative case of Spice Girls Ltd v Aprilia World Service BV
(2002). On 6 May 1998 the Spice Girls entered into a contract with the
Italian manufacturer of scooters Aprilia. Aprilia would sponsor the tour of
the Spice Girls (according to the contract consisting of five members) in
return for the right to use Spice Girls’ images and their participation in the
filming of an Aprilia TV commercial. On 29 May, shortly after the conclu-
sion of the contract and the shooting of the commercial, Gerri Halliwell
(‘Ginger Spice’) left the group. As a result, Aprilia refused to pay under
the sponsorship contract and claimed back the costs of making the com-
mercial and plans to launch a ‘Spice Sonic’ scooter, arguing that the group
already knew about Halliwell leaving before the conclusion of the contract
and should have disclosed this to Aprilia. The court agreed and held the
Spice Girls liable for negligent misrepresentation. The representation con-
sisted of allowing Halliwell to participate in the commercial, with which
the group represented that she would stay on as a member for the period
the commercial would be used. It would have been difficult for Aprilia to
prove that the Spice Girls actually knew of Halliwell leaving the group,
but as a result of section 2 (1) of the Misrepresentation Act it did not have
to prove this – the Spice Girls could not prove they did not know about
Halliwell leaving and were therefore liable.
z Innocent misrepresentation exists if an incorrect statement is made
without fault, meaning that a party believed its statement to be true and
could also reasonably believe this to be the case. If you sell your stereo
to somebody else, telling the buyer that ‘it functions well’ (which you
believe to be true because you have not used the stereo in the last few
years), this is an innocent misrepresentation. It allows a party to avoid
the contract, unless the court regards this to be a too severe sanction and
wants to award damages instead (Misrepresentation Act, s. 2 (2)).
TOPICS FOR REVIEW
Defects of consent
Fundamental mistake
Types of mistake
Mistake in English law
Duty of disclosure
Duty to investigate
Fraud
Threat
Undue influence
Abuse of circumstances
Gross disparity
Terms and representations

176 · Contract law
Caveat emptor
Misrepresentation
Types of misrepresentation
Remedies for misrepresentation
FURTHER READING
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapters 14–16.
– John Cartwright, Towards a European Civil Code, 4th ed. Nijmegen (Ars Aequi) 2011, Chapter
23.
– Hein Kötz, European Contract Law (translated by Tony Weir and Gill Mertens), 2nd ed., Oxford
(Oxford University Press) 2017, Chapters 9 and 10.
– Anthony Kronman, ‘Mistake, Disclosure, Information and the Law of Contracts’, Journal of
Legal Studies 7 (1978), 1 ff.
– Ewan McKendrick, Contract Law, 12th ed., Basingstoke (Palgrave Macmillan) 2017, Chapters
12 and 13.
– Frances Quinn, Elliott and Quinn’s Contract Law, 12th ed., Harlow (Pearson) 2019, Chapters 9
and 10.
– Ruth Sefton-Green (ed.), Mistake, Fraud and Duties to Inform in European Contract Law,
Cambridge (Cambridge University Press) 2005.

10
Prohibited contracts
CHAPTER OVERVIEW
Freedom of contract finds its limits in mandatory law, public policy and
good morals. Even if contracting parties intend to be bound, and their
consent is not affected by mistake, fraud, threat, duress or misrepresenta-
tion, their contract can still be void or unenforceable if its conclusion or
performance violates a statute or fundamental principles of society. This
chapter examines these prohibited contracts.
Despite the great importance the law attaches to the principle of freedom
of contract, parties are not free to enter into any contract whatever its con-
tents. Every legal system puts limits on the freedom of contracting parties by
declaring contracts void or unenforceable if they are contrary to mandatory
law, public policy or good morals (bonos mores). If Marjolein agrees to sell
nuclear arms to a terrorist group, or if Jens agrees to kill someone in return
for a sum of money wired to his Swiss bank account, not many people would
doubt that these contracts interfere with the public interest and should there-
fore not be enforceable. Even if it is unlikely that Marjolein and Jens, or their
counterparts, would sue each other in court, the law cannot do without rules
on prohibited contracts. If a court happens to come across one, it is to declare
the contract invalid out of its own motion.
All jurisdictions concur in declaring a contract unenforceable if it infringes

a statute or public policy or good morals – although the exact formulation
naturally differs somewhat from one country to another. The relevant provi-
sions of the French, German and Dutch codes are the following (English law
could also very well live with what these provisions express):
Art. 6 CC: ‘Statutes relating to public policy and morals may not be derogated
from by private agreements.’
Art. 1162 CC: ‘A contract cannot derogate from public policy either by its
stipulations or by its purpose, regardless of whether the latter was known to all the
parties or not.’

178 · Contract law
§ 134 BGB: ‘A juridical act which violates a statutory prohibition is void, unless
the statute leads to a different conclusion.’
§ 138 (1) BGB: ‘A juridical act which violates good morals is void.’
Art. 3:40 BW: ‘1. A juridical act that by its contents or implications violates good
morals or public policy, is null and void.
2. A juridical act that violates a statutory provision of mandatory law is null and
void; if, however, this statutory provision is only intended to protect one of the
parties to a multilateral juridical act, the juridical act is only avoidable; in both cases
this applies in so far as the provision does not imply otherwise.
3. Section 2 does not apply to statutory provisions which do not purport to
invalidate juridical acts contrary to them.’
These dry provisions raise two main questions. The first question (A) is
Two questions
when exactly a contract goes against a statutory prohibition, public policy
(ordre public, openbare orde) or good morals (gute Sitten, goede zeden).
Public policy or good morals (taken together in the remainder of this
chapter) are open-ended clauses that leave much discretion to the court.
This is on the one hand a good thing because it allows the courts to deal
with changing conceptions of what should be prohibited. What was seen
as immoral in the 1950s (e.g. to let a house for use as a brothel) may
today be accepted, and what was a hundred years ago perfectly permissible
(e.g. to agree to organise a goose-pulling competition) is seen today as
unacceptable (in this example because it entails intolerable cruelty against
animals). On the other hand, it can be difficult for a court to decide what
public policy or good morals requires. Judges are not allowed to impose
their own standards, but rather must feel out what society as a whole
believes to be morally unjustifiable. And while this may still be possi-
ble within one national society, it is highly improbable that there is one,
uniform, global, or even European, conception of what parties can freely
agree upon. This explains why the PECL only contain a very shallow pro-
vision on prohibited contracts (Art. 15:101), which merely states that a
contract is of no effect to the extent that it is ‘contrary to principles rec-
ognized as fundamental in the laws of the member states of the European
Union’.
The second question (B) is what must be the effect of a prohibited con-
tract if it has already been performed. It seems self-evident that a prohibited
contract cannot be enforced and does not allow a claim for damages in case
of non-performance. This is because State courts must refuse to assist in
upholding prohibited contracts. But what if one party, or both parties, have

Prohibited contracts · 179
already performed under the contract (arms dealer Marjolein and hitman
Jens received their money)? Are their partners in crime then allowed to claim
back the payment, or would this mean that the court unjustifiably lends its
services to parties to a prohibited transaction?
A. When is a contract prohibited?

a. Statutory illegality
All jurisdictions contain statutory provisions that prohibit the conclu-
sion of certain types of contracts. For example, encouraging someone
to commit a crime by paying this person money (as in the case of the
hitman) is a criminal offence (namely incitement). The same is true for
knowingly buying stolen property (fencing). Both crimes are prohibited
by statute. Such statutory illegality can often also be categorised as being
against public policy or good morals (the hitman’s contract does not only
violate a provision of criminal law, but is naturally also against public
policy or good morals), but the important advantage of being able to refer
to a statutory provision is that the court no longer needs to ask itself what
public policy or good morals exactly require. In the unlikely event that
the incited party or fencer claims payment before the court, the court will
declare the contract void and reject the claim. Another example concerns
trade in human organs: many countries have adopted a statute that prohib-
its the selling of body parts. Violation of such a statute will also make the
contract void.
Sanction It was seen in Chapter 6 that not all contracts violating a statutory rule will
be declared void. Sometimes a provision only aims to protect one party to
the contract, as in the case where consumer suretyship is not made on a
written form, which only makes the contract avoidable by the guarantor. This
is explicitly laid down in Art. 3:40 (2) BW, but it is also accepted in the case
law of other jurisdictions. It could even be that a statutory provision prohib-
its a contract, but does not purport to invalidate it in any way (as Art. 3:40
(3) BW states). An example of this is the rule that prohibits shops selling
products after hours, such as the UK Sunday Trading Act 1994 and the Berlin
Ladenöffnungsgesetz. Such statutes do not mean to invalidate the contract
with a customer who happened to be in need of a product at an unusual hour,
but only provide administrative sanctions for the retailer (for example that
she must pay a fine to the authorities).
Art 101 TFEU An important example of statutory illegality following from European law can
be found in Art. 101 TFEU. This provision prohibits agreements between

180 · Contract law
competitors that restrict competition on the European internal market, such

as cartels and price-fixing agreements. The provision reads as follows:
1. The following shall be prohibited as incompatible with the internal market:

all agreements between undertakings, decisions by associations of undertakings
and concerted practices which may affect trade between Member States and
which have as their object or effect the prevention, restriction or distortion of
competition within the internal market (…)
2. Any agreements or decisions prohibited pursuant to this Article shall be
automatically void.
If the agreement has an appreciable effect on competition (which is usually

the case if a share of at least 5 per cent of the market is affected by the illegal
deal), it is not only void but the European Commission is also allowed to
impose fines on the companies involved. These fines usually attract a lot of
publicity, as when tech company Google was fined a multi-billion euro fine.
In the above examples, the formation of the agreement itself is prohibited. But
Performance
it can also be that a contract is legally concluded, with illegality only arising at
illegal the time of performance. If A agrees with B to transport goods from Latakia to
Rotterdam, this is a perfectly valid contract. Nowhere in a statute is it written
that a transport contract is illegal. But if shortly before the transport is to
take place the Dutch Government prohibits the import of any products from
Syria, transporting the goods becomes an illegal act.
There is one category of illegal agreements that merits special attention. It

Motive
is not always apparent to the other party that the contract is concluded to
unknown engage in an illegal activity. If I were to buy a knife in a nearby supermarket
with the aim of killing my neighbour, it is not likely that I will tell the seller
about this motive. But if the other party should reasonably know about my
intentions, this contract is arguably void as well. This is why most jurisdic-
tions hold that if both parties are aware of the illegality (either in forma-
tion or performance of the contract), neither party can enforce it. But if the
other party did not know about the illegal performance, the innocent party
can still enforce the contract. If a taxi driver agrees to drive my guests from
Maastricht to Brussels in a taxi that does not have a licence to operate on
Belgian soil, the actual performance of the contract is against the law. But as
long as I do not know of this, I can normally sue the driver in case of non-
performance (for example, because she is too late or causes an accident in
which my guests are hurt).

b. Contracts against public policy or good morals

While it is relatively easy to determine that a contract violates a statutory
rule, it is often more difficult to establish that the agreement of the parties
goes against public policy or good morals. The code provisions mentioned
above do not give much guidance. The term ‘good morals’ is supposed to
refer to the common decency of reasonable persons, while ‘public policy’
refers to fundamental principles of society. But these descriptions do not
help much in understanding what the statutory texts mean. The recently
amended French Art. 1162 CC no longer mentions good morals at all and
regards these as part of the overall concept of public policy. The best way
to grasp the gist of these provisions is by looking at some categories of
cases.
1. Contracts unduly restricting personal, artistic or economic freedom

Contracts that unduly restrict a party’s personal, artistic or economic
freedom are contrary to public policy or good morals. If you agree to be
my house sitter while I am away on holiday, I will not be able to enforce the
clause in our contract that you must stay inside the house for the four weeks
Personal that I am away. Slavery is too strong a word for this, but our agreement is no
freedom doubt seen by society as an unpermitted burden on your personal freedom.
And if a writer or a musician promises a publisher or a record company to
offer all his future works to the latter, this is also seen as a too severe restric-
tion of the artist’s freedom. In this type of case the German Supreme Court
once held that allowing such an agreement to be binding on the artist would
Artistic
lead to a ‘one-sided burden, which constrained his economic and personal
freedom freedom to an unacceptable extent’ (Vorrechtsvertrag Verfasser, 1956). This
would have been different if the contract had contained a time limit of, for
example, five years. Yet another example from German law was seen in the
previous chapter: if a party’s vulnerable position is exploited by somebody
else, this could constitute such a violation of someone’s freedom that the
contract is void for undue influence (§ 138 (2) BGB).
A party could also be tempted to waive one of its fundamental rights. Although
Waiver
fundamental rights traditionally only work in the ‘vertical’ relationship
between the State and the citizen, they often reflect common societal stand-
ards that also have value in the ‘horizontal’ relationship between citizens.
It would therefore be contrary to public policy or good morals to make the
purchaser of a house agree to no longer exercise his religion in return for a
lower price on the contract. Similarly, Evy will not be able to enforce Ben’s
promise that he will never marry anyone else but her (which would be a

182 · Contract law
clear violation of Ben’s right to family life). Also contrary to public policy
is a clause (for example in general conditions) that excludes a party from
access to court in case of a dispute, which is seen as a violation of the right to
a fair trial as protected by Art. 6 of the ECHR. Also other agreements that go
against freedom of religion, freedom of speech or other fundamental rights
are usually unenforceable.
Another important category of possibly unduly restrictive agreements is

Economic
that of contracts in restraint of trade. These are contracts in which a party
freedom agrees to restrict his economic freedom, particularly his freedom to trade or
to conduct his profession or business. An employment contract can contain
the clause that an employee, after her employment has ended, is not allowed
to start her own business or work for a competitor. It is even very common
that the seller of a business agrees not to set up a similar business in order
to avoid customers following the seller. The law looks with suspicion upon
such agreements. On the one hand, it is clear that the employer and pur-
chaser of the business have an interest in restricting the activities of their
former employee and competitor, but on the other hand enforcement of
such clauses could deprive them of the possibility of making a living for
themselves (and would also infringe upon the public interest of free compe-
tition). In particular people such as lawyers, accountants, doctors and hair-
Restraint of
dressers could be hit hard by such a non-competition clause. This explains
trade why contracts in restraint of trade and non-competition clauses are only
considered valid if they are restricted in scope (the exact type of activity
or clients must be defined, e.g. only clients advised in the year prior to
departure cannot be approached), time and place (e.g. only a prohibition
to compete within 20 kilometers from the original workplace and only for a
period of two years).
2. Contracts against moral views believed to be held in society

The category of cases discussed above (subsection 1) typically involves agree-
ments that are one-sided in the sense that one party clearly benefits from the
contract. In each of these cases, one could also ask whether the other party
would really have accepted the conditions of the contract if it had been com-
pletely free to design it in accordance with its own desires. But there are also
contracts that are deemed to violate the interests of the community at large.
In this category, there is no question that both parties wanted to enter into
the contract, but the contract is believed to be against the moral views that
society holds dear. An obvious example is to have somebody else write your
bachelor thesis (or any other academic paper): both you and your ghost-
writer profit from this, but society finds it unacceptable. The cases that have

come before the courts in the last hundred years offer a nice perspective on
changing views of morality.
In any event until the Summer of Love – and probably for some time
afterwards – agreements promoting ‘sexual immorality’ were, together with
gambling contracts, a main category of contracts held void for violating good
morals. It was considered immoral to let a house be used as a brothel, or for
cohabitants (if married to somebody else) to agree on their mutual financial
obligations in the common household (or, in the language of times foregone
‘to pay a mistress’). Just at the end of the Victorian era, the English court still
held void a contract under which a person was paid a fee by a lonely single to
find her a marriage partner (Hermann v Charlesworth, 1905).
All these examples have become redundant. The frontiers of today’s sexual
morality lie somewhere else. Not many European jurisdictions would still
disallow a claim of a prostitute or a call girl for the agreed price. The English
Court of Appeal also held a contract to advertise for telephone sex lines in
magazines perfectly valid, arguing that, although ‘distasteful’, sex lines were
generally accepted by society (Armhouse Lee Ltd v Chappell, 1996). In the
same vein, not many people have sleepless nights – at least not because of the
infringement of standards of morality – if they are confronted with so-called
‘casual dating’ sites that actively promote adultery under the slogan ‘Life is
short, have a second love.’
The more important cases today are concerned with topics such as surrogate
Surrogate
motherhood and trading in body parts and human blood. In the last 30 years
motherhood cases of surrogate motherhood have come before the courts in a wide variety
of countries. This is the result of better techniques of artificial insemination,
but the phenomenon itself is as old as the Old Testament. In Genesis 16 the
following story is told:
Now Sarah, Abraham’s wife, had borne him no children. But she had an Egyptian
slave named Hagar; so she said to Abraham, “The Lord has kept me from having
children. Go, sleep with my slave; perhaps I can build a family through her.”
Abraham agreed to what Sarah said. So after Abraham had been living in Canaan
ten years, Sarah his wife took her Egyptian slave Hagar and gave her to her husband
to be his wife. He slept with Hagar, and she conceived.
While Hagar was the child’s genetic mother, surrogate motherhood (a woman
agreeing to bear and give birth to a child for a person or a couple with a view
to that person or couple adopting or taking legal custody of the child) today
often consists of carrying a child that is genetically unrelated to the woman

184 · Contract law
who delivers it. Jurisdictions around the world differ widely in their approach
to holding such surrogacy agreements enforceable or not. The French Civil
Code, in a chapter on ‘respect of the human body’ introduced by the French
legislator in 1994, explicitly declares void ‘all agreements relating to procrea-
tion or gestation for the sake of somebody else’ (Art. 16-7 CC). If a surrogacy
agreement (maternité pour autrui) was made and the surrogate mother does
not want to keep the child, the intended parents are even excluded from
the possibility to adopt it. German law is equally strict and introduced in
1998 a new § 1591 BGB, which concisely states: ‘The mother of a child is
the woman who gave birth to it.’ The other extreme is India, where com-
mercial surrogacy (meaning that the surrogate mother receives a fee for her
services) is perfectly legal, making it a leading country in so-called fertility
tourism. Clinics in India even offer full packages for foreigners including the
hiring of Indian surrogate mothers, fertilisation and delivery of the baby for a
price ranging between €15,000 and €90,000. In between these two extremes
are the UK and the Netherlands that allow only altruistic surrogacy, which
means that the intended parents and surrogate mother (draagmoeder) can
validly agree on reimbursement of the latter’s medical and other expenses,
but not on an enforceable obligation of the surrogate mother to give the
newborn to the intended parents or to be paid a fee. While this is established
case law in the Netherlands, the UK adopted legislation on this in the form of
the Surrogacy Arrangements Act 1985, which states:
S. 1A: No surrogacy arrangement is enforceable by or against any of the persons

making it.’
S. 2: No person shall on a commercial basis do any of the following acts in the
United Kingdom, that is –
(a) initiate or take part in any negotiations with a view to the making of a
surrogacy arrangement,
(b) offer or agree to negotiate the making of a surrogacy arrangement, or
(c) compile any information with a view to its use in making, or negotiating the
making of, surrogacy arrangements;
and no person shall in the United Kingdom knowingly cause another to do any of
those acts on a commercial basis.
3. Other contracts
The very nature of an open-ended clause such as public policy or good
morals makes it impossible to list all categories of agreements that might fall
under it. When US Supreme Court justice Potter Stewart asked himself how
to define the open-ended term ‘hardcore pornography’, he replied: ‘I know
it when I see it.’

BOX 10.1
SHOULD A SURROGATE MOTHERHOOD

CONTRACT BE ENFORCEABLE?
Views on the legitimacy of surrogate moth- child’s legal parents. The court, however,
erhood differ widely from one country to recognised Mary Beth as the legal mother
another. The general stance among EU because she gave birth, but William was
Member States is one of disapproval: at awarded legal custody as this was regarded
most the agreement to reimburse medical to be in the child’s best interest. Mary Beth
and other expenses is seen as valid. The idea was allowed to visit the child.
that the intended parents should be able The Baby M decision makes excellent
to enforce the contract and claim ‘back’ reading as it lists all the main arguments
the baby from the woman who gave birth against allowing enforcement of a surro-
is usually regarded as morally and legally gacy contract (and these arguments matter
wrong. But is it? The task of academic regardless of the jurisdiction in which the
lawyers is not to take moral convictions at contract is concluded). Let us have a look at
face value, but to find rational arguments. the court’s arguments (according to Posner
This necessarily involves contrarian thinking: showing ‘a lack of economic sophistication’)
one must argue against the majority view, and at how Posner retorts.
regardless of how unpopular it may be. It is
• Court: allowing the claim would mean
therefore interesting to contrast the oppo-
that the child finds itself immediately
sition against the validity of commercial
after birth in a tug of war between con-
surrogacy with the views of Richard Posner.
tending mother and father. Posner: this
Posner, a former judge and law professor
tug of war is only the result of present
at the University of Chicago, is one of the
legal uncertainty. If it is settled that a sur-
most cited legal authors worldwide. In his
rogate contract can be enforced, the sur-
pioneering textbook on Economic Analysis
rogate mother will no longer challenge
of Law, he takes issue with the famous case
the contract.
of Baby M (1988), in which the Supreme
• Court: the purpose of the surrogacy
Court of New Jersey found the enforcement
contract was to give the father the
of a commercial surrogacy contract against
rights to the child by destroying the
public policy. In this case, William Stern and
rights of the mother. Posner: the court
his wife entered into a surrogacy agreement
overlooks that without a contract no
with Mary Beth Whitehead, a woman they
child would have been born in the first
found through a newspaper advertisement.
place. The purpose of the contract was
The contract held that Mary Beth would
not to destroy the mother’s right, but to
agree to be inseminated with William’s
encourage one woman to help another
sperm, deliver the baby, and then abandon
woman. A contract is in this sense
her parental rights in favour of William’s
immensely productive: it helps to realise
wife. However, Mary Beth decided to keep
something that would otherwise not
the baby and was subsequently sued by
have been possible.
the Stern couple to be recognised as the


186 · Contract law

• Court: allowing surrogacy probably this would not only remedy the short-
means that the baby will go the highest age of adoption babies, but it could also
bidders, regardless of whether they are lead to fewer children being neglected
suited as parents. Posner: unlike paintings by their parents, and to benefits for a
by Van Gogh, there is no fixed supply mother who may not want to be bur-
of babies. Supply will increase if money dened with the need to carry a baby for
can be earned and the ensuing com- nine months. Moreover, an illegal market
petition among surrogate mothers will for babies probably already exists today
force down the price. The court should and would disappear if one could validly
therefore not be worried that adoption is contract about parental rights.
only available to the wealthy (who, inci- • Court: infertile couples with a low
dentally, are also the first to adopt in case income will not find surrogate mothers.
adoption is regulated by the State). Posner: this argument is the ‘jurispru-
• Court: the shortage of babies for adop- dence of envy’. Even if it were true that
tion will lead to middlemen who get poor couples cannot afford the price of a
paid to increase the supply of babies [so surrogate mother, they are not helped by
the type of surrogacy clinics we saw that a rule that prohibits infertile high income
exist in India, JMS]. Posner: this is cer- couples from hiring one.
tainly true, but this is not an argument • Court: ‘There are, in short, values that
against but for baby brokers. There are society deems more important than
not enough babies offered for adop- granting to wealth whatever it can buy,
tion precisely because middlemen are be it labor, love, or life.’ Posner: it is not
not allowed to bring together demand clear how these values are served by
and supply and are not allowed to be refusing to allow the enforcement of a
paid for this. It must be noted that, in surrogacy contract.
one of the most famous law articles of
One need not agree with all of Posner’s
the 1970s, Posner and his colleague
counterarguments to see that there is
Elisabeth Landes argued in favour of cre-
(much) more to prohibiting surrogacy con-
ating a market for babies. If a mother is
tracts than mere ‘morality’.
allowed to put up her child for adoption,
B. The effect of a prohibited contract; recovery of

money or goods
It has already been pointed out that illegality does not necessarily mean that
a contract is void. We saw that a statutory provision sometimes only aims to
protect one party to the contract, in which case it is only avoidable by this
party (e.g. when a consumer suretyship is not made in writing). We also saw
that a prohibition on making a certain type of contract does not always aim
to invalidate the contract itself (meaning the contract is neither void nor
voidable), as in case of legislation restricting shopping hours. But if the con-
tract is void or avoided for illegality, the consequence is that no party can sue

for performance or for damages resulting from breach of contract. This is a

logical consequence: State courts cannot be expected to assist a person who
bases their claim on an illegal or immoral act.
However, a practical difficulty arises if a party (or both parties) have already
performed the prohibited contract. The normal consequence of a contract
being void or avoided (for example on the ground of legal incapacity or
mistake) is that each of the parties can claim restitution of what it has already
supplied under the contract. So in case of a sales contract the buyer can
recover the money paid and the seller can claim the goods back. But this
is not the self-evident outcome in case of a prohibited contract. The mafia
boss who paid the hitman for his much-needed services should not be able
to recover the paid sum. The Romans certainly thought so. The Digest (the
most important part of the Corpus Iuris Civilis) devotes an entire title (Book
12, Title 5) to ‘The action for recovery if the cause is immoral or unlawful.’
Here we find the views of the great Roman jurists Julius Paulus and Domitius
Ulpianus on the consequences of respectively bribing a judge, sexual immo-
rality and paying hush money to an unwelcome spectator:
3. Paulus (…): Where both the giver and the recipient are guilty of immoral
conduct, we hold that no action lies for recovery as, for instance, where money is
paid in order to pervert a judgment.
4. Ulpianus (…): The same applies where something is given for sexual
malpractice, or where someone caught in adultery buys his way out: no action for
recovery will then be available (…).
This rule of Roman law is still known today as the in pari delicto rule: in cases
In pari delicto
where both parties have unclean hands because they willingly acted against a
statute or against public policy or good morals, they cannot recover anything.
This rule can be found in the German BGB (§ 817) and is accepted in most
other jurisdictions as well. The lucky consequence of the in pari delicto rule is
that if only one of the parties is primarily responsible for the illegality, and the
other party is relatively innocent, the latter’s claim for restitution is allowed.
An example is provided by the limitations that many jurisdictions pose on
the payment of so-called ‘key money’ when renting a house or a room. A
tenant must naturally pay the rent, and possibly a refundable deposit not
exceeding a reasonable amount (for example two or three months of rent),
but the payment of a non-refundable sum to the landlord when the lease
is concluded is a fatal recipe for abuse and therefore often prohibited. Even
if the tenant knew that this practice is illegal when he paid the key money,
he can reclaim the money. His ‘fault’ is only little compared to that of the
landlord.

188 · Contract law
The extent to which both parties were at fault or intended to infringe upon
Factors
statutory or fundamental norms is not the only factor that plays a role in
deciding whether or not restitution should be granted. Another relevant
factor is the purpose of the rule. One can well argue that a difference must be
made between a contract that amounts to a gross infringement of fundamen-
tal values (the hitman’s agreement to kill someone) and a contract that only
violates an administrative provision (such as a provision on rent control or
the need for a licence). This multi-factor approach, which makes it depend-
ent on a range of factors whether a claim for recovery is possible, is gradu-
ally becoming the accepted view in the whole of Europe. Art. 15:104 PECL
reflects the progressive solution that we need in this complicated matter.
(1) When a contract is rendered ineffective under Articles 15:101 or 15:102, either
party may claim restitution of whatever that party has supplied under the contract,
provided that, where appropriate, concurrent restitution is made of whatever has
been received.
(2) When considering whether to grant restitution under paragraph (1), and what
concurrent restitution, if any, would be appropriate, regard must be had to the
factors referred to in Article 15:102 (3).
(3) An award of restitution may be refused to a party who knew or ought to have
known of the reason for the ineffectiveness.
(4) If restitution cannot be made in kind for any reason, a reasonable sum must be
paid for what has been received.
The factors referred to in Art. 15:102 (3) are the following:
(a) the purpose of the rule which has been infringed;

(b) the category of persons for whose protection the rule exists;
(c) any sanction that may be imposed under the rule infringed;
(d) the seriousness of the infringement;
(e) whether the infringement was intentional; and
(f) the closeness of the relationship between the infringement and the contract.
The provision no longer starts from the in pari delicto rule, but states instead
that a claim for restitution must be available if this is appropriate, which is
made dependent on six factors to be weighed in the circumstances of the
case.
TOPICS FOR REVIEW
Prohibited contracts
Statutory illegality
Contracts against public policy or good morals

Prohibited formation and prohibited performance

Illegal motive unknown to the other party
Agreements prohibited under Art. 101 TFEU
Public policy or good morals as an open-ended concept
Agreements violating a person’s personal, artistic or economic freedom
Waiver of fundamental rights
Contracts in restraint of trade and non-competition clauses
Surrogate motherhood contracts
Arguments pro and contra the enforceability of surrogate motherhood contracts
Effects of prohibited contracts
Recovery of money or goods
In pari delicto rule
FURTHER READING
– Hein Kötz, European Contract Law (translated by Tony Weir and Gill Mertens), 2nd ed., Oxford
(Oxford University Press) 1997, Chapter 7.
– Ewan McKendrick, Contract Law, 12th ed., Basingstoke (Palgrave Macmillan) 2017, Chapter
15.
– Hector L. MacQueen, Towards a European Civil Code, 4th ed., Nijmegen (Ars Aequi) 2011,
Chapter 24.
– Richard A. Posner and Elisabeth M. Landes, ‘The Economics of the Baby Shortage’, Journal of
Legal Studies 7 (1978), 323 ff.
– Richard A. Posner, Economic Analysis of Law, 9th ed., New York (Wolters Kluwer) 2014,
Chapter 5.

Part Five
Contractual remedies
This part examines the contractual remedies, which are available when the
other party does not perform its contractual obligations. In a normal situa-
tion both parties perform in conformity with what they agreed upon, leading
to discharge of the contract by performance. But it can also happen that a
party is in breach of what was agreed upon. The tenant can refuse to leave
the apartment, the hairdresser can set up shop next to his former employer,
and the ordered products may not be delivered on time, or not at all. This
raises the question of what the disappointed creditor can do. Depending on
whether the exact requirements for each of these remedies are met, there are
five possible actions:
z bring a claim for performance of the contract and, in case of consumer

sale, bring a claim for price reduction (Chapter 11);
z claim damages for non-performance (Chapter 12);
z terminate the contract, possibly preceded by withholding perfor-
mance (Chapter 13).

11
Performance
CHAPTER OVERVIEW
The question addressed in this chapter is whether a party to a contract can

compel the other party to perform in natura. While in civil law jurisdic-
tions there is no doubt whatsoever that performance is a right of the cred-
itor, this is different in English law, which regards specific performance as
an exceptional remedy that is only available if a claim for damages would
not do adequate justice. This chapter examines:
• the availability of the action for performance in civil law and common
law;
• how to execute a court order for performance;
• when the action for performance cannot be brought because of impos-
sibility (frustration) or because it requires personal services or constant
supervision of compliance by the court;
• when unforeseen circumstances can be invoked;
• repair, replacement and price reduction in consumer sales as laid down
in the Consumer Sales Directive;
• the solution proposed by the PECL.
The principle of binding force of the contract would be futile in cases where
a party could escape from being bound to its agreement. However, there are
two fundamentally different ways in which one can reason about what it
means to be ‘bound’ to a contract.
First, one can argue that this must mean that the creditor can go to court and
Civil law actually force the debtor to perform in natura; so he can obtain a court order
that the goods must be delivered, that the former employee must refrain from
competition, or that the contractor must build the house. The position of the
civil law is that binding force of the contract means that in principle the credi-
tor is allowed to claim performance in any case. Civil law jurisdictions thus
tend to regard a contract as a moral device: promises must be kept.
Second, one can argue that binding force means primarily that the credi-
Common law tor is allowed to claim monetary compensation where the debtor does not

194 · Contract law
perform. If A agrees to sell two tons of bananas or 100 barrels of oil to B,

and A does not deliver, then why would B not be satisfied with obtaining
damages? If A compensates B for the costs he incurred in concluding the
contract as well as for the lost profits, this prevents A from having to find
substitute goods to deliver to B while B obtains the money value of the
contract. This is, of course, different if a party has an interest in obtaining a
specific good (like a house or a rare painting), but in the case of products
that are readily available on the market, this is a commercially viable solu-
tion. This is the position of English law. In his famous book The Common
Law (published in 1881), the American jurist Oliver Wendell Holmes put
it like this: ‘The only universal consequence of a legally binding promise is,
that the law makes the promisor pay damages if the promised event does
not come to pass. In every case it leaves him free (…) to break his contract
if he chooses’. This quote reveals that in the common law a contract is not
primarily seen as a moral device, but as an economic one. If one assumes
that a contract is concluded to make a profit, it is just as good (and perhaps
even better) to get the money value as it is to obtain performance in natura.
This difference between the civil law and the common law approach to per-
formance sets the agenda for this chapter. First, several civil law jurisdictions
are examined (A), followed by a survey of English law (B). Separate attention
is paid to the doctrine of unforeseen circumstances (C) and to the European
solution in the PECL and in the European directive 2019/771 on sale of
goods (D).
A. Civil law: Performance as the routine remedy

1. General
In civil law jurisdictions it is self-evident that the contracting parties can
claim performance (exécution en nature, Erfüllung, nakoming) of the contract.
This is so obvious that not all civil codes have, in fact, explicitly codified the
rule. In Germany it can be derived from § 241 (1) BGB, which states that the
creditor is entitled ‘to demand performance from the debtor’ while accord-
ing to Art. 1221 of the French Civil Code a party can require the other ‘to
perform in kind unless performance is impossible.’
It is of course dependent on the contract itself at what point such a claim for
performance can be brought. If the parties have agreed that delivery is due
on 1 May, it is only from this day onward that performance can be claimed.
The law supplements the gap in case no time was fixed for performance. For
example, § 271 (1) BGB and Art. 6:38 BW specify that performance can

Performance · 195
then be demanded ‘immediately’, which means that the debtor has as much
time as he reasonably needs to carry out his obligations (a similar rule is pro-
vided by Art. 7:102 PECL).
The general availability of the claim for performance implies that it is dif-
Futile defect
ficult for the debtor to argue that the creditor has only little interest in per-
formance compared to the disproportionate efforts that the debtor may have
to go through. The performance must in general entirely match what the
parties agreed upon. In a Dutch case in which the tiles of the façade of a
newly built office building showed cosmetic defects through corrosion the
court still allowed a claim for performance (meaning that the debtor had
to replace the tiles), even though the costs of replacement amounted to Fl.
6 million (€2,730,000) and the defects were hardly visibly from the street
(Multi Vastgoed v Nethou, 2001). French courts also used to allow a claim for
performance in cases where the creditor seemed to suffer only little harm
or inconvenience. In a case in which a swimming pool was built with three
instead of four steps, the contractor could still be obliged to perform correctly
(Piscine, 1984). In the extreme case of Belhadj v Les Batisseurs du Grand Delta
(2005), a family house had been built that was 33 cm lower than agreed upon.
This did not make it unfit for its purpose and use, but still the court allowed
the claim to demolish and rebuild the house. This decision seems contrary
to what reasonableness and fairness require in the contractual relationship,
and it would probably be decided differently today. The new Art. 1221 CC
(introduced in 2016) now requires the court to deny a claim for performance
if there is a manifest disproportion between its cost to the debtor and its inter-
est for the creditor. The German § 275 BGB also offers space for denying the
claim in case of a futile defect. It states that the debtor may refuse performance
‘to the extent that performance requires expense and effort which, taking into
account the contents of the obligation and the requirements of good faith, is
grossly disproportionate to the interest in performance of the creditor’.
2. Impossibility of performance
Even if the claim for performance is in principle always available in a civil law
jurisdiction, without the need for a requirement other than that the obliga-
tion is due, this does not mean that claiming performance is always useful.
The court will naturally deny the claim if performance is impossible. If a
house burns down the day before it has to be delivered to the buyer, it would
be pointless for the court to order the seller to perform. It may be possible
to bring a claim for damages or termination (if the requirements for these
claims are met), but performance is no longer possible. Lawyers distinguish
between different types of impossibility.

196 · Contract law
BOX 11.1
HOW TO ENFORCE PERFORMANCE?

The creditor who is confronted with an himself, while the second is to have a third
unwilling debtor cannot obtain the neces- party perform in his place.
sary performance by way of self-help: for The usual way to make an unwilling
obvious reasons the law does not allow debtor perform by himself is to impose a
creditors to confront the defaulting party to monetary penalty for non-compliance with
‘convince’ the latter of the need to perform the court order, often to be paid by each
by simply taking the goods or throwing day or week of delay. Thus, the court can
out the tenant. This is why the creditor first order the debtor to pay €1,000 for each
needs to obtain a court order in which the day that he refuses to deliver the goods
debtor is ordered to perform his obligations. or write a reference for his employee.
The relevant rules are to be found in the This non-compliance penalty (astreinte,
law of civil procedure. Thus, § 887 (1) of Ordnungsgeld, dwangsom), usually very
the German Code of Civil Procedure (ZPO) effective as a threat of punishment, is to
states that if the debtor does not perform, be paid to the creditor in France and the
the creditor ‘is to be authorised by the Netherlands, but directly to the State in
court to have performance rendered at the Germany. As a measure of last resort the
expense of the debtor’, while Art. L111-1 German and Dutch court may even be
of the French Code on Civil Execution prepared to imprison an unwilling debtor
Procedures confirms that ‘each creditor until he has performed (Ordnungshaft,
can, under the conditions laid down by law, lijfsdwang), a method that has long been
force his defaulting debtor to perform his abolished in France. English law regards
obligations’. the non-compliance with a court order as
An important question is how the cred- a case of contempt of court, which can be
itor can exactly obtain what he is entitled penalised with imprisonment (committal)
to if the debtor refuses to comply with the or a fine. It is likely that one of the reasons
court order. Generally this is not a problem why English law is reluctant to allow a claim
in cases where the claim is for the payment for specific performance lies in the fact that
of money (such as the price for purchased these quasi-criminal procedures are simply
goods or the interest on a loan): a bailiff too powerful: if enforcement can only take
(huissier, Gerichtsvollzieher, deurwaarder) is place in a such a heavy-handed way, a court
then able to seize and sell the property of is less willing to allow it.
the debtor and give the proceeds of the sale Performance by a third party at the
to the creditor. Matters are equally simple – debtor’s expense comes in useful if perfor-
at least for the law –if the debtor is a tenant mance can easily be rendered by a party
and refuses to leave the house. In that case, other than the debtor. If a contractor fails
the bailiff can oblige the debtor to leave, if to construct a house or install a kitchen, or
need be with the help of the police. For per- if an iPhone repair shop does not do the
formance other than by payment of money job, enforcement can be effected by having
or eviction, two different methods exist. somebody else perform instead at the cost
The first is to make the defendant perform of the debtor.

Performance · 197
Absolute
First, the most obvious type of case in which performance is impossible
impossibility is that of absolute impossibility. This means that performance is objectively
(‘logically’) impossible. Apart from the example of the burnt-down house,
one can think of a car dealer who promises to service a car that is wrecked in a
crash just before the agreed day on which the maintenance would take place.
Another example is when a party needs to perform the contract personally,
but is unable to do so (the lead singer of the group dies of an overdose or
the hired architect goes insane). A contract can also require a party to do
something that was already achieved: I hire a plumber to unplug my sink, but
before she arrives a plunger has already done the job. A final example is when
the contract fixes a time for performance and the time has elapsed. A DJ
who is to perform in Amsterdam on King’s Day can no longer perform if the
due date has passed. The classic case is that of ordering a wedding dress. If
Alfredo agrees to deliver a snow-white fairy tale bridal to Liz for her wedding
with Rita on 8 August 2008, performance has become absolutely impossible
after that date (at least if we assume that Liz does not want to use the dress for
her second, third or fourth marriage).
When courts have to decide whether performance is absolutely impossible

Generic goods
in case of sale of goods, they can rely on a useful rule of thumb that already
existed in Roman times. This rule of genus non perit means that in cases where
so-called generic goods are sold, there can never be a case of absolute impossibil-
ity. Generic goods are goods that are only defined on the basis of their quantity,
type, quality or weight (five bottles of Tequila, a Saab 9-3 Cabrio, a golden
ring, ten tons of potatoes). The seller is always expected to find similar goods,
even if the specific goods she had in mind to sell no longer exist. Products such
as bananas, oil, seeds, wheat and stones can be found elsewhere, while the
original manufacturer of T-shirts, chairs and tiles can be traded in for some-
body else – the higher costs naturally coming at the risk of the seller. The genus
non perit rule is thus one instance of a more general principle, namely that the
impossibility of performance only exists if any type of performance has become
impossible. The agency that promised to provide ‘a pianist’ (of average quality)
can, in case of illness, still find somebody else. And if you promise to transport
goods from Barcelona to Warsaw, you are expected to find means of alternative
transport in case the Catalan air traffic controllers go on strike.
All this is different in case of non-generic (or specific) goods. If I buy a work
Specific goods
of art by Damien Hirst, hire Armin van Buuren to play at my birthday, or have
Santiago Calatrava build my new house, these are obligations that can only
be performed by these specific debtors. Hence, absolute impossibility of per-
formance will follow from the object’s decay and from the DJ and architect
falling ill.

198 · Contract law
Until a hundred years ago or so, only absolute impossibility was accepted by
Relative
the law as a reason for not being able to claim performance. This was in line
impossibility with the liberal climate of the nineteenth century, in which the bindingness of
a contract was almost absolute and the interest of the creditor in performance
prevailed over that of the debtor to escape if performance would be unreason-
ably difficult. This has changed. A second type of impossibility of performance
is recognised today under the heading of relative impossibility. If Samantha’s
ring slides off of her finger while on a boat trip on the North Sea, the jeweller in
Paris to whom she sold the ring cannot claim delivery. In principle it would be
possible for Samantha to organise a search and rescue operation with pontoons
and divers, but the time and money this would take would be so dispropor-
tionate to the value of the ring that this is not what she is reasonably expected
to do. It may be that the loss of the ring was caused by her careless behaviour,
but this then only allows a claim for damages and not for performance.
It is evident that the law cannot easily accept a case of relative impossibility
as this would violate the binding force of contract. Legislators and courts
throughout the world have tried to find a formula that expresses when per-
formance can no longer be demanded. Article 9:102 PECL requires that
performance would cause the debtor ‘unreasonable effort or expense’, Art.
7.2.2 PICC that performance is ‘unreasonably burdensome or expensive’, the
American Restatement (Second) of Contracts an ‘unreasonable difficulty,
Practical expense, injury or loss’ and the explanatory memorandum to the Dutch Civil
impossibility Code demands ‘a so exceptional effort or sacrifice that performance is prac-
tically impossible’. Finally, § 275 (2) of the German BGB allows the debtor
to refuse performance if this requires expense and effort of the debtor that
is ‘grossly disproportionate’ to the interest of the creditor in performance.
These are all necessarily imperfect formulations that only beget their true
meaning when applied to real cases. These cases show that there is a thin line
between performance that is difficult and performance that is too difficult.
Sometimes a debtor argues that performance of the contract would make him
go bankrupt, or in any event cause great financial difficulty. This is not an
argument that courts are willing to accept. A purely financial reason does not
amount to impossibility. The policy reason behind this must be that there is an
alternative way to deal with financial difficulties of the debtor, namely insol-
vency law. Rather than allow the debtor not to perform his obligations towards
one specific claimant, insolvency will allow the law to consider the interests of
all creditors as well as that of the debtor in a special procedure created for this.
Moral The cases discussed until now are sometimes referred to as practical impossi-
impossibility bility. They concern situations in which performance has become so onerous

Performance · 199
that it can no longer be expected from the debtor. Two other categories of
relative impossibility are moral and legal impossibility. In a case of moral
impossibility performance by the debtor is not possible without unreason-
able danger to his own (or another’s) life, health or freedom. The textbook
example is that of an opera singer who refuses to sing at the recital because
his child is seriously ill. In the same vein, an employer cannot oblige her
employees to remain at work if an epidemic disease has broken out or if tem-
peratures at the office are too high to bear. An illustrative case from English
law – which, as we shall see below, also accepts impossibility as a valid excuse
for non-performance – is Liston v SS Carpathian (Owners) (1915). Here, the
claimants were sailors on a trip from England to Port Arthur. Upon arrival
in the port, located in Texas, the sailors heard that the First World War had
broken out and were therefore allowed to refuse to sail back to Europe. In a
German case (Wehrdienst im Ausland, 1983) a Turk living and working in
Germany was allowed to stay away from work due to moral impossibility: he
had to perform his military service in Turkey and failure to do so would have
meant prosecution and possibly even the death penalty.
An interesting question is whether moral objections could also be accepted as

constituting a case of moral impossibility. For example, can someone refuse
to pay the electricity bill if they are against nuclear energy? Or not pay the
water bill because it was cleaned using chemical techniques that were tested
on animals? It is clear that this question can only arise if the consumer lacks
a choice as to the available suppliers. If, for example, an electricity company
exists that does not make use of nuclear energy, the morally sensitive con-
sumer is expected to choose this company. But also in case of a monopolistic
supplier it is difficult to accept impossibility because it was the customer
himself who deliberately chose to conclude the contract, thus making his
moral objections necessarily self-induced.
A final category of relative impossibility concerns cases of legal impossibility.

Legal
It was seen in Chapter 10 that performance of the contract is sometimes pro-
impossibility hibited by statute, public policy or good morals. This does not render perfor-
mance absolutely impossible, but it does make it prohibited. Also in this case
performance cannot reasonably be expected from the debtor.
3. Personal services
Sometimes contracts call for services to be delivered by a party who is the only
one able to provide them. A famous photographer can agree to make a series
of photos of a wealthy businesswoman or a scientist can contract with a pub-
lisher to write a book on the Higgs particle. Can such contracts for personal

200 · Contract law
services be enforced in the courts? All the world’s legal systems answer in the
negative, allowing the drafters of the DCFR to formulate a common rule in
Art. III-3:302 (3): ‘Specific performance cannot (…) be enforced where:
(…) c. performance would be of such a personal character that it would be
unreasonable to enforce it.’ Three reasons can be given for this. First, to force
the debtor to perform personal services or work is seen as a too-severe interfer-
ence with the debtor’s personal liberty. Second, when compelled to perform
such services, the debtor is not likely to deliver high-quality work. And third,
the court will find it difficult to determine whether the debtor performed its
obligations in the proper way. This means that the likes of David Guetta and
Jürgen Habermas cannot be ordered by the court to show their artistic and
academic talents. If this seems harsh on the organiser of the concert or on the
publisher, one must realise that it may be possible to claim damages (Chapter
12) or terminate the contract (Chapter 13). In addition, the court can help
the creditor by issuing a so-called injunction (an order not to do a particular
thing), which forbids the debtor from performing a similar obligation at the
same time for somebody else. Thus, if Guetta refuses to stand by his original
agreement to perform on Ibiza because he was asked to do a better-paid gig in
Berlin, the court can prevent such opportunistic behaviour by prohibiting his
performance. When the German singer Johanna Wagner broke her contract
to perform at Her Majesty’s Theatre in London’s West End because Covent
Garden offered her more money, Lord Chancellor St Leonards prohibited her
from performing anywhere other than in Her Majesty’s Theatre:
It is true that I have not the means of compelling her to sing, but she has no cause
of complaint if I compel her to abstain from the commission of an act which she
has bound herself not to do, and thus possibly cause her to fulfil her engagement’
(Lumley v Wagner, 1852).
B. English law: Specific performance as an

exceptional remedy
It has already been pointed out that English law adopts a different position
Unique goods
regarding the claim for performance of the contract. In English common law
such a claim does not exist. In equity, however, the court has the discretionary
power in exceptional cases to grant a claim for so-called specific performance.
The criterion is whether a common law remedy (in particular the claim for
damages) would not be an adequate remedy to do justice to the obligee. Thus,
if the creditor can easily find other goods that replace the performance (as in
the case of generic goods), no specific performance can be claimed. This
is different in case of unique goods, such as a particular piece of art, a spe-
cifically designed machine, or a teddy bear with sentimental value. In practice

Performance · 201
specific performance is mainly applied in case of sale of land and buildings.

The assumption here is that the interest of the creditor can then not be esti-
mated in money terms because each immovable is seen as unique. Section
52 of the Sale of Goods Act summarises the English position: ‘In any action
for breach of contract to deliver specific or ascertained goods the court may,
if it thinks fit, on the plaintiff ’s application, by its judgment or decree direct
that the contract shall be performed specifically.’ English law also recognises
Impossibility
that no claim lies in case of personal services (such as a contract of employ-
ment) and if performance is impossible. Impossibility is a case of frustration
and exists if, after the contract was concluded, an event occurs which makes
performance of the contract impossible. The English doctrine of frustration
covers not only impossibility, but also cases that would fall under unforeseen
circumstances in the civil law (although it is very rare that an English court
would recognise unforeseen circumstances as a ground for escaping from
the contract; see below, subsection C). A paradigmatic case of impossibility
is Taylor v Caldwell (1863), in which the parties had entered into a contract
for use of the Surrey Music Hall in London for a number of concerts. Shortly
before the date of the first concert the music hall was destroyed by fire, clearly
leading to the impossibility to perform and hence to frustration.
Similar to the civil law, the mere fact that performance has become more
Practical
onerous is not likely to amount to frustration because of practical impossibil-
impossibility ity. In the case of Tsakiroglou Co Ltd v Noblee Thorl GmbH (1962), a contract
had been concluded for the shipping of 300 tons of Sudanese peanuts from
Port Sudan to Hamburg. Both parties assumed that the ship could navigate
through the Suez Canal, but the Canal was blocked as a result of the second
Arab-Israeli War of 1956. The only way to deliver the peanuts within the
agreed upon time was to go via the Cape of Good Hope, a distance three times
as long as what was originally envisaged. The debtor argued that the contract
had been frustrated and refused to deliver the goods. However, the court
found that it was still possible to perform: the fact that it was more difficult
and costly did not amount to frustration.
Even if a claim for damages would not do perfect justice, performance does not
Continuous
duties require personal services and is not impossible, English law is still hesitant to
grant a decree of specific performance in case the execution of the judgment
would be difficult. This is in particular the case if the contract requires continu-
ous duties, as in case of long-term contracts. In Co-operative Insurance Society Ltd
v Argyll Stores (Holdings) Ltd (1997), for example, the court refused to compel
a supermarket to carry on a tenancy. In 1979 Co-op had let the main unit of
the Hillsborough Shopping Centre in Sheffield to Argyll for use as a Safeway
supermarket for a period of 35 years. The contract explicitly stated that Argyll

202 · Contract law
was ‘to keep open the demised premises for retail trade’ during this period.
This provision (a ‘keep-open covenant’) was motivated by the wish of Co-op
to have one big ‘anchor’ shop in the shopping centre that could attract many
customers and thus also generate business for the smaller shops in the centre.
When in 1995 Argyll decided to close the shop because it was no longer profit-
able, Co-op demanded a court order for specific performance of the keep-open
agreement. Unlike the Court of Appeal, the House of Lords did not grant the
order. It found that an order for specific performance could not be granted in
order to compel someone to carry on a business as this would require constant
supervision by the court. This would be different if the contract is for a certain
result because then the court can easily establish whether this is reached or not.
One of the other arguments used by the court was that it is not in the public
interest to require someone to carry on business at a loss if there is a plausible
alternative way of providing compensation (namely a claim in damages). If a
party were ordered to run a business, it would effectively be locked into a hostile
relationship, which is likely to lead to a flow of complaints, solicitors’ letters and
new court cases. This is, however, not the only way to deal with keep-open cov-
enants. In Scots law, for example, such agreements can be enforced.
C. Unforeseen circumstances
In Chapter 8 the doctrine of unforeseen circumstances (‘hardship’ or ‘super-
vening events’) was mentioned as an application of the principle of good
faith. There is a thin line between these unforeseen circumstances and cases
of practical impossibility. In theory the difference is clear: while practi-
cal impossibility renders performance reasonably impossible (the golden
ring lies at the bottom of the sea), unforeseen circumstances only render it
(much) more difficult or expensive (the market for gold unexpectedly soars).
But in practice the difference is difficult to make. This explains why English
law usually lumps the two situations together under the heading of frustration
(because the purpose of the transaction is frustrated, both in case of impos-
sibility to perform and in case of excessive hardship). Other jurisdictions dis-
tinguish between the two, often leading to difficult questions of demarcation.
English law does not allow the court to amend or put an end to the contract
only because the contract has become more onerous as a result of superven-
ing events. As was seen above in the case of the Tsakiroglou, English courts
are very hesitant to invoke the doctrine of frustration in cases other than
of impossibility. It is only allowed if the supervening event radically or fun-
damentally changes the nature of the performance. For example, the High
Court recently held that Brexit does not frustrate a 25-year lease of premises
in Canary Wharf worth £500 million of a European agency having to move its

Performance · 203
headquarters to another member state (Canary Wharf v European Medicines

Agency, 2019). Case law in which frustration is recognised is extremely rare,
but the position can be illustrated with two well-known cases.
The first is one of the unusual cases in which frustration was allowed because
Frustration
of a supervening events In Krell v Henry (1903) Henry had hired a room for
two days to watch the procession for the coronation of King Edward VII as
the successor of Queen Victoria. Shortly after his accession, Edward fell ill
and the coronation was postponed. Krell claimed payment, but the court held
that the purpose of the contract was frustrated because of ‘the cessation or
non-existence of an express condition or state of things, going to the root of
the contract, and essential to its performance’. The coronation was so central
to the agreement that the parties were no longer bound when it was cancelled.
The second case is Davis Contractors Ltd v Fareham Urban District Council
(1956). Davis had agreed to build 78 houses for Fareham for £94,000. The
parties thought that it would take eight months to carry out the work, but a
lack of skilled labour led to a delay of 14 months and £20,000 in extra costs.
Davis’s argument that the contract had been frustrated was rejected. This was
simply a contract that turned out to be a bad deal for Davis, but that could
also have worked out the other way if he had been able to finish the contract
in less than eight months. Radcliffe LJ held:
It is not hardship or inconvenience or material loss itself which calls the principle
of frustration into play. There must be as well a change in the significance of the
obligation that the thing undertaken would, if performed, be a different thing from
that contracted for.
The position of English law is not as harsh as it seems. The legal rules on
Clause
impossibility, unforeseen circumstances and frustration are all default rules
that parties can set aside when concluding their contract. In practice parties in
any commercial contract of some value, in particular if long-term, will include
a clause on the impact of unexpected events. Such a force majeure clause could
read in this way: ‘A party to this contract shall not be liable in the event of
non-performance of any obligation under this contract by reason of strikes,
fire, disease, Act of God, and any other incident of any nature beyond the
control of the relevant party.’ The clause could also include an obligation to
renegotiate the contract to deal with the hardship (in which case one usually
speaks of a hardship clause). The English reluctance to allow a party to escape
from an onerous contract can be explained from this: if parties can contractu-
ally provide for unforeseen circumstances, it comes at their risk if they do not.
Unlike English law, French, German and Dutch law all accept unforeseen
Civil law circumstances as a ground for termination or adaptation of the contract

204 · Contract law
next to the impossibility to perform. These imprévision, Störung der

Geschäftsgrundlage (interference with the basis of the contract) and onvoorz-
iene omstandigheden all have an explicit basis in the civil code:
Art. 1195 CC: ‘If a change of circumstances unforeseeable at the time of the
conclusion of the contract renders performance excessively onerous for a party
who had not accepted the risk of such a change, that party may ask the other
contracting party to renegotiate the contract. The first party must continue to
perform his obligations during renegotiation.
In case of refusal or failure of renegotiations, the parties may agree to terminate the
contract from the date and on the conditions which they determine, or by a common
agreement ask the court to adapt the contract. In the absence of an agreement within
a reasonable time, the court may, on the request of a party, revise the contract or put
an end to it, from a date and subject to such conditions as it shall determine.’
§ 313 BGB: ‘1. If circumstances upon which a contract was based have significantly
changed since the contract was entered into and if the parties would not have
entered into the contract or would have entered into it upon different terms if they
had foreseen this change, adaptation of the contract may be demanded to the extent
that, taking account all the circumstances of the specific case, in particular the
contractual or statutory distribution of risk, one of the parties cannot reasonably be
expected to continue to be bound to the contract without adaptation.
2. It is equivalent to a change of circumstances if material assumptions that have
become the basis of the contract turn out to be incorrect.
3. If adaptation of the contract is not possible or cannot reasonably be imposed
on one party, the disadvantaged party may terminate the contract. In the case of a
contract for the performance of recurring obligations, the right to terminate with
notice takes the place of the right to terminate.’
Art. 6:258 BW: ‘1. Upon the demand of one of the parties, the court may adapt
the effects of the contract or terminate the contract in whole or in part on the
basis of unforeseen circumstances which are of such a nature that the other party,
according to criteria of reasonableness and fairness, may not expect that the
contract be maintained in an unmodified form. The court may give retroactive
effect to the adaptation or termination.
2. The adaptation or termination of the contract is not granted to the extent that
the party invoking the circumstances, in view of the nature of the contract or
common opinion, should come for account of the party who invokes them.
(…).
The great advantage of the civil law approach is that it allows the court not
only to terminate, but also to amend the contract. Frustration in English law

Performance · 205
automatically ends the contract, no matter whether the parties want this or
not. The new French Art. 1195 CC (inspired by Articles 6:111 PECL and
6.2.3 PICC) goes even further and requires that the parties first enter into
negotiations about the adaptation or termination of the contract. The court
is only allowed to step in if they do not reach agreement about new condi-
tions or about how to end the contract.
BOX 11.2
COVID AND CONTRACTS: HOW TO SHARE THE

BURDEN?
In 2020, the world was hit by COVID-19. The risk? While parties already have to take into
spread of the coronavirus prompted national account each other’s interests as a result of
governments to close shops, restaurants and having entered into the contract, a sudden
schools and take other restrictive measures. event like a pandemic, that a reasonable
Events were cancelled and international person did not have to foresee, reinforces
travelling became virtually impossible. This the need for solidarity. The pandemic
situation invokes a plethora of questions, equally hits the consumer and the gym, the
also for contract lawyers. Should I continue tourist and the holiday rental, and the res-
to pay for my gym membership? Can I get taurant owner and the landlord. This calls
rid of a rented holiday house in Portugal? for renegotiation and adaptation of existing
Can a restaurant owner claim a reduction of contracts, rather than for making one sole
the rent she is paying? In times like these the party suffer the consequences. It is not just
legal doctrines of impossibility, unforeseen to put the burden on one party alone.
circumstances, force majeure and frustration This ‘share the burden’ approach was
must show what they are worth. applied in the first few Dutch court cases
As always, the contract itself is the dealing with the effects of corona. In the
first point of reference. Things are clear if case of Palace Hotel v Deka Immobilien
my contract with the local gym says I am (2020), one party decided to close its luxury
allowed to end the contract within one hotel, restaurants and shops in Amsterdam
month, or the holiday rental can be can- due to an almost complete lack of guests.
celled up until three days before arrival. It subsequently claimed a reduction of rent
But how about the month in which I could from its landlord. The court, basing its deci-
not do my daily workout? And what if sion on Art. 6:258 BW in summary proceed-
borders were closed just before my arrival ings, held that parties were to share the loss,
in Albufeira? Can I claim back any money? meaning only half the monthly rent was due.
No doubt these are cases of impossibility Some jurisdictions choose to adopt
to perform the contract; there is also little special legislation. Germany, for example,
doubt that a pandemic of this magnitude adopted a new provision § 240 EG BGB that
qualifies as unforeseen circumstances or allows consumers and small businesses to
force majeure. However, the underlying refuse performance of long-term contracts
question when applying any legal doctrine concluded before 8 March 2020 if neces-
to this situation, is who should bear the sary to ensure the adequate subsistence of


206 · Contract law

the consumer (think of rental and energy special provisions to prohibit landlords from
contracts) or the economic basis of the evicting their tenants in the case of non-
business. Several countries, including the payment of rent.
UK in its Coronavirus Act 2020, introduced
D. European principles and the Consumer Sales

Directive
It seems that the civil law and common law approaches to performance of
the contract differ widely. However, the rift between the two legal families
may not be as great as it appears. It was seen that in the civil law, the claim for
specific performance cannot be brought in cases of impossibility or personal
services. And even if the possibility does exist, it is likely that a commercial
party will often prefer to claim damages instead of performance because this
may be a much quicker and therefore more effective remedy than forcing the
debtor to execute a court order. The remaining difference between English
law and the law in the rest of Europe seems to centre on one type of case: the
sale of generic goods. If A sells B a number of ordinary chairs and A refuses
to deliver, B cannot require performance by A under English law, while this
possibility does exist in a civil law jurisdiction.
This difference necessitated a choice by the drafters of European principles.

PECL Article 9:102 PECL reads:
(1) The aggrieved party is entitled to specific performance of an obligation other
than one to pay money, including the remedying of a defective performance.
(2) Specific performance cannot, however, be obtained where:
(a) performance would be unlawful or impossible; or
(b) performance would cause the obligor unreasonable effort or expense; or
(c) the performance consists in the provision of services or work of a personal
character or depends upon a personal relationship, or
(d) the aggrieved party may reasonably obtain performance from another source.
(…)
Section (d) reflects the choice made and it comes close to the common law
approach. If the debtor proves that the creditor can obtain performance from
another source, and may therefore reasonably be expected to make a cover trans-
action (buy the goods elsewhere), no action for performance can be brought.
Meanwhile, the difference between civil law and common law has further
Consumer diminished as a result of European legislation. Directive 2019/771 on sale

Performance · 207
of goods (repealing existing Directive 1999/44 as of 1 January 2022) and

Directive 2019/770 on contracts for the supply of digital content (e.g. CDs,
software and e-books) and digital services (e.g. streaming and online games)
aim to enhance cross-border shopping by confirming the rights consumers
have in case of non-conformity of the delivered product with the contract,
no matter in which Member State they purchase their goods or obtain digital
content or services. As the directives offer partly minimum harmonisation,
member States are allowed to offer their consumers more protection – as
they already did under Directive 1999/44 – but the rights given by the direc-
tive are what the consumer can in any case rely upon in a B2C contract con-
cluded anywhere within the EU.
Article 6 of Directive 2019/771 – similar rules apply under Directive
2019/770 – stipulates that the seller must deliver the goods to the consumer
in conformity with the contract of sale. This means that the goods must not
only comply with the description by the seller and be fit for the particular
purpose that the consumer made known to the seller, and that the seller
accepted at the time of conclusion of the contract, but also that the goods
must be of a quality which is normal and which the consumer can reasonably
expect. Article 13 subsequently lists the rights of the consumer:
(1) In the event of a lack of conformity, the consumer shall be entitled to have the
goods brought into conformity or to receive a proportionate reduction in the price,
or to terminate the contract, under the conditions set out in this Article.
(2) In order to have the goods brought into conformity, the consumer may choose
between repair and replacement, unless the remedy chosen would be impossible
or, compared to the other remedy, would impose costs on the seller that would be
disproportionate (…).
The consumer cannot choose at random between these claims for perfor-
mance (repair or replacement) on the one hand, and price reduction and ter-
mination on the contract on the other. The latter two actions are essentially
only available in case the seller did not complete (or outright refused) repair
or replacement, the lack of conformity was so serious it justified immediate
price reduction or termination, or the seller declared he would not bring the
goods into conformity within a reasonable time. With this, the European legis-
lator created a hierarchy of actions, thus balancing the interest of both seller and
buyer. The buyer who is confronted with the breaking down of his washing
machine must first allow the seller to repair or replace it. Only if the seller
is unable or unwilling to do so, or the defect is really serious, can the buyer
terminate or claim an appropriate price reduction. Next to these ‘European’
rights, the consumer is still able to exercise all the rights it has under national
law, in particular the right to damages for non-performance (see Chapter 12).

208 · Contract law
It is clear why the consumer’s right to repair and replacement brings English
law closer to the civil law. Prior to European intervention, an English consumer
to whom a defective good was delivered had to have it repaired at his own cost
and then claim back the money from the seller by way of damages. The alterna-
tive was to terminate the contract and buy the goods elsewhere, but both rem-
edies are not as effective as a direct claim for repair or replacement (as is now
laid down in the UK Consumer Rights Act 2015, s. 19 (3–4) and 23).
The directive provides a highly effective protection to the consumer, also

because of a reversal of the burden of proof. If a lack of conformity becomes
apparent within one year of delivery of the goods, the goods are presumed
not to have been in conformity at the time of delivery (Art. 11 (1) directive).
It is for the seller to prove that the defect originated after delivery, which is
no easy task. If a TV or mobile phone breaks down as result of abuse by the
buyer, it will be difficult for the seller to prove that the defect did not exist at
the time of delivery.
TOPICS FOR REVIEW
Performance in civil law and common law

Impossibility of performance
Types of impossibility
Generic goods and specific goods
Genus non perit
Personal services
Frustration
Injunction
Keep-open covenants
Unforeseen circumstances
Force majeure and hardship clauses
Consumer rights under the Consumer Sales Directive
FURTHER READING
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapters 23 and 28–30.
– Oliver Wendell Holmes, The Common Law, 1881, Mark DeWolfe Howe (ed.), Cambridge
Mass. 1963.
14 and 21.
– Reinhard Zimmermann, ‘Breach of Contract and Remedies under the New German Law of
Obligations’, Saggi, Conferenze e Seminari 48, Centro di studi e ricerche di diritto comparato e
straniero, Rome 2002, 17–27.
Weir), 3rd ed., Oxford (Oxford University Press) 1998, Chapters 35 and 37.

12
Damages for
non-performance
CHAPTER OVERVIEW
If a party does not perform the contract in the way agreed upon, or not at
all, the creditor can exercise a contractual remedy. The creditor will, if the
relevant criteria are met, be able to terminate the contract (Chapter 13) or
claim damages for non-performance (this chapter). Jurisdictions differ in
the extent to which they require that the non-performance is not excused
(‘attributable’), a notice needs to be sent, or a second chance to perform
needs to be given to the debtor. Another relevant question is which
damages can exactly be claimed and whether parties can agree upon a
damages clause or not.
It was seen in Chapter 11 that contracts are usually discharged through per-
formance, either voluntarily or through a court order. But it can also happen
that a party does not perform. This chapter and Chapter 13 are devoted to
the rights of the creditor in such a case of non-performance (or ‘breach’) of
the contract. This means that we enter the pathology of contract law: it is not
normal that contracts are not (properly) performed, but if it happens the
law must provide a set of default rules that balances the interests of creditor
and debtor in a fair way. On the one hand, the creditor has a clear interest in
obtaining damages that put him in the same position he would have been
in had the contract been properly performed; on the other hand, however,
it may be that the debtor could not help his non-performance, for example
the seller cannot be blamed for the fact that the object was stolen before
delivery, or where a singer falls ill just before the concert takes place. The
law must balance these interests and different jurisdictions do so in different
ways.
The action for damages for non-performance (this chapter) and the action
for termination of the contract (Chapter 13) have in common that they both
require non-performance: the debtor does not do what the contract requires.
The law classifies non-performance in three different ways:

210 · Contract law
z on the basis of the type of non-performance. Following this criterion, it

is possible that a party does not perform at all (the ordered chairs are
not delivered), performs defectively (the wrong chairs are delivered) or
performs too late (the chairs are to be handed over before 1 March, but
the seller only does so on 5 March). In addition to these three types of
non-performance, it is possible that the performance itself takes place in
a correct way, but collateral damage is caused in the course of performing
the contract (for example, the seller breaks an antique vase in the home
of the buyer while delivering the chairs). It will be shown that the rel-
evance of this distinction lies in the question of whether any additional
requirements need to be established before a claim of damages can be
brought. Sometimes the creditor will first have to send a notice to the
debtor or allow the debtor an additional period for performance.
z on the basis of the reason for non-performance: why is it that the debtor
Types of non-
does not perform? The law distinguishes between the situation in which
performance the non-performance is the debtor’s fault (or attributable to him for another
reason) and the situation in which there is force majeure. If a debtor who is
to install central heating in a house takes a four-week holiday, causing the
works to be delayed, this is a clear case of fault. But it may also be that
the debtor cannot be blamed for the non-performance, but must still bear
the risk (the debtor’s diligently selected employee turns out to have lied
about his diplomas and work experience, making him unsuitable to help
with the performance of the contract). We will see that the distinction
between non-excused (‘attributable’) and excused (‘non-attributable’)
non-performance is relevant for the possibility to claim damages.
z on the basis of the seriousness of the non-performance. If someone is to
deliver 300 laptop computers and delivers only five, the breach is obvi-
ously more serious than in case 299 laptops are delivered. This is relevant
for the availability of the claim for termination of the contract, as will be
seen in Chapter 13.
While the world’s legal systems all agree that non-performance is the main
requirement for claiming damages, they diverge to a greater or lesser extent
when it comes to the answer to four other questions:
(a) Must the non-performance be attributable to the debtor or, in other

words, is the debtor freed in case of force majeure? If so, what are the
requirements for attributability?
(b) Which types of damages can be claimed and what are the mechanics of
the damages claim?
(c) Are there any limitations on the damages the creditor can claim?
(d) Can the parties validly agree upon a damages clause?

Damages for non-performance · 211
A. Attributability of the non-performance

It is clear that a contracting party can only claim damages from a debtor
who failed to do what he promised. This requirement of non-performance
(or ‘breach’) is what any jurisdiction accepts as a prerequisite for a damages
claim. But opinions differ on whether the non-performance must be attrib-
utable to the debtor. ‘Attributability’ means that the debtor is held liable
for the non-performance, either because he is to blame for it or because he
must bear the risk even if he was not at fault. This can also be expressed by
saying that the non-performance must be non-excused, or that there is no
force majeure. Civil law jurisdictions (subsection A.1 below) all pose this
requirement, while English law (subsection A.2) generally finds the fact of
non-performance itself quite sufficient to bring a claim for damages. This
difference is clearly caused by a different balancing of the interests of credi-
tor and debtor: while civil law emphasises that a debtor is freed from his
obligations if he cannot help his failure to perform, English law highlights
the interest of the creditor who counts on obtaining what was promised to
him.
1. The civil law approach

The requirement that the non-performance must be attributable to the
debtor comes out clearly in the various code provisions. The relevant articles
in the French, German and Dutch Civil Codes are the following:
Art. 1231-1 CC:‘The debtor is condemned, where appropriate, to the payment of

damages either on the ground of the non-performance or a delay in performance
of an obligation, unless he justifies this on the ground that performance was
prevented by force majeure.’
Art. 1218 CC: ‘In contractual matters, there is force majeure where an event
beyond the control of the debtor, which could not reasonably have been foreseen at
the time of the conclusion of the contract and whose effects could not be avoided
by appropriate measures, prevents performance of his obligation by the debtor.
If the prevention is temporary, performance of the obligation is suspended unless
the delay which results justifies termination of the contract. If the prevention
is permanent, the contract is terminated by operation of law and the parties are
discharged from their obligations under the conditions provided by articles 1351
and 1351-1.’
§ 276 BGB: ‘(1) The debtor is responsible for intention and negligence, if a higher
or lower degree of liability is neither laid down nor to be inferred from the contents

212 · Contract law
of the obligation, including but not limited to the giving of a guarantee or the
assumption of a procurement risk. (…)
(2) A person acts negligently if he fails to exercise reasonable care. (…)’
§ 280 BGB: ‘(1) If the debtor breaches a duty arising from the obligation, the
creditor may demand damages for the damage caused thereby. This does not apply
if the breach of duty (Pflichtverletzung) is not attributable to the debtor.
(2) Damages for delay in performance may be demanded by the creditor only
subject to the additional requirement of § 286.
(3) Damages in lieu of performance may be demanded by the creditor only subject
to the additional requirements of § 281, of § 282 or of § 283.’
Art. 6:74 BW: ‘1. Any non-performance of an obligation obliges the debtor to
compensate the creditor for the damage the latter suffers as a result, unless the non-
performance is not attributable to the debtor.
2. In so far as performance is not yet permanently impossible, section 1 of this
Article only applies with due observance of what is regulated in subchapter 2 on
default of the debtor.’
Art. 6:75 BW: ‘Non-performance is not attributable to the debtor, if he is not to

blame for it, nor accountable for it by virtue of statute, a juridical act or generally
accepted societal norms.’
These provisions allow the creditor to claim damages whenever the non-
French law
performance is attributable to the debtor (Art. 9:501 PECL speaks of non-
performance that is ‘not excused’). The key question is of course what counts
as an excusable obstacle to performance, meaning that the debtor is freed
from the obligation to pay damages. It seems rather clear that each jurisdic-
tion draws the line somewhat differently.
Under the French Article 1218 CC, force majeure requires that two condi-
Best efforts and
tions are satisfied: the obstacle must be ‘imprévisible and inévitable.’ This
results means that the event must have been unforeseeable at the time of concluding
the contract and must pose an irresistible obstacle for performance. This for-
mulation still leaves much leeway for the courts in deciding when the debtor
is freed. In the case of La Concorde v Montagnani (1994), Mr. Montagnani
had checked into the Hotel des Lices in Saint-Tropez. Shortly after he had
deposited almost €17,000 in the hotel safe, the hotel was robbed by four
thieves who forced the hotel staff to open the safe. Mr. Montagnani claimed
damages on the basis of non-performance by the hotel. The court did not find
this a case of force majeure. Armed robbery in a luxury hotel is not unforesee-
able and, even if it was impossible for the hotel staff to resist opening the safe

(thereby making performance of the contract with the client impossible),

this does not mean that the hotel could not have taken better precautions to
avoid the robbery. In fact, the night porter had let in one of the robbers who
had claimed that he had an appointment with a hotel guest.
Meanwhile the French position is not always as harsh on the debtor as this
decision suggests. In reality an important role is assigned to the distinction
between the obligation de moyens and the obligation de résultat. In the case
of the first type of obligation, the debtor only needs to show that he carried
out all best efforts that can be expected from a reasonable party (true to its
masculine roots the French Code spoke until 2014 of the bon père de famille –
the good housefather). In case of the obligation to achieve a result, however,
the debtor must ensure that he achieves what is agreed upon in the contract.
This is an important distinction in practice because if the debtor needs to
procure a certain result, it is easy for the creditor to prove that the contract is
not properly performed. It is subsequently up to the debtor to show that force
majeure prevented him from performing. In the case of an obligation to use
best efforts, the debtor is only liable if the creditor proves that the debtor did
not try as hard as can be expected from a reasonable party, which is obviously
more difficult.
This makes it important to know which obligations are for a result and which
are for best efforts. Although this is a matter of interpretation of individual
contracts by the courts, it is consistent case law that for example the seller’s
obligation to deliver goods on time, of the lessor to provide the good to the
lessee, and of the ski-lift operator to keep the user safe, are all obligations
to achieve a result. The same is true for the doctor’s duty to use proper and
clean equipment, while the doctor’s obligation to treat patients, and the law-
yer’s obligation to represent clients, are only obligations to use best efforts.
This is sound reasoning: the doctor cannot be expected to cure the patient or
the lawyer to win his case.
German law also excludes liability in damages in case the non-performance

German and
(Pflichtverletzung) is not attributable to the debtor. §§ 276 and 280 BGB
Dutch law make clear that non-performance needs to be attributable to the debtor and
that this is the case if the breach is intentional or negligent (meaning that
the debtor did not exercise reasonable care). Dutch law (Arts 6:74 and 6:75
BW) applies the same norm in order to be able to claim damages for non-
performance (tekortkoming).
What the German and Dutch Code say explicitly, but what the French courts
No fault also accept, is that the debtor is not only responsible in case he is at fault.

214 · Contract law
Attributability of the non-performance can also be based on other grounds.

First, an important reason can be that the parties have themselves dealt with
the issue in their contract by way of a guarantee (for example by adding a
clause saying: ‘export guaranteed’, ‘sold as authentic’). Second, most jurisdic-
tions hold the debtor responsible for the persons he uses in performing the
contract (such as employees and subcontractors) as well as for any instru-
ments he makes use of. Third, the debtor is held liable for circumstances
that are foreseeable or in regard to him personally. Inexperience, inability
and financial difficulty (the Germans say ‘Geld hat man zu haben’, money
one must have) of the debtor all count as such. Importantly, the debtor is
also held liable in case he has to provide generic goods: if the seller of a
quantity of bananas is unable to deliver the ones he had in mind because of
an unexpected strike or fire in his supplier’s premises, this is not accepted as
force majeure because the seller will still be able to obtain bananas elsewhere.
Force majeure would only be accepted if the entire genus is destroyed (which
is highly unlikely).
Art. 8:108 (1) PECL aptly summarises the civil law position:
‘A party’s non-performance is excused if it proves that it is due to an impediment

beyond its control and that it could not reasonably have been expected to take the
impediment into account at the time of the conclusion of the contract, or to have
avoided or overcome the impediment or its consequences.’
2. English law
English law, unlike civil law jurisdictions, regards any contract as containing
a guarantee. This means that the debtor can in principle not escape liability
in damages in cases where he could not help his failure to perform. The seller
must simply deliver the goods and the contractor must build the house. This
doctrine of strict or ‘absolute’ liability for breach of contract dates back to
the case of Paradine v Jane (1647), in which the lessee was kept to his obli-
gation to pay rent to the landowner, even though he could not access the
land for three years because it had been invaded by hostile forces during the
English Civil War. The inclination of English law is not to be interested in
why a party did not perform. In the attractive language of Sellers, J in Nicolene
Ltd v Simmonds (1953): ‘It does not matter whether the failure to fulfil the
contract by the seller is because he is indifferent or wilfully negligent or just
unfortunate. It does not matter what the reason is. What matters is the fact of
performance. Has he performed or not?’

The only possible way of escaping liability is to invoke the doctrine of frus-
Frustration
tration. The effect of a debtor successfully invoking frustration is that the
contract comes to an end by operation of the law, which also excludes a
damages claim. However, as already seen in Chapter 11 where the claim for
performance was discussed, the boundaries of frustration are very limited.
Frustration exists in cases of impossibility of performance because of the
destruction of an essential element of the contract (such as the music hall in
Taylor v Caldwell) or because of the death of a party who needs to perform
personally (such as an employee). It also exists when performance is in prin-
ciple possible, but nevertheless pointless (as in Krell v Henry). The authorita-
tive criterion formulated by Radcliffe LJ in Davis Contractors Ltd v Fareham
Urban District Council (1956) is the following:
Frustration occurs whenever the law recognises that, without default of either
party, a contractual obligation has become incapable of being performed because
the circumstances in which performance is called for would render it a thing
radically different from that which was undertaken by the contract.
Because it is rare that a claim for frustration succeeds, parties often allocate
the risk themselves by including a force majeure clause in their contract. But
there is still another way in which the harsh position of English law is eased.
Just as in French law, not all contracts require a party to achieve a certain
result. English law is happy to accept that the obligations of doctors, lawyers
and other advisers are only to use reasonable care and skill. Lord Denning
put it like this in Greaves & Co v Baynham Meikle & Partners (1975):
The surgeon does not warrant that he will cure the patient. Nor does the solicitor
warrant that he will win the case. But, when a dentist agrees to make a set of false
teeth for a patient, there is an implied warranty that they will fit his gums (. . .).
B. Types of damages and the mechanics of damage

claims
Until now nothing has been said about the type of damages that can be
Delay
claimed. Here the creditor has a fundamental choice to make. He is (assum-
ing that performance is still possible) allowed to hold the other party to the
contract (thus: claim performance) and claim damages next to this for the
loss he suffers as a result of the delay (dommages-intérêts moratoires, Verzö
gerungsschaden, vertragingsschade). If the car I rented is not delivered to my
home at the promised time, I will not only have to take a taxi to my appoint-
ment, but also may be obliged to rent a car from a different company at a
higher price. Both costs are damages for delay. The basis for claiming these

216 · Contract law
damages can be found in the Arts. 1217 (that conveniently lists the available
remedies) and 1231-1 CC, §§ 280, 286 BGB, Art. 6:74 BW, as well as in
English common law.
If the debtor does not perform because he is unable or unwilling to do so, or

Damages in lieu
if the creditor is simply no longer interested in obtaining performance (and
therefore decides to terminate the contract), he will seek a different type of
damages. These so-called damages in lieu of performance (dommages-intérêts
compensatoires, Schadensersatz statt der Leistung, vervangende schadevergoed-
ing) replace the performance. Claiming these should put the creditor in the
same position that he would have been in had the contract been properly
performed (as we will see subsection C below, this is the so-called expectation
interest). If Rose buys 20,000 Poeticus Narcissi flower bulbs from her regular
supplier with the intention of selling the bulbs to florists around the world,
she can claim the profits that she would have made on these contracts if her
supplier fails to deliver the bulbs to her. And if seller of goods A is confronted
with buyer B who fails to pay the price, allowing A to terminate the contract
and sell the goods at a lower price to somebody else, A can claim from B the
difference between the price B had agreed to pay and the price at which the
goods were sold to the new buyer. The bases for claiming these damages
in lieu of performance are again the Arts 1231-1 CC and Art. 6:74 BW in
French and Dutch law, while German law bases these on § 280 in combina-
tion with §§ 281–283 BGB.
A third type of damages concerns collateral damage or consequential loss

Collateral
(Mangelfolgeschäden, gevolgschade). This is damage caused in the course of
damage performing the contract (as in case where the painter damages the inte-
rior of his customer’s home, or cattle are delivered that are infected with
a disease and infect all the other cattle of the buyer). The legal bases for
claiming this harm caused by the defect are Art. 1231-1, § 280 BGB and Art.
6:74 BW.
The distinction between damages for delay, damages in lieu of performance

and collateral damages is highly relevant to the question at which point in
time a claim for damages can be brought. It is self-evident that if proper per-
formance is no longer possible or can no longer be expected, or if the loss is
already suffered (as in case of collateral damage), the creditor must be able
to claim damages without any further requirement. But this may be different
in cases where the creditor claims damages for delay or damages in lieu of
performance. In these cases, the interest of the debtor can require that he is
first warned by way of a notice that damages are going to be claimed if he does
not perform. It may even be that the debtor must be given a second chance

to perform if the original performance was defective. The national rules on

this question are quite technical and show so many differences in detail that
French, German, Dutch and English law will be discussed consecutively.
In French law a claim for damages can only be brought if the debtor is in
French law
default (en demeure). The creditor puts the other party in default by sending
a formal notice (a sommation by a bailiff) or a clear letter demanding that
the debtor performs, but this is not necessary in cases where the contract
itself already indicates a particular time for performance or states that perfor-
mance must take place immediately. A notice is obviously also unnecessary if
it would be futile, as in the case of the debtor already indicating that he is not
going to perform or being simply unable to do so. All this follows from the
Arts 1139 and 1146 Code Civil:
Art. 1231 CC: ‘Unless non-performance is permanent, damages are only due if
the debtor has previously been put on notice to perform (mise en demeure) his
obligation within a reasonable time.’
Art. 1344 CC: ‘A debtor is put on notice to perform (mise en demeure) either by
formal demand (sommation) or an act which gives sufficient warning, or, if this is
provided for by the contract, by the mere fact that the obligation is enforceable.’
The German law of contractual remedies, which was fundamentally

German law
reformed in 2002, is characterised by a high level of doctrinal precision. §
280 BGB, quoted above, makes a distinction between damages for delay and
damages in lieu of performance. Damages for delay are subject to the addi-
tional requirement of § 286 BGB, which states:
(1) If the debtor, following a warning notice (Mahnung) from the creditor that is
made after performance is due, fails to perform, he is in default (Verzug) as a result
of the warning notice. Bringing an action for performance and serving a demand
for payment in summary debt proceedings for recovery of debt have the same
effect as a warning notice.
(2) There is no need for a warning notice if
1. a period of time according to the calendar has been specified,
2. performance must be preceded by an event and a reasonable period of time
for performance has been specified in such a way that it can be calculated,
starting from the event, according to the calendar,
3. the obligor seriously and definitively refuses performance,
4. for special reasons, weighing the interests of both parties, the immediate
commencement of default is justified.
(…)

218 · Contract law
This means that the debtor must be in default (Verzug) before damages
for delay can be claimed. This default comes about by way of a notice
(Mahnung) and a debtor who then still does not perform. This notice
is simply sent to remind the debtor that he is to perform. It does not
have to meet any form, although the notice will in practice always be
written (by letter or e-mail). Sometimes a notice is not needed, in par-
ticular if a time for performance has been fixed according to the calendar
(‘Delivery before 15 November’, ‘Payment within two weeks after deliv-
ery’). This is in line with the French Code and with the old legal maxim
of dies interpellat pro homine (‘an agreed upon day warns instead of the
creditor’).
The other type of damages mentioned in § 280 BGB are damages in lieu of
performance. Claiming these will lead to loss of the right to performance.
Section III of this provision distinguishes between three situations that all
have their own corresponding provision in the code. First, § 283 refers to the
case in which performance is impossible or where the debtor simply refuses
to perform. It is quite logical that no further requirement needs to be met in
this case: the creditor can claim his expectation interest, unless of course the
debtor proves that the non-performance was not attributable to him. § 283
BGB: ‘If, under § 275 (1) to (3), the debtor is not obliged to perform, the
creditor may, if the requirements of § 280 (1) are satisfied, demand damages
in lieu of performance. (…)’
Second, § 281 BGB sets an additional requirement for damages in lieu of per-
formance in case of delay or defective performance. In that case, the creditor
must first have fixed, without success, a reasonable period for performance or
for remedying the defective one.
§ 281 BGB: (1) To the extent that the debtor does not render the due
performance or does not render the performance as owed, the creditor may, subject
to the requirements of § 280 (1), demand damages in lieu of performance, if he has
without result set a reasonable period for the obligor for performance or cure. (…)
(2) Setting a period for performance may be dispensed with if the debtor seriously
and definitively refuses performance or if there are special circumstances which,
after the interests of both parties are weighed, justify the immediate assertion of a
claim for damages.
(3) If the nature of the breach of duty is such that setting a period of time is out of
the question, a warning notice (Abmahnung) is given instead.
(4) The claim for performance is excluded as soon as the creditor has demanded
damages in lieu of performance.

This requirement of a second chance to perform (or Nachfrist) is exceptional

Nachfrist
in a comparative perspective. Even though the debtor was late in perform-
ing, or performed defectively, a claim for damages in lieu of performance can
in German law only be brought if the debtor was given a second chance to
perform or to perform properly. This rule, that clearly provides additional
latitude to the debtor by allowing him a grace period, cannot be found in
any other legal system. It is true that for example the Arts 47 and 63 of the
CISG (and Art. 8:106 (1) PECL) provide that buyer and seller may fix an
additional period of time for delivery and payment, but this is only a discre-
tionary power of the creditor: he is not obliged to allow the debtor this extra
period. The reason for the German legislator to give the seller a right to a
second performance was its desire to strengthen the seller’s rights vis-à-vis
the buyer.
Third, § 282 BGB allows the creditor to claim damages in lieu of perfor-
mance if the debtor has violated a so-called ancillary duty and the creditor
can no longer reasonably be expected to accept performance. § 282 BGB
states to this effect: ‘If the debtor breaches a duty under § 241 (2), the credi-
tor may, if the requirements of § 280 (1) are satisfied, demand damages in
lieu of performance if he can no longer reasonably be expected to accept
performance by the debtor.’
What the German code means by an ancillary duty is the type of obliga-
tion that follows from the contract although the parties have not explicitly
discussed it and that does not affect the performance as such. A common
example is that of the painter who paints the interior of a house in an excellent
way, but who damages all kinds of objects in the house in the process (a vase
on day one, a door on day two and the television on day three). This is a good
reason for the creditor to lose all reliance on the painter’s ability to continue
work without causing further damage to his property, which then allows him
claim damages in lieu of performance (and terminate the contract).
Dutch law also requires that the debtor be in default before damages can
be claimed. It is again logical that default is not required if performance is
impossible, but if the debtor can still perform or repair his previous defec-
tive performance the creditor is in principle obliged to send a notice to the
debtor giving him a reasonable period to perform. Art. 6:82 (1) BW states
to this effect: ‘The debtor is in default when he is held liable for his non-
performance by a written notice in which he is granted a reasonable period of
time during which he still may perform, and he nevertheless fails to perform
within that period.’ As in French and German law, a notice is not needed if a
time for performance was fixed in the contract (Art. 6:83 BW).

220 · Contract law
BOX 12.1
GOING TO COURT OR NOT? RELATIONAL

CONTRACTS
The mere fact that contract law provides cases of so-called relational contracts.
rules that allow a party to enforce its rights Legal scholar Ian Macneil juxtaposes such
does not mean that a party is also willing contracts with discrete contracts. The
to do so. Empirical work on the actual use typical example of a discrete contract is
of contract law in commercial practice, the purchase by a consumer of fruit at the
pioneered by the American author Stewart market or a newspaper at a gas station.
Macaulay, suggests that not many commer- These contracts are of short duration, with
cial parties are willing to bring their coun- limited personal interaction, and about
terpart to court. This is partly due to the easily defined objects of exchange. The
costs involved in litigation, but also because cooperation between the parties is minimal.
most parties value a good relationship with Relational contacts, such as employment
their counterpart much more than being and franchise contracts, are at the other
‘right’ in one particular instance. Particularly end of the spectrum. Here, parties strive
in long-term relationships parties will work for a long-standing relationship in which
towards an amicable outcome and are often they work closely together. Only during the
flexible in finding a solution. Thus, rather course of the relationship does it become
than resorting to the letter of the contract, clear what the parties need to do exactly.
the creditor is likely to voluntarily adjust The contract is only one aspect of the com-
the contract price or give the debtor more plete relationship between the parties, in
time for performance. Reputational sanc- which mutual trust and social sanctions
tions are likely to play a more important role are much more important than compliance
than legal sanctions: a party who does not with the legal rules. One could say that the
perform will rapidly lose its attraction for distinction between discrete and relational
other parties. contracts mirrors the difference between a
This analysis is particularly relevant in one-night-stand and a marriage.
English law, finally, does not require a notice to put the debtor in default and
English law
to exercise a remedy. In line with the more strict English approach towards
contractual obligations, the expiration of the time affixed for performance
is reason enough to be able to claim damages. If no time is fixed for per-
formance, performance must take place within a reasonable time. Practice,
however, shows that any sensible party – in England and elsewhere – will first
fix an additional period for performance before resorting to the far going step
of pursuing a legal remedy (if at all: see Box 12.1).

C. Limitations of claiming damages

Once it is established that the requirements for a damages claim are met, the
question must be asked whether any limitations exist to claiming damages.
These limitations do indeed exist. They relate to (1) the type of interest that
is protected, (2) causation, and (3) non-pecuniary loss.
1. Expectation and reliance interest

The first way in which the law limits the recoverable damages is by allowing
the creditor only to claim compensation for the real loss and deprived profits
he suffers (‘no damages without loss’). This means that the claimant can
never claim more damages than what he loses on the contract. Article 1231-2
CC, §§ 249 ff BGB, Arts 6:95 ff. BW and Art. 9:502 PECL all provide rules to
this effect. A different view would put the creditor in a better position than he
was without the contract or the breach and this would of course be unaccep-
table. Put differently: damages in contract law are always compensatory and
never punitive. This is in sharp contrast to the law of torts, where some juris-
dictions allow a claim for punitive damages in case of intentional or grossly
negligent wrongdoing.
The question that the law must answer is how the creditor is best compen-
sated for his loss. If the suffered loss is caused by delayed or defective per-
formance or consists of collateral damage, as illustrated by the examples
above, this is usually not too difficult to establish. These damages are usually
claimed next to the normal performance. But what if the creditor is no longer
interested in performance and decides to terminate the contract? For this
type of situation lawyers often distinguish between two types of ‘interest’ of
the creditor: the expectation interest and the reliance interest.
As noted earlier a claim for damages in lieu of performance should put the
creditor as closely as possible to the position in which it would have been if
the contract had been duly performed (cf. Art. 9:502 PECL). This expecta-
Expectation tion interest (or ‘positive’ or ‘performance interest’) protects the expecta-
interest tions the creditor had when he entered into the contract, in particular the
expectation to make a profit with the contract. But the creditor could also be
interested in claiming his so-called ‘reliance interest’ (‘negative’ interest). In
that case the creditor’s interest is to be put into the position he was in before
Reliance the contract was made. The creditor may have changed his position in reli-
interest ance on the other party’s promise, for example by incurring costs to conclude
the contract, or by already starting the performance (hiring an employee,
buying materials to construct a house, etc.). While the expectation interest

222 · Contract law
thus puts the creditor in the position as if the contract is duly performed,
the reliance interest places him into the position as if the contract was never
concluded at all. A contracting party usually has the choice between claiming
either of these two interests.
A concrete example can illustrate the difference between the expectation

Example
and the reliance interest. Suppose that Rose has sold a large quantity of
flower bulbs to the Russian buyer Boris for €20 per bag. Boris pays upon
delivery in Kaliningrad, but shortly thereafter the flower bulbs turn out to
be infected with mildew. Boris now has a choice. If he chooses to claim his
expectation interest, he must be put into the position he would have been
in had the contract been duly performed. If we assume that the market
value of the flower bulbs is identical to the price (€20), Boris’ expectation
was to obtain flower bulbs with a value of €20, but due to the disease they
are only worth €10. Deducting the received value (€10) from the expected
value (€20) means that Boris can claim damages amounting to €10 per bag.
If, however, Boris claims his reliance interest, he must be put in as good
a position as he was in before the contract was made. In this case, Boris’s
reliance interest is therefore also €10 per bag. If he had not concluded the
contract, Boris would not have paid €20 and would not have received defec-
tive flower bulbs only worth €10. The reliance interest is thus calculated
by deducting the received value (€10) from the paid price (€20), so in this
case €10.
In this example the expectation and reliance interest are the same because
the paid price is identical to the market value. But this need not be the case.
If Rose has made a good bargain and the flower bulbs only had a value of €17
euro, Boris’s expectation interest would be €17 and he would only be able
to claim €7 per bag (the expected value of €17 minus the real value of €10).
In this case, Boris could better claim his reliance interest, which naturally
remained the same: the paid price (€20) minus the received value (€10),
which equals €10. If, on the other hand, the contract was to Boris’s advantage
because the real value of the flower bulbs was higher than the contract price
(say €23 per bag), Boris would certainly claim the expectation interest of €13
per bag (the value of €23 minus the paid price of €10). It thus depends on
how advantageous the contract to each of the parties is whether one is better
off claiming expectation or reliance damages.
2. Causation
A second limitation to a damages claim lies in the requirement that the
damage must have been caused by the non-performance. It is obvious why

the law would require such causation: the debtor cannot be held responsible
for losses that he did not cause. However, the question whether there is a
legally relevant causal lien between breach and damage is not always easy
to answer. If my taxi to Amsterdam airport is late and I consequently miss
my flight to Rome, a whole range of events can follow from this. Not only
will I have to take the next flight at an extra cost to be paid to the airline, I
also have to buy myself drinks and dinner while waiting. I may get robbed at
the airport. I could also miss an important appointment in Rome at which
I expected to conclude a contract that would have made me €100,000 in
profits. I go bankrupt as a result of missing this deal, which leads to my wife
leaving me. The subsequent divorce makes me so depressed that I end up
in a hospital and lose my job. Now, all these events are ‘caused’ by the non-
performance of the taxi company: had the taxi been on time, all this would
(most probably) not have happened. But the law certainly does not allow me
to claim compensation for all these events. This is because the legal concept
of causation is different from the one used in physics or normal life. German
lawyers speak about ‘adequate’ causation, Dutch lawyers about ‘reasonable’
causation, French lawyers limit compensation to the ‘immediate and direct’
consequences of the breach, and English law asks whether the damage is not
too ‘remote.’ All these expressions aim to denote a similar thing: it must be
reasonable to hold the debtor liable for the damage.
An important factor in any jurisdiction when assessing causation is whether

Foreseeability
the loss was foreseeable by the debtor at the time of contracting. In the
English case of Hadley v Baxendale (1854) it was formulated in this way;
that the debtor is liable for loss which arises in ‘the usual course of things’ or
that ‘may reasonably be supposed to have been in the contemplation of the
parties at the time when they made the contract, as the probable result of the
breach of it’. Article 9:503 PECL does not aim to say anything else: ‘The non-
performing party is liable only for loss which it foresaw or could reasonably
have foreseen at the time of conclusion of the contract as a likely result of
its non-performance, unless the non-performance was intentional or grossly
negligent.’
In the above example I will be able to claim the costs of rescheduling to a later
flight and possibly the reasonable costs of a dinner as the loss that the taxi
company could reasonably foresee, but not any of the more remote losses.
Factors other than foreseeability are also likely to play a role when establish-
Factors
ing a causal link between the non-performance and the damage. Article 9:503
PECL explicitly mentions the factor that the breach is intentional or grossly
negligent. If A, as the organiser of a major art fair, hires B to erect stands and

224 · Contract law
a week before the opening of the event B demands an increase of the contract
price, which A refuses, this may lead to extended liability of A towards the
various art dealers aiming to exhibit at the fair. Some art dealers may hold A
liable for lost opportunities to sell. Even though this type of damage was not
foreseeable for B, he may still be liable for these damages because of the fact
that the breach was intentional. This would have been different if the reason
for not erecting the stands was because of a lack of skilled employees. A must
still bear the risk for this, leading to attributable non-performance, but he is
then no longer liable for any unforeseeable losses.
3. Non-pecuniary loss
A third point of interest is whether only financial loss (such as economic loss
and medical costs in case of physical harm) can be compensated in case of
non-performance, or also so-called non-pecuniary loss. Non-pecuniary loss
(or immaterial damage) cannot be undone with money and is therefore dif-
ficult to quantify. The photo shop that I asked to digitise my wedding photos
accidentally puts them in the shredder, or the veterinarian I asked to vac-
cinate my six-year old dog for rabies kills it when the assistant hands her a
needle with way too much of the vaccine. In both cases my material damages
are low (no one would have wanted to buy my photos and my dog was a
mongrel with low-market value), but I am obviously angry, devastated and
hurt. Should I therefore be able to claim non-pecuniary damages (préjudice
moral, Schmerzensgeld, smartengeld) for mental distress? Unlike their col-
leagues in the United States, European courts (and legislators) are reluctant
to allow this: no matter how much distress the breach of contract is causing,
money is not going to make this good. In addition, there is the fear of a liti-
gation culture: if any form of inconvenience or disappointment would be a
reason for a damages claim, the courts would be flooded with claimants. This
explains why non-pecuniary damages are only allowed in a limited number of
cases and why the awards are usually not very high.
The type of contracts for which courts are often willing to recognise that
Pleasure
non-pecuniary damages must be paid in case of non-performance are con-
contracts tracts of which the main purpose is pleasure, relaxation and peace of mind.
The distress of having lost one’s wedding photographs surely falls into this
category: the whole aim of having a photographer take pictures, or to have
them digitised, is the pleasure of looking at the photographs in the hopefully
many years that the marriage will last. If the taxi does not show up to get the
passenger to a concert of the Rolling Stones, the passenger cannot only claim
the money he spent on the ticket, but also a fair sum of damages to compen-
sate him for his disappointment of not attending the performance. In the

English case of Farley v Skinner (2001), Mr. Farley had bought a house in the
countryside after retirement. The house was 20 km from Gatwick airport,
but a surveyor had advised him that the house was unlikely to be affected by
any noise. After moving in, Mr. Farley discovered that reality was very differ-
ent: airplanes tended to circle above the house in case of congestion. He was
awarded £10,000 for the distress and inconvenience of the noise. The court
acknowledged that this was not a contract whose only object was pleasure,
relaxation and peace of mind (Mr. Farley also simply needed a place to live),
but the peace and quiet of the countryside was surely an important reason for
him to buy the house.
It is no surprise that many court cases on non-pecuniary loss deal with spoilt
holidays. What if one books a first-class seat on the train from Brussels to
Saint-Raphael on the warmest day of the year, but the air-conditioning and
water supply on the train fail and the staff tell the passengers that the train
will not go any further than Metz and that they should find their own way to
the Cote d’Azur? Courts would not find it difficult to allow non-pecuniary
damages. The best-known holiday case is Simone Leitner v Tui Deutschland
CJEU (2002), decided by the Court of Justice of the European Union (CJEU). The
Austrian family Leitner had booked a two-week, all-inclusive holiday to a
Turkish holiday resort. After one week of unspoilt holiday pleasure, 10-year-
old Simone Leitner (together with many other hotel guests) started to show
symptoms of Salmonella poisoning due to the food offered in the resort. Her
parents had to look after her for the rest of the holiday. The parents brought
a claim against TUI for loss of holiday pleasure. Austrian law had until then
not recognised a claim for non-pecuniary loss for breach of contract. But it
had, as every other European Member State, implemented the EU Directive
on package travel (now Directive 2015/2302). This directive states that
the retailer of a package travel is liable in damages to the consumer for the
proper performance of the contract. This raised the question whether such
‘damages’ could also include a claim for lost holiday pleasure. The CJEU held
that it did, meaning that immaterial damages for breach of a package travel
contract must now in principle be allowed in any EU Member State. Article
9:501 (2) PECL goes much further than this and firmly states for breach
of any type of contract: ‘(2) The loss for which damages are recoverable
includes: (a) non-pecuniary loss (…)’
D. Damages clauses
It has been seen many times before in this book that contract law often only
provides default rules. Within the limits set by mandatory law parties can
make their own clauses if they believe this better suits their interests. The

226 · Contract law
same is true in the field of damages. Parties can in principle agree on an

amount of damages to be paid in case of non-performance. For example,
when booking a flight the contract is likely to contain a clause that if the
consumer cancels the trip the travel company is allowed to keep a percentage
of the contract price. Building contracts typically contain the clause that if
the work is not finished on time, the builder is to pay a specified sum to the
aggrieved party.
Two types of such damages clauses can be distinguished. First, the sum speci-
Liquidated fied in the contract can be based on a real assessment of what the likely
damages damage will be in case of non-performance. The big advantage of such a liq-
uidated damages clause (or agreed damages clause) is not only that the creditor
no longer needs to prove what its actual damage is, but also that parties know
in advance for which amount they are liable in case of breach. It does not
matter that the real loss turns out to be higher or lower. If A agrees to build
a house for B and to finish the work before 1 June, the contract can provide
that A has to pay €500 for each week of delay. Consequently, if A completes
the house on 29 June B can claim €2,000 as agreed damages (even if B’s actual
loss is greater or smaller). The law accepts these clauses as valid. Second,
parties can agree on a specified sum to be paid in case of non-performance as
an inducement to a party not to breach the contract. In such a penalty clause
the sum is not a reasonable pre-estimate of the likely damages, but a much
Penalty clause higher amount. A penalty clause thus does two things: not only does it allow
the parties to avoid the difficult calculation of the real damages (as in liqui-
dated damages clauses), but it also serves as a way to pressure the debtor to
perform.
It is clear that a penalty clause can lead to excessive liability and must there-
fore be looked at with some suspicion. For example, if a contract for the
supply of an academic gown (price: €1,000) stipulates that €20,000 must
be paid in case the customer refuses to pay the price and take delivery of
the gown, this is a highly disproportionate sanction. It is likely that a much
lower penalty would be sufficient to coerce the buyer to perform. This is why
the law is reluctant to accept just any penalty clause as valid. Under English
law, for example, only liquidated damage clauses are valid. Penalty clauses
will not be enforced because the courts do not see punishment of a party
in breach as a purpose of contract law. However, this does not mean that a
damages clause cannot validly aim to deter the debtor from breaching the
contract. In the case of ParkingEye v Beavis (2015), a car park had charged Mr.
Beavis £85 for overstaying, by almost an hour, his two hours of free parking.
Even though this was not a reasonable pre-estimate of the likely damages, the
Supreme Court still found this clause valid. It considered that a stipulated

sum is not a penalty if it protects a legitimate interest of the creditor in the

performance of the contract (here funding the car park and ensuring free
parking space for everyone) and the agreed sum is not out of all proportion
to that interest (which was held not to be the case here). French, German and
Dutch law do regard damages clauses valid (both for liquidated damages and
as a penalty), but provide that these clauses can be moderated if necessary,
which is highly convenient for sloppy parties who put the penalty at an unac-
ceptably high level. Thus, § 343 BGB allows the court, at the request of the
debtor, to reduce a disproportionately high penalty to a reasonable amount
unless the debtor is a commercial party (§ 348 HGB). A commercial debtor
may still be able to invoke the general § 242 BGB to escape the clause. Article
1231-5 CC provides that the court can even out of its own motion moderate
or increase the agreed penalty if it is obviously excessive or ridiculously low.
Article 6:94 BW allows this if ‘fairness manifestly requires this’. In line with
French, German and Dutch law, Art. 9:509 PECL also does not distinguish
between penalty clauses and liquidated damages clauses, but allows the court
to reduce or increase a grossly excessive agreed upon sum:
(1) Where the contract provides that a party who fails to perform is to pay a
specified sum to the aggrieved party for such non-performance, the aggrieved party
shall be awarded that sum irrespective of its actual loss.
(2) However, despite any agreement to the contrary the specified sum may be
reduced to a reasonable amount where it is grossly excessive in relation to the loss
resulting from the non-performance and the other circumstances.
TOPICS FOR REVIEW
Relational contracts
Non-performance
Attributability of non-performance
Force majeure
Obligation to achieve a result and obligation to use best efforts
Absolute contracts
Frustration
Force majeure clause
Notice
Second chance to perform
Default of debtor
Types of damages
Expectation and reliance interest
Causation
Non-pecuniary loss
Liquidated damages clause
Penalty clause

228 · Contract law
FURTHER READING
– Lon L. Fuller and William R. Perdue, ‘The Reliance Interest in Contract Damages’, Yale LJ 46
(1936), 52 ff.
– Charles J. Goetz and Robert E. Scott, ‘Liquidated Damages, Penalties, and the Just
Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient
Breach’, Columbia Law Review 77 (1977), 554 ff.
– Ole Lando and Hugh Beale (eds.), Principles of European Contract Law Parts I and II, The
Hague (Kluwer) 2000, Chapter 9.
– Stewart Macaulay, ‘An Empirical View of Contract’, Wisconsin Law Review (1985), 465 ff.
– Ian R. Macneil, ‘Relational Contract: What We Do and Do Not Know’, Wisconsin Law Review
(1985), 483 ff.
19 and 20.
– Frances Quinn, Elliott and Quinn’s Contract Law, 12th ed., Harlow (Pearson) 2019, Chapters 14
and 15.
– G.H. Treitel, Remedies for Breach of Contract, Oxford (Oxford University Press) 1988.
– Reinhard Zimmermann, ‘Breach of Contract and Remedies under the New German Law of
Obligations’, Saggi, Conferenze e Seminari 48, Centro di studi e ricerche di diritto comparato e
straniero, Rome 2002, 17–27.

13
Termination of the contract
CHAPTER OVERVIEW
Contracting parties not only have the right to claim damages for non-
performance of the contract. If the relevant criteria are met, the creditor
may also terminate a bilateral contract. This chapter lays out the require-
ments that have to be met before a claim for termination can be brought.
It will be seen that the law is reluctant to accept a claim for termination
in other cases than serious non-performance. This is because it is often in
the interest of the mal-performing debtor that the contract is upheld. This
chapter also pays attention to the defence of withholding performance,
which often precedes a claim for termination.
In a bilateral contract such as sale of goods, provision of services, lease or

credit, each party only wants to perform because the other party is also to
perform. This means that if the other party is not willing or unable to perform
the contract, the very reason for being bound falls away. The contractual
remedy of termination is based upon this ratio: if the other party does not
perform, this allows the creditor to bring the contract to an end. The effect
of termination is that each of the parties is no longer bound to perform and
is usually able to claim back what has already been rendered. The ratio of
termination – the equilibrium between the mutual performances would be
destroyed if the creditor were not able to escape from the contract in the
event that the debtor mal-performs – entails that there is no need for attribut-
ability of the non-performance to the debtor or loss to the creditor in order to
bring a claim. Even if the debtor cannot help its non-performance, an action
for termination can be brought.
Whether termination or not should be allowed requires the balancing of the

Interest
interests of creditor and debtor. It is evident that it is a legitimate interest of
the creditor to be able to terminate the contract as soon as possible if the
debtor is unable or unwilling to perform or has gone bankrupt. In this case,
the creditor should be allowed to free himself and find somebody else to
contract with. However, it is the rightful interest of the defaulting debtor
that not every minor non-compliance with the terms of the contract justifies

230 · Contract law
t ermination. If shop A orders 100 handmade bags from manufacturer B, and

B delivers 98 bags on time but announces that the remaining two are likely
to come next week, this would surely form a legitimate reason for A to claim
damages for delay (in case he suffers any), but it would normally not allow
him to terminate the entire contract. If it did, B would suffer a great detri-
ment by losing all incurred expenses, as he is not able to sell the bespoke bags
to somebody else. This requires a criterion to decide under which circum-
stances the non-performance is allowed.
The following questions must be asked:
(a) How to decide whether the non-performance allows termination?

(b) What are the mechanics of the claim for termination?
(c) Is it possible to terminate the contract before performance is due
(‘anticipatory breach’)?
(d) What is the effect of termination?
(e) Can the creditor withhold performance?
A. When is termination allowed?

It was seen above that not every breach of contract allows the creditor to
terminate the contract. Different jurisdictions adopt different approaches to
limit a claim for termination. While the CISG, PECL and English law adopt a
clear substantive criterion and only allow termination in case of a breach that
is serious enough, French law traditionally gives the court a central role in
assessing whether termination is justified. German law limits termination by
requiring that the non-performance is serious enough or that the debtor was
granted a second chance to perform, which he let pass. Dutch law is the odd
one out by not limiting the termination action in a significant way. We will
have a closer look at each of these approaches in this section.
Fundamental
It makes sense to start with the PECL, which poses a clear limit on termina-
non- tion by requiring that the non-performance must be ‘fundamental.’ The rel-
performance evant provisions are the following:
Art. 8:103: ‘A non-performance of an obligation is fundamental to the contract if:

(a) strict compliance with the obligation is of the essence of the contract; or
(b) the non-performance substantially deprives the aggrieved party of what it was
entitled to expect under the contract, unless the other party did not foresee and
could not reasonably have foreseen that result; or
(c) the non-performance is intentional and gives the aggrieved party reason to
believe that it cannot rely on the other party’s future performance.’

Termination of the contract · 231
Art. 9:301: ‘(1) A party may terminate the contract if the other party’s non-
performance is fundamental.
(2) In the case of delay the aggrieved party may also terminate the contract under
Article 8:106 (3).’
The notion of fundamental non-performance (which is inspired by the

CISG) makes termination only possible in case of a serious breach. One can
easily relate to the three situations mentioned in Art. 8:103 PECL. In a com-
mercial sale the time of delivery of goods is presumed to be of the essence
(subpara. a). If a contractor is to build and pave a road to a new building
before 1 May and on that date the road is not yet paved, making it unsuit-
able to drive upon, the breach deprives the creditor of what it was entitled to
expect (subpara. b). If a freelancer hands in invoices for expenses he did not
incur, this allows his client to terminate the freelance agreement: this is an
intentional breach and the client can no longer be reasonably expected to rely
on the freelancer’s proper future performance.
English law allows termination (in England also referred to as rescission for
English law
breach or repudiatory breach) only in case of breach of a ‘condition’. The term
‘condition’ has different meanings in the law. What is meant by it here is that
not all contractual terms are of equal importance. If you rent a house for the
holiday, the contractual term that you are allowed to make use of it during
three weeks in July is more important than the term that use of the house
includes free access to the local health club. English law makes the explicit
distinction between terms that are ‘essential’ and that, in case of breach, allow
termination (conditions) and terms that only allow a claim for damages (war-
ranties). For example, the Sale of Goods Act 1979 specifies that the implied
terms that the sold goods must be of satisfactory quality, fit for purpose and
comply with the given description are conditions (ss 12–15). These are all
terms that go ‘to the root of the contract’. Parties can of course also explicitly
agree that certain terms are of the essence, turning them into conditions that
allow termination in case of breach. Or, as was held in Hong Kong Fir Shipping
Co. v Kawasaki Kisen Kaisha (1962):
it is open to the parties to a contract to make it clear either expressly or by necessary

implication that a particular stipulation is to be regarded as a condition which goes
to the root of the contract, so that it is clear that the parties contemplate that any
breach of it entitles the other party at once to treat the contract as at an end.
Articles 1224-1230 Code Civil form the basis for termination (résolution)
French law
in French law. The most relevant provisions, all introduced with the grand
reform of French contract law in 2016, are the following:

232 · Contract law
Art. 1224: Termination results either from the application of a termination clause,
or, where the non-performance is sufficiently serious, from notice by the creditor
to the debtor or from a judicial decision.
Art. 1225 (1): The termination clause must specify the undertakings whose non-
performance will lead to the termination of the contract.
Art. 1226: The creditor may, at his own risk, terminate the contract by notice.
Unless there is urgency, he must previously have put the debtor in default to
perform his undertaking within a reasonable time. (. . .)
The debtor may at any time bring proceedings to challenge such a termination.
The creditor must then prove the seriousness of the non-performance.
Art. 1227: Termination may in any event be claimed in court proceedings.
Art. 1228: The court may, according to the circumstances, recognise or declare
the termination of the contract or order its performance, with the possibility of
allowing the debtor further time to do so, or award only damages.
Art. 1224 CC provides the disappointed creditor with three options to part
with the other contracting party. First, the parties can agree on a termina-
tion clause (the clause résolutoire of Art. 1225 CC) indicating the conditions
that allow a party to terminate the contract (for example: ‘any breach’) and
preferably how to realise this (‘by letter’). It has become common practice
in commercial contracts to include such a clause, especially because the
old (pre-2016) French law made it cumbersome to terminate a contract in
any other way. Second, a party can turn to the court (Art. 1227 CC) which
will then assess whether the non-performance is serious enough to justify
termination. The court will look at the circumstances, such as the extent to
which the debtor is to blame and the loss to the creditor, and may decide
to order a less intrusive remedy than termination if it deems fit (Art. 1228
CC).
As for the third option, French law recognises that it would be highly
impractical if, in cases where the contract does not contain a termination
clause, only a court order were able to put an end to the contract. It would
Unilateral mean that the creditor would have to wait endlessly before it could get rid
termination of the defaulting debtor and conclude a cover transaction with somebody
else. Art. 1226 CC therefore also allows the creditor to terminate the con-
tract by way of notice. The protection of the non-performing party lies in
the requirement that the breach must be sufficiently serious: if not, the
debtor can successfully challenge the termination in court. This serves as

an effective hurdle for ‘termination happy’ creditors, but in obvious cases

of non-performance, a creditor will eagerly accept the (low) risk that a
court will subsequently leave the contract in place and make him pay
damages. In the case Abonnement téléphonique/Pigranel (1987), the alarm
system installed by the claimant had continued to go off at the wrong
moment ever since it was installed. The buyer was allowed to terminate the
contract in view of the seller’s carelessness in installing and maintaining the
alarm and the high costs of the installation and maintenance incurred by
the buyer.
The core provisions on termination for non-performance (Rücktritt) in

German law German law can be found in §§ 323–324 BGB:
§ 323: ‘(1) If, in the case of a bilateral contract, the debtor fails to perform or does
not perform in accordance with the contract, then the creditor may terminate the
contract if he has fixed, to no avail, an additional period for performance or cure
(Frist zur Leistung).
(2) The additional period need not be fixed if
1. the debtor seriously and definitively refuses performance,
2. the debtor fails to perform by a date or within a period specified in the
contract and, in the contract, the creditor has made the continuation of his
interest in performance subject to the punctuality of that performance, or
3. there are special circumstances which, when weighing the interests of both
parties, justify immediate termination.
(3) If the nature of the breach of duty is such that it is not feasible to fix a period for
performance, a warning notice (Abmahnung) is given instead.
(…)
(5) If the debtor has performed in part, the creditor may terminate the entire
contract only if he has no interest in partial performance. If the debtor has not
performed in conformity with the contract, the creditor may not terminate the
contract if the breach of duty is trivial.
(…)’
§ 324: ‘If the debtor, in the case of a bilateral contract, breaches a duty under
§ 241 (2), the creditor may terminate the contract if he can no longer reasonably be
expected to uphold the contract.’
The most interesting aspect of these provisions lies in what they do not say:
a fundamental non-performance (as in the PECL) or breach of a condition
(as in English law) is not required. Nor does § 323 BGB require intervention
by the court: the creditor can terminate the contract himself. And yet, also
German law is eager to avoid termination for minor violations of the contract.

234 · Contract law
A minimum threshold (much lower than the one provided by the PECL,
English and French law) can be found in the second sentence of paragraph
(5): the breach may not be ‘trivial.’ But the real way in which the BGB limits
termination is by summing up the types of situations in which a good ground
for termination exists. Apart from the case mentioned in § 324 (that mirrors
the damages claim of § 282 BGB in case of an ancillary duty, discussed in
Chapter 12 subsection B) and the case in which performance is impossible
(which under German law leads to automatic release from the contract: §§
326 and 275 BGB; Art. 9:303 (4) PECL provides for the same), the three
situations mentioned in § 323 (2) BGB are familiar. The PECL, English and
French law would probably also qualify these cases as fundamental non-per-
formance, breach of a condition or a non-performance that is serious enough
in the eyes of the court.
The real innovation that § 323 BGB brings, lies in the rule that termination is
Nachfrist
allowed in case of any non-performance, provided that the debtor is given a
second chance to perform (para. (1)). We encountered this Nachfrist before
in Chapter 12 subsection B, when the claim for damages based on § 281 BGB
was discussed. § 323 mirrors § 281, albeit that in case a time was specified
for performance (a so-called Fixgeschäft) the creditor is allowed to terminate
the contract on the basis of § 323 (2) 2, while a claim for damages then still
requires a Nachfrist. The main point is that German law thus makes it pos-
sible for the creditor to terminate the contract for any less than trivial breach
by giving the debtor a second chance to perform. This is particularly useful
in case of delay or defective performance. If A is to deliver 50 mobile phones
for use by B’s employees and it is unclear at which exact date delivery is due
(in which case § 323 (2) 2 BGB would apply), or the delivered goods are
defective, all that B needs to do is set a reasonable time for A to perform and
see what happens.
Dutch law Dutch law, finally, makes it the easiest on the creditor. Art. 6:265 BW states:
1. Every non-performance of a party of one of its obligations gives the other party
the right to terminate the contract in full or in part, unless the non-performance,
given its specific nature or trivial importance, does not justify this termination and
its consequences.
2. In so far as performance is not permanently or temporarily impossible, the right
to terminate the contract only arises when the debtor is in default.
This provision sets the threshold for termination comparatively low.

Termination (ontbinding) is a right of the creditor and it is for the debtor
to show that the non-performance does not justify the termination. Dutch

BOX 13.1
EFFICIENT BREACH
A thriving field of legal scholarship asks 25,000 widgets. I sell him the widgets and
which rules are the most economically as a result do not complete timely delivery to
efficient. Pioneered by Nobel Prize winner A, who sustains $1,000 in damages from my
Ronald Coase (1910–2013) and Guido breach. Having obtained an additional profit
Calabresi, the discipline of Law and of $1,250 on the sale to B, I am better off
Economics applies micro-economic analysis even after reimbursing A for his loss. Society
to the law. One of the best-known theories is also better off. Since B was willing to pay
in this field is that of efficient breach. This me $.15 per widget, it must mean that each
theory holds that a party should be allowed widget was worth at least $.15 to him. But
to breach (‘terminate’) a contract and pay it was worth only $.14 to A – $.10, what he
damages if doing so would be economically paid, plus $.04 ($1,000 divided by 25,000),
more efficient than performing the obliga- his expected profit. Thus the breach resulted
tions under the contract. This is a far cry in a transfer of the 25,000 widgets from a
from the view that a contract has binding lower valued to a higher valued use.’
force because morality requires it to be so. It
It is difficult to deny the logic of this
is also inconsistent with the existing law on
reasoning. The non-performance towards
when a contract can be terminated. Richard
A is efficient because everyone is better
Posner’s Economic Analysis of Law gives the
off: the promisor profits from his default
following well-known example of efficient
and the promisee is in as good a position
breach:
as he would have been in had the perfor-
‘Suppose I sign a contract to deliver 100,000 mance been rendered. The common law is
custom-ground widgets at $.10 a piece to sympathetic to the idea of efficient breach.
A, for use in his boiler factory. After I have The rule that the creditor is in principle only
delivered 10,000, B comes to me, explains entitled to damages (and not to perfor-
that he desperately needs 25,000 custom- mance) is an incentive to breach the con-
ground widgets at once since otherwise he tract if this is efficient (for example, as in
will be forced to close his pianola factory at the above case, because the seller receives
great cost, and offers me $.15 a piece for a better offer).
law assumes that a seller who receives €19,997 instead of the agreed upon
€20,000 cannot terminate, but this is an essentially different approach
to asking whether the non-performance was fundamental or serious
enough.
B. The mechanics of termination

In any jurisdiction termination of the contract can be claimed before the
Declaration court, but as noted before, this is often very impractical. This is exactly the

236 · Contract law
reason why the law also allows unilateral termination by a party. But which
requirements must the termination meet? Articles 1226 CC and 6:267 BW
state that the terminating party must send a written declaration, while the
PECL and German law provide that termination can be made by a declara-
tion in any form (Art. 9:303 (1) PECL, § 349 BGB). An English creditor
who decides to terminate (in the terminology of English law, the creditor’s
acceptance of the repudiation by the debtor) must naturally also communicate
this to the defaulting debtor. Again, no form is needed, provided that the
communication clearly and unequivocally indicates that the creditor wants
to put an end to the contract.
It was seen in Chapter 12 that in French and German law (and the same
Notice
is true for Dutch law), a damages claim can usually only be brought if the
debtor is put in default by a warning notice (mise en demeure, Mahnung)
unless this would be futile. Is such a notice also needed in case of termina-
tion? One could reason that if the breach is already serious enough to justify
termination, a formal warning to the debtor that he should perform usually
no longer makes much sense. However, this is not the existing law. French
Arts. 1225 (2) and 1226 (1) CC require in principle that the debtor is put
in default by way of notice. In German law the Nachfrist will usually replace
the notice (see, however, § 323 (3) BGB). The Dutch Art. 6:265 (2) BW
requires default (consisting of a notice unless a time was fixed for perfor-
mance) in case performance is not already impossible. This is quite under-
standable: Dutch law is lenient on the creditor and allows termination also in
case of a less serious breach.
C. Anticipatory breach
It seems obvious that a contractual remedy can only be brought in cases
where the other party fails to perform. A strict application of this rule
would imply that no termination (or damages) can be claimed before
there is actual non-performance. But what if it is clear that the debtor
will not perform or is unable to do so? It would be peculiar if the creditor
must then wait until the date that performance is due. Is the creditor then
allowed to treat the declaration or behaviour of the debtor to this effect as
a breach of contract? Although it seems strange to hold a party in breach
before performance is due, most jurisdictions make this possible by allow-
ing a so-called anticipatory breach. The following provisions are evidence
for this.
§ 323 (4) BGB: ‘The creditor may already terminate the contract before
performance is due, if it is obvious that the requirements for termination will be met.’

Art. 6:80 (1) BW: ‘The effects of a non-performance set in even before the claim
of the creditor is due:
a. if it is certain that performance will be impossible without breach;
b. if the creditor must conclude from a statement of the debtor that he will not
perform in conformity with his obligation; or
c. if the creditor has good reasons to fear that the debtor will not perform in
conformity with his obligation and the debtor does not comply with a written
notice of the creditor in which the debtor is asked to confirm, within a reasonable
time, that he is willing to perform in conformity with his obligation. The grounds
that gave the creditor good reasons to fear a non-performance of the debtor must
be mentioned in this notification.’
Art. 9:304 PECL: ‘Where prior to the time for performance by a party it is
clear that there will be a fundamental non-performance by it the other party may
terminate the contract.’
It follows from these provisions that if, for example, Mary hires Yves to reno-
vate her flat, and two months before the work is to start Yves tells Mary that
due to a busy schedule he will not be able to do the work, Mary can imme-
diately terminate the contract. English law adopts the same position. French
law, however, does not allow anticipatory breach. It is noted that jurisdictions
that allow anticipatory breach will not only permit a premature claim for ter-
mination but also for damages.
D. The effect of termination

In a typical case of non-performance the creditor will combine several rem-
edies. It is obvious that a party cannot bring a claim for performance and
termination at the same time, but a claim for termination will usually be
combined with one for damages for non-performance. This is self-evident:
the mere termination will not make good the damage that the innocent party
suffers as a result of the breach. The new Art. 1217 (2) of the French Code
states what any jurisdiction accepts:
‘Remedies which are not incompatible may be combined; damages may always be
added to any of the others.’
The obvious aim that a creditor has with termination is to be freed from the
contract. It is therefore no real question what the effect of termination is
for the future: it releases both parties from their obligations to effect and to
Future receive future performance (see e.g. Art. 9:305 PECL, which speaks for all
other jurisdictions).

238 · Contract law
Past The more difficult question is what is the effect if one or both parties have
already performed part of the contract before termination. A party who
already paid the price is naturally allowed to recover the money (see e.g. Art.
9:307 PECL). But what if goods were delivered? Is the seller allowed to claim
these back and, if so, on what basis?
The rift in Europe is between jurisdictions that award the termination with
retroactive effect and those that do not. If termination has retroactive effect
(as in Italy, Spain, Bulgaria and Belgium), this means that it is as if the contract
has never been concluded. The property in the goods that a party received
automatically returns to the seller (assuming that the seller was the owner
before delivery). This is highly practical in cases where the debtor becomes
insolvent: if the seller is ‘still’ the owner, he can collect the goods from the
debtor’s home and is not bothered by claims that any other creditors may
have.
If termination has no retroactive effect (as in France, Germany, England,

the Netherlands and under the PECL), the property in the delivered goods
remains with the party to whom the goods were transferred. In practice,
however, commercial parties will agree upon a retention of title clause. Such
a clause states that the property in the goods remains with the seller as long
as the buyer has not paid the purchase price. But what if the parties have
not included such a clause in their contract? Both the German (§ 346 BGB)
and the Dutch Civil Code (Art. 6:271 BW) as well as Art. 1229 CC and the
PECL (Art. 9:308) contain a specific provision according to which each of
the parties is then obliged to return the received performance. The differ-
ence with Italian and Spanish law becomes clear if one realises that the duty
to return the received goods is an obligation that in case of insolvency of the
debtor must compete with claims of the other creditors (see however Box
13-2).
It is sometimes not very practical, or even impossible, to return the received

Value
performance. It is for example difficult to see how provided services (such
as painting a house, treatment by a physiotherapist, or carriage of goods)
can be ‘returned’. The painter is not going to take off the paint, the physi-
otherapist will not kick her patient in the neck, and the carrier will not bring
back the goods to the port of dispatch. In such cases the law allows a party to
claim back the value of the performance. Article 9:309 PECL states what Art.
1352-8 CC, § 346 (2) BGB and Art. 6:272 BW also accept:
On termination of the contract a party which has rendered a performance which

cannot be returned and for which it has not received payment or other counter-

BOX 13.2
AN EXTRA STATUTORY RIGHT FOR THE UNPAID

SELLER?
The seller of a good naturally expects to good upon payment. A jurisdiction in which
get paid by the buyer. If the buyer does this is still the case today is South African
not pay the price, the seller can ask for law (which is heavily influenced by seven-
performance or eventually decide to termi- teenth century Roman-Dutch law). The rule
nate the contract. But this remedy may not has long been abandoned in Europe, which
always be the optimal one if the seller has makes the passing of property dependent
already delivered the goods. Mere termina- on either the moment at which the contract
tion will not automatically lead to the seller is concluded (as in France) or when the
regaining the property. If termination has goods are delivered (as in the Netherlands).
no retroactive effect, the seller’s claim to However, the remains of the old rule are still
payment is only one of many in the case detectable in French and Dutch law. Article
of the buyer’s insolvency, meaning that the 2332 CC, for example, allows the seller to
seller will probably remain empty-handed. It ‘revendicate’ (claim back the property in)
has already been seen that this is the reason the good within eight days after delivery
why many sellers are only willing to sell (which is too short a period to make this
goods under a retention of title clause. This right of great practical importance). Dutch
ensures that they remain the owner of the law also allows the unpaid seller to claim
goods until full payment has taken place. back the good as his property, but allows
One could very well argue that a seller who a longer period of six weeks from the
refrains from adding such a clause, but still moment at which payment was due. This
delivers the goods before payment, must so-called recht van reclame (Art. 7:39 BW)
face the consequences. provides the unpaid seller with a highly
This does not prevent some jurisdictions practical remedy: if the requirements for the
from providing special protection to the termination of a contract are met, he can
unpaid seller who has already delivered invoke this special right by way of a written
movable goods. This extra protection finds declaration. The effect of this is that the
its origins in legal history. Both in the law of seller, as the revived owner of the goods, is
Roman times and in the pre-codified laws of not bothered by the insolvency of the
France and the Netherlands, the rule existed buyer.
that the buyer only became the owner of a
performance may recover a reasonable amount for the value of the performance to
the other party.
In the case of long-term contracts, the law provides a different solution.

Long-term
Long-term contracts are characterised by the fact that mutual perfor-
contracts mances take place over a longer period of time. The landlord for example
is to provide the tenant with a liveable-in apartment in return for the tenant

240 · Contract law
paying the monthly rent. The franchisor receives a regular remuneration

from the franchisee, who in return has the right and obligation to use the
franchisor’s trade name, know-how and business method. In such contracts
non-performance often only takes place after a number of months or even
years. The effect of termination can then not be that the whole contract
must be unwound back to the moment of conclusion. There is also no
need for this as both parties have performed perfectly well until the breach.
Termination in case of contracts providing for continuous performance is
therefore only allowed for the future. In French law, this résiliation does thus
not affect the period before the breach. The same is true for the German
Kündigung (§ 314), which allows a party to terminate a contract for the
future in case of performance of a recurring obligation if there is a good
cause for doing so.
A final exception to the rule that termination leads to the end of the contract
Partial
is when termination is only partial. If a contract is to be performed in separate
termination parts and it is possible to apportion the non-performed part to a counter per-
formance, the creditor can terminate for only this part (cf. Art. 9:302 PECL
which in effect is an adequate description of the European common core). In
other words: a partial non-performance could justify a partial termination.
If the seller delivers 50 copies of the Swiss Civil Code instead of the agreed
upon 200 copies, this is surely a non-performance that justifies termination,
but if the buyer would like to keep the codes he received, he can terminate
the contract for the remaining 150 codes and consequently pay one-quarter
of the price. This is an easy example because the breach lies in a lesser quan-
tity than agreed upon. It is more difficult to apportion a breach as to quality
to a corresponding part of the counter performance. If the delivered bananas
do not meet the expected quality, one must assess what would have been paid
for bananas of the delivered type.
E. Withholding performance
Termination is an extreme remedy that a party will only bring if it is no
longer interested in the counterpart’s performance. This is no small thing:
parties conclude a contract to obtain a performance and the decision to
bring this contract to an end is usually a bitter disappointment. This explains
why a creditor usually prefers to postpone the moment of termination until
he is absolutely certain that the debtor is unwilling or unable to perform.
However, in a bilateral contract the mal-performing debtor is always also
a creditor and may ask for performance himself. If the landlord of an office
building refuses to repair the central heating, the tenant may want to wait to
terminate the lease and hope for better times, but the landlord will still claim

payment on the monthly rent. And if a seller delivers defective goods, he is

likely to ask for payment from the buyer anyway. The question is whether
this tenant and buyer (or any other debtor) can withhold performance until
the other party has performed properly. One should note that withholding
Defence performance is in this sense not a true contractual remedy, but a defence of
the debtor to a claim for performance by the creditor. Withholding perfor-
mance (exception d’inéxecution, Einrede des nichterfüllten Vertrags, opschort-
ing) is often a prelude to termination: the tenant and buyer will put an end
to the contract if the landlord and seller end up being unwilling or unable to
perform.
Any jurisdiction accepts that withholding performance is a valid defence

against the creditor’s claim for performance. Article 9:201 PECL is therefore
a fair description of the European common core:
(1) A party who is to perform simultaneously with or after the other party may
withhold performance until the other has tendered performance or has performed.
The first party may withhold the whole of its performance or a part of it as may be
reasonable in the circumstances.
(2) A party may similarly withhold performance for as long as it is clear that there
will be a non-performance by the other party when the other party’s performance
becomes due.
In the situation mentioned subparagraph (1) there is already non-

Two types
performance by the other party, while in the situation subparagraph (2)
performance is not yet due but the party who is to perform first has a good
reason to believe that the other party is not going to perform. The defence
in the first case is also known as the exceptio non adimpleti contractus (liter-
ally: the exception of a non-performed contract), in the second case as the
defence of uncertainty (which is the natural prelude to anticipatory breach).
For example, if a party, after the conclusion of the contract, has good reason
to fear that the other party will be declared bankrupt or will deliver the sold
object to somebody else, he can invoke the defence of uncertainty. Both
defences can also be found in the Arts. 1219 and 1220 CC, §§ 320 and 321
BGB and in the Arts. 6:262 and 6:263 BW while English law recognises
them in case law.

242 · Contract law
BOX 13.3
THE RIGHT OF RETENTION

A special type of withholding performance of retention is codified in the Arts. 1612
is the so-called right of retention. This is a and 2286 CC (droit de rétention), § 273
highly practical right: it allows a creditor to BGB and § 369 German Commercial Code
retain a good until the owner has met his (Zurückbehaltungsrecht) and in Art. 3:290
obligations that relate to it. Thus, a garage BW (retentierecht). English law enacts a
is allowed to keep a repaired car in its pos- right of retention for the unpaid seller (sell-
session as long as the owner does not pay er’s lien) in Sale of Goods Act 1979, s. 41,
the bill, a hotel can withhold the luggage but also recognises such a lien in common
of the guest, and a construction company law, equity and maritime law if further spe-
can refuse to allow access to the finished cific requirements are met.
building if the client does not pay. The right
TOPICS FOR REVIEW
Limits to termination in English, French and German law

Fundamental non-performance
Conditions and warranties
Method of termination
Efficient breach
The role of a second chance to perform
The role of notice
Anticipatory breach
The effect of termination
Retention of title clause
Termination of long-term contracts
Partial termination
Withholding performance
Exceptio non adimpleti contractus
Defence of uncertainty
FURTHER READING
– Dagmar Coester-Waltjen, ‘The New Approach to Breach of Contract in German Law’, in:
N. Cohen and E. McKendrick, Comparative Remedies for Breach of Contract, Oxford (Hart)
2005, 135–56.
– Richard A. Posner, Economic Analysis of Law, 9th ed., New York (Wolters Kluwer) 2011,
Chapter 4.

Part Six
Contracts and third parties

The last part of this book is devoted to the rights and obligations of third
parties. Third parties are persons who are not a party to the contract and who
therefore, in principle, do not incur rights and obligations under the contract.
Although this principle of privity or relativity of the contract seems self-
evident, a number of situations exist in which outsiders to the contractual
bond are affected by the contract, either because they can sue or because they
can be sued as a result of other people’s agreement. This part (consisting of
one single chapter) examines these situations.

14
Contracts and third parties
CHAPTER OVERVIEW
Adding a third party to the equation often makes things more exciting.
Contract law is not any different. This chapter studies a number of situa-
tions in which a person is affected by a contract although he is not a party
to it. This can be the case because he derives a right from other people’s
contracts (in case of so-called contracts for the benefit of a third party),
because he relies on an exemption clause in a contract to which he is not
a party (third-party effect of exemption clauses) or because he can sue
somebody other than his immediate party (in case of linked contracts).
This chapter also investigates whether, next to these ‘third party winners’,
the law must also recognise ‘third party losers’ who suffer a loss as a result
of a contract entered into by other people. Separate attention is paid to
agency, in which a third party is involved in the conclusion of the contract,
and assignment, which leads to the transfer of an existing right to a new
creditor.
Nothing seems more natural than only the contracting parties themselves
Privity incurring rights and obligations under the contract. If contracts are based
on the mutual consent of the parties, how could others ever be affected by
the agreement? Lawyers speak of the doctrine of privity or relativity of con-
tracts: not only can contracting parties not impose a burden on a third party,
a third party is in principle also unable to derive rights from other people’s
contracts. Art. 1199 s. 1 of the French Civil Code well reflects this line of
thinking, where it states: ‘A contract creates obligations only as between the
parties.’ Although this provision is perfectly consistent with the emphasis
that contract law puts on the party agreement, it reflects neither the needs
of commerce to sometimes benefit somebody else through the contract nor
the brutal reality in which a contract can in fact harm others. The law must
take this into account. It does so under the broad heading of ‘contracts and
third parties’, a group of highly diverse situations in which others than the
contracting parties are involved in the making of, or feel the effects of, the
contract. This chapter considers six types of such third-party involvement.

246 · Contract law
Contracts for the benefit of a third party

The most important exception to the principle that contracting parties can
only create obligations among themselves is the so-called contract for the
benefit of a third party (stipulation pour autrui, Vertrag zugunsten Dritter,
derdenbeding). In this case, the parties (A and B) agree that a third person
(beneficiary C) obtains a right that is enforceable against one of them.
Although it took most jurisdictions until the nineteenth century (and
England even until 1999) to accept such a third-party right, there is a clear
economic and societal need for it.
One straightforward example of a contract for the benefit of a third party is

Examples when two parties want to settle a debt owed by one of them to somebody
else. If A owes C €200 and A decides to sell his bicycle to B, then A and
B can agree in their contract that buyer B must pay the purchase price to
C. C then acquires the right to claim direct payment from B. Next to C, A
(sometimes called the promisee or ‘stipulator’) also can require promisor B
to perform against third party C. Another common example is the contract
of life insurance. This insurance entails that the insurer will pay a sum of
money to a beneficiary upon the death of the insured person. If Mary buys
a policy on Jim’s life for the benefit of their common children, she has to pay
premiums to the insurer while their children, obviously not parties to the
contract, can claim the insured sum upon their father’s death. In a similar
manner, two football clubs transferring a player can agree that part of the
transfer sum must be paid to the player himself, and a company taking over
another company can agree to continue to employ certain employees.
These examples make clear that the benefit to be conferred on the third party
can take a variety of forms. The broadly formulated statutory provisions in
France, Germany and England confirm this:
Art. 1205 CC: ‘A person may make a stipulation for another person.
One of the parties to a contract (the ‘stipulator’) may require a promise from the
other party (the ‘promisor’) to accomplish an act of performance for the benefit
of a third party (the ‘beneficiary’). The third party may be a future person but
must be exactly identified or must be able to be determined at the time of the
performance of the promise.’
§ 328 (1) BGB: ‘Performance to a third party may be agreed by contract with
the effect that the third party acquires the right to demand the performance
directly.’

Contracts and third parties · 247
S. 1 (1) Contracts (Rights of Third Parties) Act 1999: ‘Subject to the provisions
of this Act, a person who is not a party to a contract (a ‘third party’) may in his own
right enforce a term of the contract if –
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him.’
One characteristic of a contract for the benefit of a third party is that the
Right latter obtains an independent right against the promisor, meaning he can
claim performance as well as damages in case of breach. In the examples
above, the children, the football player and the employees obtain a right at
the moment the contract is concluded. This is important because it means
that the third party is not affected by the insolvency of the promisee, as the
right is no longer part of the promisee’s assets.
It is obvious that the promisor and promisee must have the intention to
Intention create a right for the third party. Art. 6:110 PECL confirms that in all jurisdic-
inferred tions, this intention can also be inferred from the purpose of the contract or
the circumstances of the case. In the German Denied passenger case (1985)
a tourist had booked a charter flight from Frankfurt to Santa Lucia with a
holiday tour operator, but the airline refused to give her a seat on the return
flight. She had to book another flight herself and was able to successfully
claim damages for non-performance from the airline, even though she and
the airline were not in a direct contractual relationship. The court reasoned
that it is typical for charter contracts that the individual holidaymakers are
not known at the time the airline and the charterer conclude their contract,
although the contract is clearly concluded in the interest of these individual
passengers. This justifies that the latter have a direct contractual claim against
the airline. The highest court in France went even further when it held that
a hospital patient who had received blood contaminated with syphilis could
directly sue the blood-transfusion service although this organisation had
only contracted with the hospital in which the patient was treated and not
with the unlucky patient herself. She was rightly considered a third-party
beneficiary of the contract between the hospital and the supplier of the blood
(Centre National de Transfusion Sanguine v L, 1954).
An important question is whether the third party should be told about, or

Renunciation
even accept, the benefit before it becomes effective. Much speaks in favour
of this: just like donation requires the donee to agree with receiving the gift –
which he may decline because he does not like the donor or simply because
he wishes to reject the gift for tax reasons – a third party should also in some
way accept the benefit imposed upon him. The great majority of jurisdictions

248 · Contract law
(confirmed by e.g. Art. 5.2.1 PICC and Art. II.-9:301 DCFR) realise this
through the backdoor: they hold that the third party obtains the right at
the moment the contract is formed, but he can renounce it if he wishes. An
explicit acceptance or notification is not needed. It can happen, therefore,
that a right is conferred upon a third party who does not know about the
right and only finds out later that he is able to sue the promisor.
Dutch law is the odd one out. Art. 6:253 BW requires the third party to
Dutch law accept the clause in his favour before it can be enforced (be it that this accept-
ance can be implicit). This is an exceptional requirement from a comparative
perspective. It has the distinct advantage that it is clear at which exact point in
time the right comes into being, but the doctrinal quirk of this construction
is that the beneficiary is no longer a true third party. This is indeed the posi-
tion of Dutch law: Art. 6:254 BW states that after acceptance, the beneficiary
is considered a party to the contract.
Third-party effect of exemption clauses

In commercial practice, it is not only important that a third party some-
times is given a direct right to performance, but also that the third party is
able to defend itself against a claim. This is of particular importance in cases
where the parties have included an exemption or limitation clause in their
contract and a third party is involved in the actual performance, as is the
usual situation in the field of shipping and transport. If the owner or shipper
(the person who sends goods for transport) contracts a carrier to ship goods
from Shanghai to Cairo, the carrier typically relies on contractors such as
stevedores and sub-carriers to perform the contract. However, transport is a
perilous activity and the carrier is likely to limit his liability for damage to the
goods. What if the independent sub-contractor, for example, damages the
goods when loading or unloading the cargo and is sued (usually in tort) by
the owner or shipper? Can the sub-contractor rely on the limitation of liabil-
ity in the original contract to which he is not a party?
It seems obvious that the sub-contractor can rely on the exemption clause if
Himalaya the parties have formulated it in such a way that it also shields third parties
clause from liability. Inspired by the name of the ship in the court decision in
which such clauses were first accepted under English law, these contractual
provisions are usually referred to as Himalaya clauses. Such a clause could
read like this: ‘No agent or independent contractor employed by the carrier
shall be liable to the owner of the goods for any loss or damage resulting
from any act or negligence on his part while acting in the course of his
employment.’

The more interesting question is whether third parties can also invoke an
Third-party exemption clause even if they are not explicitly mentioned in it. This is what
effect most jurisdictions now accept. There is a good argument for this: the shipper
who accepts the clause as part of his contract with the carrier must under-
stand that the carrier will make use of sub-contractors, as this is the common
situation. This is also exactly the argument the Dutch Supreme Court used in
the well-known case of Securicor (1979). Bank Vlaer & Kol had agreed with
Makro wholesalers that it would come to collect the cash money at Makro
at the end of each working day. The bank subsequently contracted with the
transport firm Securicor to carry out this task. One day in November 1972,
Securicor’s employees were robbed, losing some of Makro’s daily proceeds,
and Makro filed a claim against Securicor for negligence. However, the con-
tract between Securicor and the bank contained an exemption clause to the
effect that Securicor would not be liable for any losses while performing the
contract. Even though Makro was not a party to this contract, the court held
that Securicor could invoke the exemption clause; Makro should have under-
stood that it would not be the bank itself that would collect the money and
should have realised that contracts like these typically contain exemption
clauses.
BOX 14.1
A GERMAN DOCTRINE: CONTRACTS WITH

PROTECTIVE EFFECT FOR THIRD PARTIES
A famous case decided by the German was hurt when she was already on her way
Supreme Court in 1976 is the so-called out of the supermarket, while her mother
Vegetable leaf decision. Here, a 14-year- was paying at the checkout. And yet, the
old girl accompanied her mother when she court held the supermarket liable by ingen-
went shopping at the local supermarket. The iously assuming that the pre-contractual
girl was seriously injured when she slipped duty to take into account the interests of the
on a vegetable leaf on the supermarket’s customer (the victim’s mother) also extended
floor. Although it seemed reasonable to to the victim. The daughter, as a third party,
hold the supermarket liable for the injury, was thus drawn into the contractual sphere
the court could not rely on the limited in order to enjoy the same benefits as the
scope of German tort law to realise this, in (pre-)contractual party itself.
particular because it was not clear whether This separate head of liability is now
an employee or some other customer had known as the doctrine of ‘contracts with
dropped the leaf. It was equally impossible protective effect for third parties’ (Verträge
to found liability on contract as only the mit Schutzwirkung für Dritte). The doc-
mother intended to contract with the super- trine is particularly helpful in cases where a
market and not the daughter. The victim professional expert provides the wrong


250 · Contract law

information or poorly performs its tasks pointed inheritor: a solicitor (in England) or
under the contract, such as an account- a notary public (in civil law) draws up a will,
ant or tax advisor unjustifiably declaring a but does not do so on time or as instructed,
company financially fit or a surveyor writing leading to the unfortunate result that the
an unreliable valuation report. If the infor- intended beneficiary (a third party to the
mation contained in these statements is contract between the professional and the
inaccurate, the other contracting party can testator) does not inherit. In White v Jones
surely sue for non-performance, but the (1995) the English House of Lords held
question is whether a third party (such as a that the solicitor owes a duty of care to the
bank relying on the false information when intended beneficiary, potentially leading
providing a loan) also has a claim. French, to liability in negligence (a type of tort). In
English and Dutch law would allow a claim German law, the court would hold that the
in tort, but German law regards the third contract between the notary and the testa-
party as being protected under the contract. tor has protective effect towards the third
A well-known situation is that of the disap- party.
Linked contracts
A contract seldom comes alone. As was already seen in the discussion about
the third-party effect of exemption clauses, transport contracts are often part
of a broader network of connected contracts. Other similar examples include
the many contracts required to build a supply chain in the garment industry
(see Box 1.2) or build a house. Typical for these linked contracts (groupe de
contrats, verbundene Verträge, samenhangende overeenkomsten) is that, although
they consist of different contracts among different parties, the contracts are
economically or factually connected. While the natural tendency of the law is
to treat these contracts as separate, it sometimes takes their interconnected-
ness into account. Two questions can illustrate this. The first one is whether
a party to a contract can be held liable for a lack of conformity by a party in
another (linked) contract. The second is whether a contract can share the
fate of another contract in the sense that the end of one (through termination
or withdrawal) automatically leads to the end of another.
Any product being sold is likely to be the subject of many individual con-
Direct action
tracts before it reaches its end user. The manufacturer can sell its products to
a foreign importer, the importer to a distributor, the distributor to a retailer
and the retailer to a consumer. The first question is whether a party can bring
a claim against someone further up or down the chain than his immediate
contracting partner. Only a few jurisdictions accept such a contractual short-
cut. The best-known example is French law, which allows a so-called action
directe of the final purchaser against the original manufacturer or subsequent

seller for a lack of conformity in the goods. If a buyer is confronted with a

defect in the purchased product, he cannot bring a claim for non-performance
only against the seller from which he bought the goods, but also against the
producer of the goods. The French courts justify this blatant infringement
of the principle of relativity of contracts by reasoning that the contractual
remedies for non-performance are intrinsically linked to the defective goods
as they move down the contractual chain. The claim of the buyer is seen as
an accessory of the good itself and is therefore transferred to all subsequent
buyers. This clever construction evades any further complex doctrinal rea-
soning necessary to justify this contractual shortcut.
Good policy arguments exist in favour of this direct liability of the manufac-
Policy
turer. In the great majority of cases, the seller is nothing but a mere supplier
arguments who is unable to influence the quality of the product. It then makes much
more sense to hold the manufacturer liable. This also puts the incentive
where it belongs: if the goal of contractual liability is to incentivise a person
to minimise possible defects, the manufacturer is the right party to target.
This explains why in recent decades other jurisdictions, including Finland,
Spain and the Netherlands (cf. Art. 7:25 BW), also introduced liability for
a lack of conformity of a party further up the chain. A European variation of
this direct action can be found in Art. 18 of EU Directive 2019/771 on Sale
of Goods, a provision that is rather useless as it leaves Member States the
freedom to implement it or not.
The second question is whether the end of one contract can automatically
Shared fate
imply the end of another contract. A standard situation is when a consumer
buys a car or another valuable object and at the same time concludes a second
contract with a money lender to finance the purchase, possibly with the
lender directly paying the purchase price to the seller, and with this financing
option being offered by the seller on behalf of the lender at the time of the
purchase. What if the buyer discovers major defects shortly after delivery and
successfully avoids the sale for mistake or terminates it for non-performance?
It would be highly undesirable if the buyer would then still be bound to the
credit agreement. Courts around Europe therefore held that in such a situa-
tion, the credit agreement shares the fate of the sales contract, even though it
is concluded with another party. Legislators enacted similar rules for cases in
which a consumer exercises his withdrawal right, as is for example apparent
from Art. 15 s. 1 EU Directive 2008/48 on consumer credit:
Where the consumer has exercised a right of withdrawal, based on Community

law, concerning a contract for the supply of goods or services, he shall no longer be
bound by a linked credit agreement.

252 · Contract law
Third-party losers
In the three situations mentioned above, persons stand to benefit from being
a third party to the contract: they are ‘third party winners.’ A key question
is whether contract law also allows a claim to ‘third party losers’, those who
suffer a loss as a result of a contract entered into by other people. The tra-
ditional answer is that a contract can never impose a direct duty on a third
party to do something: contracting parties cannot force someone without
his consent to send them flowers every morning or build a wall around their
gardens. However, if one looks beyond legal doctrine, to the reality of con-
tract practice, it becomes abundantly clear that individual contracts can
affect other people in many different ways. The mere fact that I buy a paint-
ing and hang it on my wall deprives many others from enjoying it. When two
business partners agree to open a restaurant, they are likely to lure custom-
ers away from existing eateries in the area. In the same vein, my decision to
buy a Volkswagen or any other car will increase pollution to the detriment
of others. It was seen before (Chapter 8) that parties must to some extent
take into account each other’s interests; however, the law generally does not
require parties to also take into account the interest of third parties. The high
threshold here is that of liability in tort: only the intentional or negligent
infringement of a party’s interest will merit a claim in damages.
A policy question legislators and courts will have to answer in the years to
CSR
come is whether this view of contractual liability is not too narrow in case of
gross violations of labour standards in the supply chain or threats to the envi-
ronment. In one American case, employees of Wal-Mart Stores Inc.’s foreign
suppliers in China, Bangladesh and Indonesia filed a claim against Wal-Mart
to improve local labour conditions. They claimed that they could benefit, as
third parties, from the contract concluded between Wal-Mart and its suppli-
ers, requiring the suppliers to comply with set labour standards. The claim
failed: even though Wal-Mart was eager to advertise to its home market that
it only used responsible suppliers, the California Court of Appeal found it
impossible to regard its foreign suppliers’ employees as third-party benefi-
ciaries of the standards Wal-Mart obliged its suppliers to use (Doe v Wal-Mart
Stores, 2009). This is an exemplary application of existing contract law prin-
ciples, but the question is whether these principles should not be adapted to
better accommodate the externalities the contract entails. One argument in
favour of this is that if a multinational company profits from the use of cheap
labour within the supply chain, it must also be responsible for the working
circumstances of the labourers employed by its sub-contractors. This argu-
ment is even stronger if the company publicly adheres to a code of corpo-
rate social responsibility (CSR) on compliance with fair labour standards.

Fresh thinking is required to translate this argument into a legal rule on when
and how to involve the effects of contracts outside of the direct circle of the
parties.
Agency
Modern economic life requires that contracts be made with the help of
others. As soon as an entrepreneur no longer has the time or energy to buy
all the equipment he needs himself, to carry out his own negotiations or to
sit at the till of the supermarket he owns, the only way to expand his business
is to find people willing to act as intermediaries and conclude contracts for
him. The law facilitates this by recognising that not all persons involved in
the conclusion of a contract are in fact considered contracting parties. Shop
managers, directors, CEOs and cashiers are only some examples of people
acting on behalf of other (usually legal) persons. In addition, one can com-
mission someone to perform a specific task on one’s behalf, as is the case if I
pay a friend on holiday in La Paz to buy me a copy of the Bolivian civil code.
In the English language, the broad term ‘agency’ is used to refer to all cases
in which one person (the principal) agrees that another person (the agent)
contracts on his behalf with a third party.
Civil law recognises two different ways in which one can act on behalf of
Civil law
another person. One method is to simply ask an intermediary (B) to con-
tract himself (‘in his own name’) with a counterpart (C) and then provide
the principal (A) with the benefits of the contract. B himself is then bound
towards the party C, but on the basis of the agreement between A and B, B
also is bound to provide A with the economic benefit of his transaction with
C. The sales commission agreement is the best-known example of this so-
called indirect representation. A commission agent (such as a broker trading
commodities) typically acts in his own name, but for the account of another.
Thus, the agent who receives an order from his client to purchase oranges will
buy these himself (possibly with the money provided in advance) and subse-
quently transfer the oranges to his client. Article 3:102 (2) PECL describes
this situation as ‘where an intermediary acts on instructions and on behalf of,
but not in the name of, a principal.’
Civil law jurisdictions distinguish this type of acting on behalf of another

from genuine (‘direct’) representation (représentation, Stellvertretung,
vertegenwoordiging). Direct representation is characterised by the fact that
the agent acts in the name of a principal and is not bound towards the party
he in fact deals with. Both the German and the French civil code put this
well:

254 · Contract law
Art. 1154 s. 1 CC: Where a representative acts within his authority and in the
name and on behalf of the person whom he represents, only the latter is bound to
the undertaking so contracted.
§ 164 s. 1 BGB: A declaration of intent which a person makes within the scope of
his own power of representation in the name of a principal takes effect directly in
favour of and against the principal. (. . .)
This explains why in civil law, the intermediary is not regarded as a real third
party: he is automatically eliminated from the relationship between the
principal and his counterpart. This obviously requires that the counterpart
knows that the agent is not acting in his own name (regardless of whether the
principal’s identity is revealed at the time the agent acts or later). This repre-
sentation often follows from the circumstances: if one buys something in a
shop, one can safely assume that the employee at the counter does not intend
to bind himself, but only the shop owner. The same is true for the manager
representing her company. In other cases, the agent will explicitly mention
that he is not acting in his own name but was given the explicit power to act
in the name of somebody else. This power is what the Germans refer to as
Vollmacht (cf. § 166 (2) BGB) and the French as procuration (cf. Art. 1984
CC): the full power of the agent to bind his principal. This authority often
coincides with a duty to act (as in case of mandate), but this need not be the
case. The aforementioned commission agent will have to follow the instruc-
tions of the commissioning party, but he does not have the power to act in his
name. Reversely, my wife may have given me the authority to use her credit
card, and although I am much tempted to make use of this power, I am not
obliged to.
The distinction between indirect and direct representation is alien to the

English law
common law. While on the European continent (followed by Art. 3:102
PECL), the principal is only bound if the agent acts in the principal’s name
and the counterpart is aware of the fact that he is dealing with an agent,
English law is more lenient. As long as the agent acts within the scope of his
authority (even when contracting in his own name), he can bind his prin-
cipal. A peculiar trait of English law is that the agent need not even tell his
counterpart that he is acting for somebody else. In such a case of undisclosed
agency, the agent himself is bound, but as soon as it becomes clear that he in
fact acted for a principal who authorised him, the counterpart can decide to
also hold the principal liable. The interesting consequence of this – unthink-
able in civil law – is that the other party can sue someone of whom he had not
heard at the time of contracting and with whom he did not want to contract
at all. This may explain why English lawyers have no difficulty calling the

principal a third party: he intervenes in an already perfectly valid contract

between the agent and the counterpart.
A central problem in the law of agency is how to protect the counterpart

Apparent
who deals with an unauthorised agent. If I ask you to negotiate in my name
authority about a house I am interested in buying but not make any offers exceeding
€250,000, it seems self-evident that I am not bound when you offer the seller
€290,000. You acted as a falsus procurator and it would infringe upon my con-
tractual autonomy if I were to pay €40,000 more than I had agreed. However,
what if the seller had no reason to doubt that you had the power to make the
offer? Should the seller’s reasonable reliance be protected? If so, it means the
seller cannot only sue the mal-performing agent (which is not of much use in
the above example because he does not own the house), but also the princi-
pal. The affirmative answer provided by Art. 3:201 (3) PECL reflects what is
accepted everywhere:
A person is to be treated as having granted authority to an apparent agent if the

person’s statements or conduct induce the third party reasonably and in good faith
to believe that the apparent agent has been granted authority for the act performed
by it.
It is obvious that the agent himself cannot create this so-called apparent
authority (mandat apparent, Rechtsscheinsvollmacht, schijn van vertegenwoor
dingsbevoegdheid). The counterpart needs to have acted in reasonable reli-
ance on a declaration or conduct of the principal. This is not difficult to
establish if the powers given to the agent are laid out in a publicly accessible
document, as in the case of directors of legal persons whose competences
are registered with the Chamber of Commerce. The counterpart is sup-
posed to know about this information and can therefore never legitimately
rely on a middleman exceeding his competences. However, there is abun-
dant case law showing that things are not always so clear. What if the prin-
cipal does not react to a confirmation of the order by the counterpart who
acted with an unauthorised agent? And what if one lets someone work at
the office, or provides someone with stationery containing the company’s
letterhead? Courts around the world have indeed held that the principal
remaining silent or putting someone in a certain position can induce a rea-
sonable person to think that the agent had the necessary authority to bring
about a contract.

256 · Contract law
Assignment
A party to a contract not only can decide to provide a third person with an
Transfer of
enforceable right (contracts for the benefit of a third party) or involve an
right intermediary in the conclusion of the contract (agency), it can also transfer
an already existing contractual right to somebody else. Assignment (cession,
Abtretung, cessie) is the transfer of a right (e.g. to the purchase money in a
sales contract) by one person (the assignor) to another (assignee), result-
ing in the assignee being able to claim from the debtor (debtor cessus). If A
sells his car to B for €3,000, A can assign his right to payment (enforceable
against B) to C in a separate contract between A and C. C is not a third-party
beneficiary or an agent, but can claim payment from B simply because he
has taken the place of A as the creditor. B is no longer allowed to pay A: in
case he does, he is not discharged of his obligation and must pay a second
time (to C).
Assignment being possible seems the logical result of freedom of contract.

Assignability
If one is able to transfer physical objects, why should one not also be able to
transfer rights to claims? However, there is an important obstacle to simply
applying contractual freedom to the transfer of rights: as long as a contract
is seen as a personal relationship between the creditor and the debtor (as
it was in Roman law), it is unacceptable that the creditor can unilaterally
decide to change the person towards whom the debtor needs to perform.
This argument is still valid today in cases where the performance hinges
on the personal characteristics of a party: a debtor obtaining a new creditor
against his will is fine if the claim is for payment of money, but the landlord
need not accept a new tenant in the existing lease or the publisher another
author in the previously concluded publishing contract. Also, in the above
example, buyer B may have had good reasons to choose A as the person
to buy the car from. This explains why, although assignment is universally
accepted (see e.g. Art. 1321 CC, § 398 BGB, Art. 3:94 BW and S. 136 Law
of Property Act 1925), many jurisdictions allow parties to include a non-
assignability clause in their contract. Such a clause limits or even prohibits
the creditor from transferring his claim to somebody else. This is a distinct
difference compared to tangible goods, where the interest of commercial
intercourse requires that these remain freely transferable, and parties usually
cannot exclude their transferability with effect against third parties.
A highly important question is at which point in time is the assignment com-

Notification
plete. This question can receive two different answers depending on what
one considers as ‘complete.’ On the one hand, one can say the assignment

is accomplished only when the new creditor can claim from the debtor, and
the debtor will only be discharged of his obligation if he pays the new credi-
tor. In order to achieve this consequence, it is essential that the debtor be
informed about the change of creditor. Next to the written form for the con-
tract between assignor and assignee in French (Art. 1322 CC) and Dutch
law (Art. 3:94 s. 1 BW), notification of the debtor is therefore a universally
accepted requirement for the assignment to be completed. The requirement
can be found in Art. 1324 CC, §§ 407, 409 BGB and Art. 3:94 BW as well as
in S. 136 of the English Law of Property Act 1925.
On the other hand, one can consider the assignment as completed when the
Between
right to claim has left the assets of the assignor and the assignee is the new
assignor and ‘owner’ of the claim. This other meaning of ‘completed’ is important because
assignee of the role that assignment plays in economic life, where it is often used as
a means to provide security to creditors. The wealth of a company is to a
large extent made up of claims. A moneylender (such as a bank) is usually
only willing to provide credit if these claims serve as collateral security for
payment of the debt. The moneylender will therefore require these claims
to be assigned so that it can turn towards the company’s debtors in case the
company is unable to pay back the loan. However, both assignor and assignee
have an interest in not having to inform the debtor about the assignment:
this is not only impractical in the typical case of an assignor having hundreds
of debtors, but it could also lead to doubts in the market about the solvency
of the assignor. This explains why several legislators hold that assignment is
already complete between assignor and assignee at the time of conclusion
of the contract, without the need for notification of the debtor. While this is
even the main rule for assignment in German (§ 398 BGB) and French (Art.
1323 CC) law, Dutch law accepts – next to the assignment, with notification
of the debtor – a so-called ‘silent assignment’ (stille cessie) in Art. 3:94 s. 3 BW.
It requires either a notary deed or a private deed registered at the tax office.
Only S. 136 of the English Law of Property Act 1925 still requires a written
notice sent to the debtor before the assignment is valid between assignor and
assignee, but this requirement is not important in practice now that the trans-
fer is valid in equity even before notification. Art. 11:202 (1) PECL thus has
no difficulty in stating the following provision as the common core:
An assignment of an existing claim takes effect at the time of the agreement to

assign or such later time as the assignor and assignee agree.

258 · Contract law
BOX 14.2
FACTORING
Assignment plays an important role in com- in this type of work. This explains why
merce, in particular in the financing of a factoring is not only popular among busi-
company’s daily business. One often-used nesses in need of immediate finance, but
technique is factoring, which is a contract also among healthcare providers such as
in which the assignor sells a large amount doctors and dentists – rarely enthusiasts of
(or all) of its claims to a factoring company paperwork.
(factor) at a discount. This allows a The success of factoring stands and falls
company to obtain immediate cash. In par- with the possibility to assign bulk claims.
ticular, small and medium-sized enterprises The instrument would not be very useful if
may lack the cash flow to run their busi- each claim on an individual debtor should
ness while waiting for payment from their have to be separately assigned. It was
debtors. If they do not wish, or are unable, already seen in the main text that legisla-
to borrow money from a bank, they can sell tors facilitate this by relaxing the notifica-
all their present and future claims (known tion requirement. They also allow for bulk
as ‘receivables’ in American terms) to the assignment and even have come to accept
factor. Because the factor buys these claims that the assignment can cover future claims
below their value (that is, the amount due without the need for a new act of transfer
by the debtor), it can make a profit when every time a claim comes into existence. The
collecting the claim. only requirement is that the future rights
Obtaining finance is not the only are identifiable as rights to which the act
reason a business may transfer its claims of assignment relates (cf. Art. III.–5:106
to a factor. Apart from the fact that it also DCFR and Art. 5 of the 1988 UNIDROIT
conveniently shifts the risk of defaulting Convention on International Factoring). For
debtors away from the assignor, factoring example, if metal manufacturer M supplies
allows the assignor to focus on his core pipes to retailers, it can effectively assign
business. He no longer needs to worry factoring company F all its future claims to
about administration and credit control and payment as listed in schedules regularly sent
can leave the sending of invoices and col- to F. This is sufficient to make the claims
lection of claims to the factor specialising identifiable.
TOPICS FOR REVIEW
Privity or relativity of contract

Contracts for the benefit of a third party
Third-party effect of exemption clauses
Contracts with protective effect for third parties
Linked contracts
Third party losers
Agency
Representation

Undisclosed agency
Apparent authority
Assignment
Factoring
FURTHER READING
Common Law of Europe, 3rd ed., Oxford (Hart Publishing) 2019, Chapters 31-33.
– Michael Joachim Bonell, ‘Agency’, in Arthur Hartkamp et al (eds.), Towards a European Civil
Code, 4th ed. Nijmegen (Ars Aequi) 2011, Chapter 22.
– Jan Hallebeek and Harry Dondorp (eds.), Contracts for a Third-Party Beneficiary: A Historical
and Comparative Account, Leiden-Boston (Martinus Nijhoff) 2008.
– Hein Kötz, European Contract Law Vol. 1 (translated by Tony Weir and Gill Mertens), 2nd ed.,
Oxford (Oxford University Press) 1997, Chapters 16–18.
– Ilse Samoy and Marco B.M. Loos (eds.), Linked Contracts, Cambridge (Intersentia) 2012
– Hendrik Verhagen and Laura Macgregor, ‘Agency and Representation’, in: Jan M. Smits, Elgar
Encyclopedia of Comparative Law, 2nd ed., Cheltenham; Northampton Mass. (Edward Elgar)
2012, Chapter 3.
– Stefan Vogenauer, ‘Contract in Favour of a Third Party’, in Jürgen Basedow et al (eds.), The
Max Planck Encyclopedia of European Private Law, Vol. I, Oxford (Oxford University Press)
2012, 385.

Glossary
Acceptance
The unconditional agreement of a party with the terms of an offer, bringing
about the contract.
Agency
A relationship under which one party (the agent) agrees to act as an interme-
diary to conclude contracts on behalf of the other party (the principal).
Anticipatory breach (or anticipatory repudiation)

The situation in which, before performance is due, a party indicates that it
will not perform the contract or is unable to do so.
Apparent authority
The situation where a person is treated as having granted authority to an
apparent agent if this person induced a third party to reasonably believe that
the agent had been granted authority to enter into a transaction.
Assignment
Transfer of a right by one person (the assignor) to another person (the
assignee), resulting in the assignee being able to claim from the debtor.
Assumpsit
A form of action at common law that gives a right to sue someone for damages
who claims that a contract has been breached.
Avoidable contract
A contract that suffers from such a defect that it allows one party or both
parties to invalidate it. See also: void contract.
Avoidance
Invoking a ground of invalidity of the contract.
B2B contract
Business-to-business contract.

262 · Contract law
B2C contract
Business-to-consumer contract.
Barter
A contract under which each party agrees to transfer the ownership of a good
in return for receiving the ownership of another good.
Battle of the forms

The situation in which each party to a contract uses its own general conditions
and the law must decide which set of conditions applies to the contract, if any
at all.
Bilateral contract
A contract under which each party assumes an obligation in order to obtain
the performance to which the other party obliges itself. See also: unilateral
contract.
C2C contract
Contract between two individuals not acting as a business.
Canon law
The law of the Catholic Church.
Capacity
The ability of a natural person to enter into a valid legal transaction.
Causa
A proper reason to be bound to a promise, codified as a requirement for the
valid formation of a contract in most civil codes in the French legal tradition.
Caveat emptor
A maxim under English law literally meaning ‘let the buyer beware’: the
buyer must investigate the goods himself in the absence of a duty of the seller
to volunteer information. The maxim applies when buyer and seller are in an
equal bargaining position.
Civil code
A comprehensive and systematic collection of the rules of private law that is
promulgated by a formally empowered authority such as a state.
Closed system of contracts

A description of a system of contract law in which only some well-defined

Glossary · 263
contracts are recognised as binding. For example: the system of Roman

contract law before the general principle of binding force of contract was
accepted.
Condition
A type of contractual term that, in case of non-performance, justifies termi-
nation of the contract under English law.
Conflict-of-laws
The rules of law that deal with relations between persons across different
jurisdictions. Conflict-of-laws (also known as private international law) deals
mainly with the question which law applies to a cross-border relationship
and which national court is competent to decide a cross-border case.
Consensus ad idem
The agreement of the parties to a contract (a ‘meeting of the minds’).
Consideration
The requirement for the valid formation of a contract under English law that
each of the parties to the contract must provide or promise something of
value to the other party.
Consumer credit
A contract under which a business (the lender) agrees to provide a private
individual (the borrower) with credit and by which the borrower is obliged
to repay the loan.
Consumer sale
Sale of goods by a business to a private individual for private consumption
or use.
Contra proferentem rule

If the words of a contractual clause are ambiguous, the clause must be inter-
preted against the party who drafted it.
Contract
A legally binding agreement.
Corpus Iuris Civilis

The sixth century compilation of Roman law commissioned by Emperor
Justinian.

264 · Contract law
Culpa in contrahendo
The violation of a duty to negotiate in good faith about a contract.
Deed
A written and signed document attested by a witness.
Default rules
Contract law rules that are automatically applicable to the contract if the
parties do not provide otherwise.
Defect of consent
A flaw in the contractual consent that is of such a nature that it allows a party
to invalidate the contract.
Directive
A European legislative instrument that is binding on the Member States as to
the result to be achieved, but that leaves the form and method of implemen-
tation to the national legislatures.
Dissensus
The situation in which intention and declaration of a party differ from each
other.
Distribution contract
An agreement under which one party (the supplier) agrees to supply another
party (the distributor) with products on a continuing basis, and the distribu-
tor agrees to pay for them and to supply them to others in the distributor’s
name.
Donation
A contract under which one party (the donor) gratuitously undertakes to
transfer the ownership of a good to another party (the donee) with the inten-
tion to benefit the donee.
Exceptio non adimpleti contractus

The right of a party to a bilateral contract to withhold its performance until
the other party has duly performed its obligations under the contract.
Efficient breach
The view that a party is allowed not to perform a contract and pay damages
instead if this is economically more efficient than performance.

Glossary · 265
Equity
The body of English law that supplements and mitigates the common law
where the latter leads to harsh results.
Estoppel
The English doctrine that precludes a person from denying or asserting any-
thing to the contrary of his own previous conduct.
Exclusion clause
A term in a contract that seeks to exclude liability of a party for non-perfor-
mance of the contract.
Executed consideration
Something given or accepted in return for a promise, where the promised act
is performed.
Executory consideration
Something given or accepted in return for a promise, where the promised act
is still to be performed in the future.
Expectation interest
The interest of a party to be put in the position that it would have been in had
the contract been performed.
Expedition theory (or dispatch theory, postal rule or mailbox rule)

The theory according to which a contract is concluded when the offeree
sends the acceptance to the offeror.
Employment contract
A contract under which one party (the employee) is to perform contractually
agreed work and another party (the employer) is to pay a remuneration for this.
Factoring
A contract in which a party assigns its claims to a factor with a view to obtain-
ing finance and/or to outsourcing administration and credit control.
Feudalism
The political and economic system in large parts of Europe between the
ninth and the fifteenth century in which vassals were protected and main-
tained by their lords and received land tenure in return for homage and legal
and military service. The rights and obligations of people primarily followed
from their status and not from contracts voluntarily entered into.

266 · Contract law
Fiduciary relationship
A special relationship of trust and confidence that requires a higher duty of
care from both parties. Examples include the relationships between bank and
client, solicitor and client, doctor and patient, principal and agent, guardian
and ward, and shareholders and directors.
Franchise
A contract under which one party (the franchisor) grants another party (the
franchisee), for a fee, the right to conduct a business, whereby the franchisee
is to use the franchisor’s trade name, know-how and and business system.
Fraud (or deceit)

Wilful deception of another party, inducing this party to enter into a
contract.
Frustration
A doctrine in English contract law that is used to set aside a contract in case
an event makes performance impossible or radically changes a party’s princi-
pal purpose with the contract.
General conditions (or standard terms)

Terms that have been formulated in advance to be used for more than one
contract and which have not been individually negotiated by the parties.
Good faith
Objective good faith is a standard of conduct prescribing a party to take into
account the justified interests of the other party. Subjective good faith is a
mental state of mind of a party characterised by a justified absence of knowl-
edge about a certain situation.
Gratuitous transaction
A transaction in which one of the parties obliges itself to another without
(the promise of) receiving anything in return.
Heads of agreement
A document outlining the main points of agreement relevant to the contract.
Hire-purchase
A contract under which one party (the ‘hirer-purchaser’) pays the price of
a good in parts (usually every month) while enjoying the use of it, and the
other party (the seller) transfers ownership when the instalments equal the
total price.

Glossary · 267
Inequality of bargaining power

The situation in which one party has greater inherent ‘power’ (ability to influ-
ence the terms of the contractual agreement, information, expertise, financial
means, etc.) than the other party.
Inertia selling
Sending unrequested goods to people, followed by demanding payment if
they do not return them.
Injunction
A court order that requires someone to perform, or to refrain from perform-
ing, a specific act.
In pari delicto rule

In cases where both parties are equally at fault, they cannot recover any-
thing and will remain in the same situation they were in before one of them
brought a court action claiming that the contract is prohibited.
Ius commune
The common system of legal thought and practice that was developed in
large parts of continental Europe between the twelfth and nineteenth centu-
ries and that found its basis in Roman and canon law.
Iustum pretium
The idea that a contract should have a ‘just price’.
Juridical act
A declaration or agreement having legal consequences because these are
intended by the person who acts.
Keep-open covenant
The clause in a commercial lease that requires the tenant to keep the prem-
ises (such as a shop or supermarket) open for trade during an agreed upon
period.
Lapse
An offer coming to an end, meaning that it is no longer open for acceptance.
Lease
A contract under which one party (the lessor) grants another party (the lessee)
a right of use for a specific period in return for a periodic payment (the rent).

268 · Contract law
Limitation clause
A term in a contract that seeks to limit liability of a party for non-perfor-
mance of the contract.
Linked contracts
Contracts that, although concluded separately, are economically or factually
connected.
Liquidated damages clause

A clause in a contract that requires the defaulting debtor to pay a specified
sum to the creditor that is a reasonable pre-estimate of the likely damages.
Minimum harmonisation
The type of European harmonisation of law that sets a threshold which
national legislation must comply with, leaving it to each individual member
state to offer more protection.
Minor
A person below the age of majority.
Misrepresentation
An untrue statement of fact, which induces a party to conclude a contract.
Mistake
The erroneous belief of one or both contracting parties that certain facts are
true and that allows one or both parties to invalidate the contract.
Multi-level legal system

A legal system in which rules are created at different (local, national, European
or supranational) levels of government.
Non-compliance penalty
The sanction that a court can impose on a party for failure or refusal to
comply with a court order.
Obligation
A usually enforceable duty to perform of one person (the debtor) vis-à-vis
another person (the creditor).
Offer
A proposal that is intended to result in a contract if the other party accepts it
and that contains sufficiently definite terms to form a contract.

Glossary · 269
Offeree
The person to whom an offer is made.
Offeror
The person making an offer.
Pacta sunt servanda

The principle that agreements must be kept. It is often mentioned to denote
the end-result of the development from a closed system of contracts to the
recognition of a general principle of binding force of contract.
Parol evidence rule

A rule of evidence under English law, which prevents a party to a written con-
tract from providing evidence extrincic to the written agreement.
Party agreement
The terms of the contract that the parties expressly agreed upon.
Past consideration
An act carried out before a promise is given and that therefore forms no good
consideration for the promise.
Penalty clause
A clause in a contract that requires the defaulting debtor to pay a speci-
fied sum to the creditor that is not a reasonable pre-estimate of the likely
damages.
Prenuptial agreement
A contract entered into prior to marriage or civil union, providing for the
division of property and possibly other things in case of divorce or breakup.
Private law
The branch of law that defines the rights and duties of private actors (such as
individuals and companies) as they relate to each other.
Privity
The principle that a contract can only bind the parties and does not confer
rights or impose duties on others.
Procedural fairness
The view that a contract is fair if the parties were free from constraints that
prevented their exercise of freedom of contract at the time of conclusion of

270 · Contract law
the contract (such as defects of consent, incapacity, lack of full information

or inequality of bargaining power). See also: substantive fairness.
Promisee
The person to whom a promise is made.
Promisor
The person making a promise.
Promissory estoppel
The doctrine in English law that if a party changes its position by acting in
reliance upon a promise lacking consideration, this party can enforce the
promise even though the requirements for a valid contract are not met.
Receipt theory
The theory according to which a contract is concluded when the offeror
receives the acceptance of the offeree.
Real contracts
Contracts which require the handing over of a good in order to be valid.
‘Red hand’ rule

The rule that a party who seeks to exclude or limit liability for non-perfor-
mance of the contract must take reasonable steps to give notice of the clause
to the other party. The more unreasonable the clause is, the greater the meas-
ures the party must take to draw attention to it.
Regulated contracts
Contracts of which the contents is substantially prescribed by law or regula-
tory measures.
Reliance interest
The interest of a party to be put in the position it was in before it acted in
reasonable reliance on the contract.
Representation
A statement under English law, which asserts the truth of a given state of facts
encouraging a party to enter into a contract.
Representation (direct)
The situation in which an agent acts in the name of a principal and is there-
fore not itself bound to the transaction.

Glossary · 271
Restraint of trade clause

A clause in a contract that restricts a party’s freedom to conduct business or
a profession.
Retention of title clause

A clause in a contract for the sale of goods that states that the property in the
goods remains with the seller as long as the buyer has not paid the purchase
price.
Revocation
The act of recalling an offer so that it no longer has any effect.
Sale of goods
A contract under which one party (the seller) obliges itself towards another
party (the buyer) to transfer the ownership of a good against the payment of
a price.
Second chance to perform

The requirement in German law that a claim for damages or termination
must sometimes be preceded by first allowing the debtor to remedy his late
or defective performance.
Services contract
A contract under which one party (the service provider) agrees to supply a
service to another party (the client) in exchange for a price.
Stare decisis
The common law doctrine of binding precedent, obliging a court to respect
the precedent established by previous decisions.
Stipulatio
A form of contract in Roman law based upon a question-and-answer ritual.
Subject to contract
A clause used to avoid that a party is bound to a contract before it is put into
writing and signed.
Substantive fairness
The view that the fairness of a contract must be judged by the extent to which
the outcome of the contracting process is in conformity with some view of
fairness (such as social justice). See also: procedural fairness.

272 · Contract law
Suretyship
A contract under which one party (the surety or guarantor) obliges himself
in favour of another party (the creditor) in order to secure a right to perfor-
mance of an obligation of a third party (the debtor) owed to the creditor.
Surrogacy
The contract by which a woman agrees to carry and deliver a child for another
person or couple.
Termination
Bringing an end to the contract for reason of non-performance.
Timeshare
A type of contract that allows a party to use the property (usually a holiday
house or an apartment) for a certain period of time, often combined with
shared ownership.
Tort (or delict)

A civil wrong causing loss or harm and allowing the victim to claim damages.
Undisclosed agency
A relationship between an agent and its counterpart where the counterpart
does not know that the agent is acting on behalf of a principal.
Unilateral contract
A contract in which only one of the parties assumes an obligation.
Venire contra factum proprium

The legal maxim that no one is allowed to act contrary to their own previous
conduct.
Void contract
A contract that suffers from such a defect that it is of no effect from the begin-
ning (‘ab initio’). See also: avoidable contract.
Warranty
A contractual term under English law, which if broken allows a claim for
damages but not for termination of the contract.
Withdrawal
The overtaking of a declaration by another declaration that reaches the
addressee before or at the same time as the first declaration.

Glossary · 273
Withdrawal right
The right of the consumer to end a contract within a limited period without
having to give any reason for doing so.

Index
absolute contracts 214 Bingham, Lord 137–8

Ackner, Lord 142 Blackburn, Judge 66, 172
adults in need of protection see legal capacity of parties, Bowen, Lord 48
adults in need of protection breach of contract see damages for non-performance;
advertisements defects of consent and misrepresentation;
contracts requiring pre-contractual information termination of contract
duties 110–11 Brexit and Consumer Rights Act 24
and offers to the public see offer and acceptance of a Brownsword, R. 143
contract, offers to the public and advertisements Bugnet, M. 25
agency Bulgaria 27, 77, 238
and third parties 253–5 BW see Netherlands, Civil Code (Burgerlijk Wetboek)
ambiguous terms 68, 126–9
apparent authority C2C (consumer-to-consumer) contracts 6, 13, 34, 150,
agency 255 262
Aristotle 4 Canada 128
assignment Canon law 12, 147, 262
and third parties 256–7 car-pooling 74
Atkin, Lord 76 Cartwright, J. 160
attributability, and damages see damages for causa requirement see legal relations, intention to create,
nonperformance, attributability consideration and causa requirements
Austin, J. 69 caveat emptor (let the buyer beware) 173
Austria 111, 147, 225 CC see France and Civil Code (Code Civil)
autonomy, and freedom of contract 10, 11–12, 69 CISG see UN Convention on Contracts for the
avoidance of contract see defects of consent and International Sale of Goods (CISG)
misrepresentation, mistake, and rules on civil law and third parties 253–4
avoidance of contract closed system of contracts 12, 262–3
commercial contracts
B2B (business-to-business) contracts 6, 13, 23, 150, arbitration, worldwide importance of 144
173, 261 business efficacy test 132
B2C (business-to-consumer) contracts 6, 17, 34, 110, business-to-business (B2B) 6, 13, 23, 150
149, 150, 151, 207, 262 commercial arbitration, worldwide importance of
babysitting 74 144
Baker, J. 43 earnestness test in problematic cases 70–72
Belgium 53, 58 PICC see UNIDROIT Principles of International
BGB see Germany, Civil Code (Bürgerliches Gesetzbuch) Commercial Contracts (PICC)
bilateral contracts 6–7, 42, 45, 51, 87, 229, 233, 240, retailers’ codes of conduct 31
262 sales contract, offer definitiveness 44
binding contract 5, 12, 44, 46, 50, 63, 78, 84, 104, 109, shared fate 251
140 special protection to unpaid seller 239
legally binding promise see performance in natura trade restraint 182
and legally binding promise commission agents 253

276 · Contract law
confiance légitime (reasonable expectations of other best efforts and results, obligation to achieve 212–13
party) 70 civil law approach 211–14
consensus ad idem (agreement) model 11, 41, 63–4, 65 employees and subcontractors, involvement of 214
consent defects see defects of consent and English law and guarantee clause 103, 214–15, 220
misrepresentation English law and guarantee clause, doctrine of
consideration doctrine 52–3, 63, 77–89 frustration 214–15
consumer contracts force majeur case 212–13, 214, 215
business-to-consumer (B2C) 6, 17, 34, 110, 149, foreseeable circumstances 212
150, 151, 173, 207 guarantee clause 214
consumer-to-consumer (C2C) 6, 13, 34 obligation de moyens and obligation de résultat,
contractual remedies 23 difference between 213
good faith principle 146–7, 153 damages for non-performance, limitations 221–5
consumer credit 10, 30, 102, 106, 107, 110, 111, 112, causation by non-performance 222–4
114, 251, 263 expectation and reliance interest 221–2
contra proferentem rule 128–30, 149, 263 foreseeability 223
contract classification 4–6 intentional or grossly negligent breach 223–4
contract definition 3, 41 non-pecuniary loss 224–5
contracts for the benefit of a third party 245–8 pleasure contracts 224–5
Corona see COVID DCFR see sources of contract law, European law, Draft
corporate social responsibility (CSR) third parties 252 Common Frame of Reference of European Private
court access, clause excluding party from access in case Law (DCFR)
of dispute 182 debt
COVID 205–6 contracts for the benefit of a third party 246–248
Croatia 27 notice to debtor, damages for non-performance 210,
culpa in contrahendo (fault in contracting) 67, 267 216–17, 220
Cyprus 28 promise to accept part payment as discharge of entire
Czech Republic 27 debt 83–7
deceit (fraud), defects of consent and misrepresentation
damages claims 78, 82, 168 167
damages for non-performance 209–27 defamation cases 7
ancillary duty violation 219 defects of consent and misrepresentation 159–76
clauses 225–7 abuse of circumstances 171–2
collateral damage (consequential loss) 216 assumptions and expectations leading to
debtor in default (en demeure) 217 disappointment 159–60
delay, damages for 215–16, 217–18 caveat emptor (let the buyer beware) 173
expectation interest 216 civil law approach 160
in lieu 216, 217–19, 221 contract avoidance for undue influence 160, 169–72,
liquidated (agreed) damages 226 181
notice to debtor 210, 216–18, 219–20 contract avoidance for undue influence, double test
penalty clause 226–7 170–71
reason for non-performance, non-excused and English law approach 160
excused 210 fraud (deceit) 160, 167–8
relational contracts and litigation avoidance 220 fraudulent misrepresentation 173
second chance to perform (Nachfrist) 219, 234 information disclosure, no general duty 172–3
seriousness of non-performance 210 innocent misrepresentation 175
see also defects of consent and misrepresentation; negligent misrepresentation 173–5
termination of contract party in error 160
damages for non-performance, attributability 211–15 terms as statement which asserts truth of given state
absolute contracts 214 of facts 174

Index · 277
threat 160, 168–9 see also damages for non- contracts for the benefit of a third party 247
performance; termination of contract Contracts (Rights of Third Parties) Act 24
defects of consent and misrepresentation, mistake, and damages for non-performance 214–15, 220, 223,
rules on avoidance of contract 159–60 225
apparent importance requirement 163 defects of consent and misrepresentation 160,
causal link requirement 163 172–5
common (shared) mistake 165–7 dissensus of declaration and intention 65
contract requirements 162 Electronic Commerce Directive 113
duty to investigate 166 EU Directives implementation methods 31–2
fundamental characteristic of the good 162–3 good faith principle, lack of general see good faith
incorrect information given by other party 163–4 principle, lack of general principle, in English
misapprehension of correct situation 162–3 law
non-disclosure by other party 164–5 gratuitous transactions 72–3, 106–7
risk factor to mistaken party 166 guarantee clause 102–3, 214–15
delay, damages for 215–16, 217–18 Hoover and airline ticket offer 48–9
Demogue, R. 139 impossibility as valid excuse for non-performance
Denning, Lord 47, 60, 85, 151, 171, 215 199
direct action linked contracts 250–51 Judicature Act 28–9
disadvantageous transactions 72–3 law of contractual remedies 29
dissensus of intention and declaration 65, 162 law of obligations 7–9
domestic agreements 75–7 Law of Property Act 106
donations/gifts 72, 104, 105, 116 Law of Property (Miscellaneous Provisions) 84,
106–7
e-commerce legal capacity of parties 91–2, 96, 98
e-mail messages and contract conclusion time 59, 60 Mental Capacity Act 98
and ‘written’ contracts 111–13 see also websites Mental Health Act 97
earnestness test and legal relations see legal relations, Misrepresentation Act 24, 174–5
intention to create, earnestness test in problematic misrepresentation, no general duty to disclose
cases information 172–3
efficient breach theory 235 offer acceptance requirements, ‘knock out’ rule 57
Ellinghaus, F. 144 offer acceptance requirements, ‘mirror image’
employees and subcontractors, and damages for rule 55
nonperformance 214 offer lapse and counter-offer 54
employment contracts 13, 45, 107, 168 offer revocation and consideration doctrine 51–3,
England 61
Argos and Sony television sale 47 offers to the public and advertisements 44–50
binding offer 43 ‘officious bystander’ test and party agreement 132
CISG, non-ratification 32 party agreement, ad hoc gap filling 121–2, 130–32
commercial agreements, gentlemen’s agreement party agreement, gap filling through default rules
71–2 132–5
common law and equity, distinction between 29 party agreement, interpretation 123–30
common law origins 28–9 performance in natura and legally binding promise
Competition and Markets Authority 154 193, 194
consideration doctrine 52, 63, 77–89 postal/mailbox rule and contract conclusion time
Consumer Credit Act 107, 111 60
Consumer Rights Act 32, 130, 133, 147, 150, 152, pre-contractual information duties 110–11
153, 173, 208 prenuptial agreements 75–6
contract avoidance for undue influence 170–71 prohibited contracts 186–8
contract conclusion time 58, 60–61 proprietary estoppel doctrine 116

278 · Contract law
Sale of Goods Act 24, 92–3, 99, 133, 173, 201, expectation interest, damages for non-performance 216,
231, 242 218, 221–2, 265
shop display of goods 50–51 expectations leading to disappointment, defects of
social agreements and cost-sharing 73–5 consent 159–60
stare decisis (binding precedent) 28 expertise and experience of parties 68, 166
Statute of Frauds 103, 108 expression theory 69
Sunday Trading Act 179
Surrogacy Arrangements Act 184 factoring 258
termination of contract 230, 231, 234–6, 241 fairness problem, good faith principle 149, 151–2
Unfair Contract Terms Act 24, 150, 150, 152 falsa demonstratio non nocet (a wrong description does
Unfair Terms in Consumer Contracts Regulations no harm) 126
30, 130, 146–7, 153 fax machines and chat services, contract conclusion
unilateral contract for a reward 46–8 time 60
voidness and avoidability of contract 115 fiduciary relationships, good faith principle 145–6
website advertisements 47 financial difficulties not acceptable, legally binding
written contracts 102, 107–8 promise 198
Estonia 27 force majeure case, damages for non-performance
EU 212–13, 214, 215
Common European Sales Law (CESL) 31 foreseeability, and damages for non-performance
Consumer Credit Directive 2008/48 30, 110, 251 223
Consumer Rights Directive 2011/83 30, 56, 113 formalities 101–18
DCFR see sources of contract law, European law, contract withdrawal rights 114
Draft Common Frame of Reference of European contract withdrawal rights, rights to return
Private Law (DCFR) comparison 114
Electronic Commerce Directive 2000/31 30, 50, 112 as evidentiary function 102–3, 109–10
Electronic Signatures Directive 1999/31 112 informality principle 11, 101
Package Travel Directive 90/314 30 as information function 102
PECL see sources of contract law, European law, internet shopping and ‘written’ contracts 111–13
Principles of European Contract Law (PECL) internet shopping and ‘written’ contracts,
(Lando Principles) information duties 113
Sale of Consumer Goods Directive 2019/771 30, internet shopping and ‘written’ contracts, withdrawal
194, 206–7, 251 rights 114
sanction for breach of an information duty 110–11 notarial deed contracts 103–6, 116
sources of contract law see sources of contract law, notarial deed contracts, civil law notary and Notary
European law Public, difference between 105
TFEU, prohibited contracts and competition notarial deed contracts, gift or donation 104
restriction on internal market 27, 29, 179–80 notarial deed contracts, land and immovables, sale
Timeshare Directive 2008/122 30, 106 and transfer 104–6
Unfair Terms in Consumer Contracts Directive pre-contractual information duties 110–11
93/13 30, 130, 146, 153 sanctions if contract lacks required form 115–17
see also individual countries sanctions if contract lacks required form, validity
European Convention on Human Rights (ECHR) 97, question and ‘good faith’ principle 116
182 sanctions if contract lacks required form, voidness
evidentiary function 102 and avoidability of contract, aim of 115
exceptio non adimpleti contractus (exception of a suretyship (guarantee) 102, 103, 107, 108, 112, 115,
nonperformed contract) 241, 264 116
exemption clauses as warning function 102
third-party effect 248–50 written contracts 103, 107, 108–10
transport 248 written contracts, evidentiary formalism 109

Index · 279
written contracts, probationis causa (with an eye to party agreement, gap filling through default rules
proof) 108 132–5
France party agreement, interpretation 123–30
Act on the Protection and Information of the party agreement, interpretation, unambiguous clause
Consumer of Products and Services (Loi (clauses claires et précises) 129
Scrivener) 150, 151 performance in natura and legally binding promise
Code Napoleon 25 193, 194
Commercial Code 23 performance in natura and legally binding promise,
Consumer Code (Code de la Consommation) 23, 32, force majeure (impossibility) case 203, 205
130, 150, 151 pre-contractual information duties 110
France and Civil Code (Code Civil) 18–19, 23, 25, 26, prohibited contracts 177–9, 186
41, 44, 92 sales contract, offer definitiveness 44
acceptance requirements, silence circonstancié surrogacy agreements 184
(circumstantial silence) 56 termination of contract 230–35, 236, 237, 238, 239,
binding principles 10 240
Catala-reform 197 written contracts 103, 108
causa requirement 78, 87–9 fraud (deceit), defects of consent and misrepresentation
contract avoidance for undue influence 170–71 160, 167–8
contract conclusion time 58–61 fraudulent misrepresentation 173
contract definition 41 freedom of contract 5, 10, 17, 71, 114, 177, 256
contracts and third parties 243, 245 freedom from contract 73
agency 253–5 Fried, C. 69
assignments 256–7 frustration doctrine 201, 202, 203, 215
contractual fairness (justice contractuelle) 11–12
damages for non-performance 212, 214, 217, 219, Gaius 7
222, 223, 224, 226 gap filling and party agreement see under party
dissensus of declaration and intention 65, 66, 264 agreement
EU Directives implementation methods 32 generic goods, sale of 197
force majeure (impossibility) cases 203, 205, gentlemen’s agreement 71–2
210–15 Germany
fundamental obligation (obligation essentielle) 88 Act on Actions for Injunctions 154
good faith principle 136–47 Act on General Conditions 150
good faith principle, unfair practices and fairness Act on Modernisation of the Law of Obligations
problem 151–2, 153 23
internet shopping and ‘written’ contracts 111–13 Code of Civil Procedure 196
juridical act (acte juridique) 9 Commercial Code 23
legal capacity of parties 91–6, 98 Pandectists 9
legal capacity to perform legal actions 92 Product Liability Act 23
mistake, rules on avoidance of contract for 160–68 Germany, Civil Code (Bürgerliches Gesetzbuch) 18, 19,
non-performance attributability 211–15 25
non-performance attributability, obligation de moyens assignment 256–257
and obligation de résultat, difference between 213 Berlin Ladenöffnungsgesetz 179
notarial deed contracts 103–6 contract avoidance for undue influence 169, 181
offer and acceptance model, lack of 42 contract conclusion time 58–61
offer invitation (offre de pourparlers) 43 contract validity question and ‘good faith’ principle
offer revocation 51–53 116
offer revocation time period (offre avec délai) 53 contracts for the benefit of a third party 246–247
offer to the public and advertisements 44–51 contractual fairness (Vertragsgerechtigkeit) 11–12
party agreement, ad hoc gap filling 122, 130–32 contractual remedies and consumer protection 23

280 · Contract law
damages for non-performance 215, 216, 217–19, interpretation of contract 140

221, 223, 226–7 iustum pretium doctrine (immoral not to pay a just
dissensus and ‘mistake in the declaration’ price) 147
(Erklärungsirrtum) 66 mental disorders, ‘in good faith’ generosity 99–100
domestic agreements, public policy violations 75–7 objective 137–8
EU Directives implementation methods 31–2 open-ended nature of 138
good faith principle 136–47, 149–50 and party agreement, gap filling, ad hoc 130–32
good faith principle, unfair practices and fairness Principles of European Contract Law (PECL)
problem 149–50, 151–2 (Lando Principles) 137, 139, 141–2, 150
internet shopping and ‘written’ contracts 113 protective duties 139
juridical act (Rechtsgeschäft) 9 reasonableness and fairness as norm 138
layered structure 22 restriction of exercise of contractual rights 140
legal capacity of parties, custodian (Betreuung) 97, 98 sanctions if a contract lacks the required form
legally binding contract 63, 64, 70 115–17
mistake, rules on avoidance of contract for 160–67 subjective 137–8
Nachfrist (second chance to perform) 219, 234, 236 supplementing function (filling gaps in party
non-performance attributability 211–15 agreement) 138–9
notarial deed contracts 103–6 as threat to legal certainty and predictability 138
offer, acceptance requirements, confirmatory notes good faith principle, lack of general principle, in English
(Bestätigungsschreiben ) 56–7 law 142–7, 149
offer, acceptance requirements, ‘knock out’ rule 57 alternative reasons for lack 144
offer invitation (invitatio ad offerendum) 43 commercial arbitration, worldwide importance of
offer lapse, acceptance time expiry 54–5 144, 146
offer revocation 51 contract avoidance and laesio enormis (substantial
offers to the public and advertisements 44–50 impairment) 147
offers to the public and display of goods in a shop 50 fiduciary relationships as exception 145–6
party agreement, ad hoc gap filling 122, 130–32 functional equivalents 145
party agreement, gap filling through default rules good faith in consumer contracts, adoption of
132–5 146–7
party agreement, interpretation 124, 127, 128, 130 legal certainty argument 143, 145
performance in natura and legally binding promise overriding principle for any contract, recent pleas
193, 194 made in favour of 146
pre-contractual information duties 110–11 policy reasons 143–5
pre-contractual liability 23 uberrimae fidei (of utmost good faith) contracts as
prenuptial agreements 75 exception 145
prohibited contracts 177–84 good faith principle, unfair contract terms, policing
Prussian Civil Code (Allgemeines Landrecht) 26 148–54
reforms 22 consumer collective action 154
social agreements and cost-sharing 73–5 contract of adhesion 149
surrogacy agreements 184 exemption (limitation) clauses 148
termination of contract 232–3, 235–40 fairness problem 149–50, 151–2
voidness and avoidability of contract 115 fairness problem, grey and black lists 152
written contracts 102, 107 incorporation problem 149, 150
gifts/donations 72, 104, 105, 116 interpretation problem 149
Goff, Lord 144 limited or excluded liability 150
good faith principle 136–54 public review 154
arguments against 143–4 reasonable notice and red hand rule 151
in civil law, understanding of 137–42 remedies for non-performance, exclusion of 150
hardship (unforeseen circumstances) doctrine 141–2 substantive fairness 148

Index · 281
Goode, R. 143 Jessel, G. 11

gratuitous and disadvantageous transactions 72–3, juridical act, contract as 9
106–7
Greece 111 Kahn-Freund, O. 143
Grotius, H. 12 keep-open covenant 202
guarantee clause 102, 103, 107, 113, 116, 214 Kötz, H. 5, 14, 59
hardship (unforeseen circumstances) doctrine laesio enormis (substantial impairment) and contract
good faith principle 141–2 avoidance 147
ground for termination of contract 203 landlord’s duty to keep building in good repair 133–4
legally binding promise see performance in natura Lando Principles see sources of contract law, European
and legally binding promise, unforeseen law, Principles of European Contract Law (PECL)
circumstances doctrine (Lando Principles)
Hedley, S. 76 Larenz, K. 69
Himalaya clauses Latvia 27
third parties 248 Learned Hand, Judge 123–4
Hoffmann, Lord 124, 125 legal capacity of parties 91–100
Holmes, O. 79 incapacitated person, balancing interests of 92
honour clause 71 legal incapacity and legal protection 91
human organ trade 179 policy reasons 92
Hungary 27 legal capacity of parties, adults in need of protection
96–100
illegal contracts see prohibited contracts custodian 97, 98
immovable property, transfer of 102, 104–6, 107–8, legally incapacitated adults 96–8
115, 147, 201 legally incapacitated adults, wardship (curatelle)
impossibility of performance see under performance in 96–8
natura and legally binding promise, performance mental disorders 98–100
as routine remedy (civil law) mental disorders, ‘in good faith’ generosity 98–100
in lieu, damages for non-performance 216, 217–18 legal capacity of parties, minors 92–6
in natura performance see performance in natura and age requirements 94
legally binding promise ‘contract for necessaries’ 92–3
in pari delicto rule, prohibited contracts 187 employment, apprenticeship and training contracts
incitement cases, prohibited contracts 179 13, 93, 115
incorporation problem, good faith principle modest transactions and capacité usuelle 94
149–50 parental consent 94–6
India 184 statutory administrator role 93–4
information disclosure 110–11, 113–15, 172–3 legal certainty argument, good faith principle 143, 145
intentional or grossly negligent breach 221, 223–4 legal relations, intention to create 63–89
intentionality consensus ad idem (meeting of minds) 11, 41–2,
contracts for the benefit of a third party 247 63–4, 65
internet shopping see e-commerce legally binding contract 63–4
interpretation problem, good faith principle 149 parties’ intention and objective approach to
intuitu personae contracts 45 agreement, will theory 69
Iran 25, 35 sender/receiver communication 64–5
Ireland 28 legal relations, intention to create, consideration and
Islamic contract law 25, 35 causa requirements 77–89
Italy 111 agreement by deed 83–4
iustum pretium doctrine (immoral not to pay a just causa in French law 78, 87–9
price) 147 circumventing 83–4

282 · Contract law
common historical roots 78–9 contractual liability basis and will, expression and
confusing elements 86–7 reliance 69
consideration in English law 78–89 court decisions, factors involved in 67–8
consideration must be sufficient but need not be culpa in contrahendo (fault in contracting) 67
adequate 80 customary in a certain branch or location 68
damages claim and assumpsit basis 78 dissensus of intention and declaration 65–70, 162
damages clause 82–3 erreur-obstacle (mistake-obstacle) 69
detrimental reliance 85 expertise and experience of the parties 68
executory consideration 80 expression theory 69
existing duty does not amount to valid consideration national emphases, differences in 70
81–3 place of contracting 68
existing public duty 81–2 reliance theory 69
illegal contracts 87 transaction beneficial for one of the parties 67–8
naked agreement (nudum pactum) 78 Leggatt, Judge 146
pacta sunt servanda 12, 64, 78 life insurance 107, 145, 246
past consideration is not good consideration 81 Lindley, Judge 61
peppercorn theory 80 linked contracts 250–51
promise to accept part payment of a debt as liquidated (agreed) damages 226
discharge of the entire debt 83–7 Lithuania 27
promisory estoppel (going against one’s own long-term contracts 201–2, 239–40
previous behaviour) 84–7, 116–17 lottery prizes 74–5
legal relations, intention to create, earnestness test in
problematic cases 70–77 Macaulay, S. 220
babysitting 74 MacKinnon, Lord 132
car-pooling 74 Macmillan, Lord 8–9
commercial agreements 70–72 Macneil, I. 220
disadvantageous transactions 72–3 Markesinis, B. 26
domestic agreements 75–7 mental disorders see under legal capacity of parties,
donation/gift 72 adults in need of protection
gentlemen’s agreement 71–2 minors see legal capacity of parties, minors
gratuitous and disadvantageous transactions 72–3 misrepresentation see defects of consent and
honour clause 71–2 misrepresentation
as legal question 70 mistakes, effects of 68–9, 160–67
lottery prizes 74–5 moral impossibility 198–9
party does something without asking anything in moral views, prohibited contracts 181–6
return 72–3
prenuptial agreements 75–7 Nachfrist (second chance to perform) 219, 234, 236
public policy violations 77 naked agreement (nudum pactum) 78
social agreements 73–5 negligent misrepresentation 173–5
social agreements, cost-sharing 74 Netherlands, Civil Code (Burgerlijk Wetboek) 18, 23, 32
social agreements, no money value 73 assignment 256–7
‘subject to contract’ clause 71–2 causa abandonment 77
legal relations, intention to create, parties’ intention and contract avoidance for undue influence 171–2
objective approach to agreement 64–70 contract conclusion time 58–61
addressee’s ability to judge declaration’s intention contract validity question and ‘good faith’ principle
67–8 116
ambiguous terms 68–9 contracts for the benefit of a third party 247
confiance légitime (reasonable expectations of other contracts requiring pre-contractual information
party) 70 duties 110–11

Index · 283
contractual liability and will-reliance theory 69 offer and acceptance of a contract 41–62
damages for non-performance 215–20, 223, 227 binding offer 43–4, 51
dissensus of declaration and intention 65, 66 consensus ad idem (agreement) model 41–2
EU Directives implementation methods 32 contract definition 41
good faith principle 136, 137, 138, 140 definition 43–51
good faith principle, unfair practices and fairness intention and terms 43
problem 152, 153, 154 invitation to enter into negotiations 43
informality principle 101 lapse of offer 53–5
internet shopping and ‘written’ contracts lapse of offer, acceptance time expiry 54–5
111–13 lapse of offer, counter-offer 54
juridical act (rechtshandeling) 9 lapse of offer, offer rejected 54
layered structure 22 offers to the public and goods on display in shops
legal capacity of parties 95–6, 99–100 50–51
legally binding contract 63 revocation of offer 51–3
mistake, rules on avoidance of contract for 161–2, revocation of offer, consideration doctrine 52–3
167, 168 revocation of offer, and postal rule 60
non-performance attributability 211–15 revocation of offer, reaches offeree before or at same
notarial deed contracts 103–6 time as offer 52
offer and acceptance model 42 offer and acceptance of a contract, acceptance
offer, acceptance requirements, ‘first shot’ rule 57 requirements 55–8
offer invitation 43 acceptance by conduct 57–8
offer revocation 52, 53 battle of the forms 57
offer to the public and advertisements 44–50 confirmatory notes 56–7
party agreement, ad hoc gap filling 132 ‘first shot’ rule 57
party agreement, gap filling through default rules ‘knock out’ rule 57
133–4 prescribed method 55–6
party agreement interpretation 123–30 problems 57
performance in natura and legally binding promise silence treated as acceptance 56
194 offer and acceptance of a contract, contract conclusion
prenuptial agreements 75 time 58–61
prohibited contracts 184 actual notice theory 58, 59
reforms 23 e-mail messages 59–61
sales contract, offer definitiveness 44 expedition or dispatch theory 58, 59
surrogacy agreements 184 externalisation theory 58, 59
termination of contract 238, 239 fax machines and chat services 60
voidness and avoidability of contract 115 postal/mailbox rule 60
written contracts 102–3, 107–8, 112–13 receipt theory 58, 59
non-pecuniary loss, damages for non-performance offer and acceptance of a contract, offers to the public
224–5 and advertisements 44–50
non-performance damages see damages for intuitu personae contracts 45
non-performance policy reasons 46
Nordic countries 105, 153, 154 proposal to the public 44–5
notarial deed contracts 103–6, 117 unilateral contract for a reward 46–7, 48–9
notice on websites 47–50
to debtor, damages for non-performance 210, ‘officious bystander’ test 132
216–18, 219–20
warning, and termination of contract 236 pacta sunt servanda 12, 64, 78, 269
notification Pakistan 35, 145
assignment 256–7 parol evidence rule 128, 269

284 · Contract law
parties performance in natura and legally binding promise,

in error, and defects of consent and performance as routine remedy (civil law)
misrepresentation 159 194–200
intention and legal relations see legal relations, absolute impossibility 197
intention to create, parties’ intention and objective financial difficulties not acceptable 198
approach to agreement futile defect 195
legal capacity see legal capacity of parties generic goods, sale of 197
party agreement 17, 121–35 impossibility of performance 195
party agreement, gap filling, ad hoc 122, 130–32, 139 legal impossibility 199
business efficacy test 132 moral impossibility 198–9
England 132, 137 non-generic (specific) goods, sale of 197
good faith principle 132 personal services 199–200
‘officious bystander’ test 132 practical impossibility 198
presumed intention 130 relative impossibility 198
party agreement, gap filling through default rules timing of claim 194
122–3, 132–5 performance in natura and legally binding promise,
landlord’s duty to keep building in good repair specific performance as exceptional remedy
133–4 200–202
ratio and balance 133 impossibility of performance and doctrine of
statutory default provisions 133–5 frustration 201, 202, 203
party agreement, interpretation 121–2, 123–30 keep-open covenant 202
ambiguous clauses 126–8 long-term contracts 201–2
ambiguous clauses, contra proferentem rule 127–8, practical impossibility 201
149 repair or replacement right 207
falsa demonstratio non nocet (a wrong description unique goods 200–201
does no harm) 126 performance in natura and legally binding promise,
first demand guarantee 127 unforeseen circumstances doctrine 202–5
knowledge and expertise effects 128 clause on the impact of unexpected events, inclusion
maxims 128–30 of 203
objective 123–4 impossibility of performance and contract
parol evidence rule 128 amendments 202–3
reasonable meaning 124–5 unforeseen circumstances as ground for termination
relevant factors 126–8 or adaptation of contract 203–5
subjective 123–25 PICC see UNIDROIT Principles of International
unambiguous clauses 129 Commercial Contracts (PICC)
Paulus, J. 187 pleasure contracts 224–5
Pearson, Lord 143 Poland 27, 58, 111
PECL see sources of contract law, European law, policy arguments
Principles of European Contract Law (PECL) linked contracts 250–51
(Lando Principles) Posner, R. 69, 185–6, 235
penalty clause, damages for non-performance postal/mailbox rule and contract conclusion time 60
226–7 Pothier, R. 6
peppercorn theory 80 precontractual liability 23, 110–11
performance in natura and legally binding promise prenuptial agreements 75–7
193–208 principles of contract law 9–14
European principles and Sale of Consumer Goods binding force 10–11, 12
Directive 2019/771 30, 194, 206–8 closed system of contracts 12
performance enforcement 196 contractual fairness 11–12
timing of claim 194 freedom of contract 5, 10

Index · 285
general conditions 10 Radcliffe, Lord 203, 215

informality principle 11 recovery of money or goods, prohibited contracts 186
procedural fairness 13, 170 relational contracts and litigation avoidance 220
regulated contracts 10, 13 relativity (privity) of contracts 245
substantive fairness 13, 147, 171–2 reliance theory 69
wealth distribution function 13–14 renunciation
private law 7–9, 13, 22, 23, 36 contracts for the benefit of a third party 247–8
privity of contract 245 repair or replacement right 207
probationis causa (with an eye to proof), written representation
contracts 108 direct 253, 254
procedural fairness 13, 170, 269–70 indirect 253, 254
prohibited contracts 177–88 residential leases 13, 115, 116, 122
and causa requirements 87–8 restriction of exercise of contractual rights, good faith
clause excluding party from access to court in case of principle 140
a dispute 182 retention of title clause, termination of contract 238,
contracts against moral views believed to be held in 239
society 182–4 Rheinstein, M. 29
contracts against public policy or good morals as rights
open-ended 177, 181–4 in assignment 256
contracts in restraint of trade (economic freedom) contracts for the benefit of a third party 247
182 risk factor to mistaken party, defects of consent and
contracts unduly restricting personal, artistic or misrepresentation 167
economic freedom 181–2 Roman law
effect of prohibited contract if it has already been assignment 256
performed 177–9, 187 contractus re 12
fencing and stolen property 179 Corpus Iuris Civilis 25, 187
illegality arising at time of performance 180 genus non perit (sale of generic goods) 197
in pari delicto rule 187 in pari delicto rule 187
incitement cases 179 legacy 25–6
motive unknown 180 pacta sunt servanda 12, 64, 78
multi-factor approach 188 special protection to unpaid seller 239
not all contracts violating a statutory rule will be stipulatio 12
declared void 179 Romania 27, 129
recovery of money or goods 188
sexual morality 183 St Leonards, Lord Chancellor 200
statutory illegality 179–81 sales see commercial contracts
surrogacy agreements 184, 185–6 sales commission agreements agency 253
TFEU and competition restriction on internal sanctions 110–11, 115–17
market 27, 29, 179–80 Saudi Arabia 25, 35
trade in human organs 179 Schlesinger, R. 26
waiver of fundamental rights 181–2 Scotland 28
promissory estoppel (going against one’s own previous second chance to perform (Nachfrist) 219, 230, 234,
behaviour) 83–4, 117 271
proprietary estoppel 116 Sellers, Judge 214
protective duties, good faith principle 139 sexual morality, prohibited contracts 183
public policy sharia (Islamic) law 35
contracts against 177, 181–4 shop display of goods 50–51
violations 77 silence treated as acceptance 56
public review, good faith principle 154 silent agreement 257

286 · Contract law
Slovakia 27 performance as routine remedy, personal services

Smith, Judge 71 199–200
social agreements 73–5 sources of contract law, European law, Principles
soft law principles and commonalities 33 of European Contract Law (PECL) (Lando
Somervell, Lord 51 Principles) 31, 33, 34, 36
sources of contract law 16–36 agency 253–5
case law, importance of 26 assignment 256–7
conflict-of-laws rules and Hague Conference on contract avoidance for undue influence 169
Private International Law 32 contract conclusion time 59
freedom of contract 17 damages for non-performance 218, 221, 222–4,
informal rules 33–6 227
layered structures (Germany and Netherlands) 22 dissensus of declaration and intention 66
legal families and civil law 24, 25–6, 28 good faith principle 136, 139, 141–2, 149
multi-level system 17 legally binding contract 64
national law 18–24, see also individual countries mistake caused by non-disclosure by other party
national law, reforms 23 164–5
national law, specific statutes 23–4 mistake, rules on avoidance of contract for 161, 162,
official sources 18 167, 169
party agreement 17 non-performance attributability 212–13, 214
recodification in Central and Eastern Europe 27 offer acceptance requirements 54–5, 56, 57
Roman law legacy see Roman law offer definition 43
soft law principles and commonalities 33 offers to the public and advertisements 44–47
supranational law 32–3 party agreement, ad hoc gap filling 130–32
sources of contract law, European law 27–32 party agreement and interpretation 124–26
Common European Sales Law (CESL) 31 party agreement and interpretation, ambiguous
common law and civil law, differences between 28–9 clauses 126, 128, 129
Communication on European Contract Law 31 performance in natura and legally binding promise
cross-border contracts 31 194, 197
Directives see under EU prohibited contracts 178, 187
internal market and national contract law differences termination of contract 230–31, 234, 235–6, 237–40,
27–32 241
legal families and common law 28–9 South Africa 25, 239
optional code for cross-border contracts of sale 31 stare decisis (binding precedent) 28
policy initiatives towards a European Contract Code statutory administrator role, legal capacity of parties,
31 minors 93–4
retailers’ codes of conduct 31 Steyn, Lord 125
Treaty on the Functioning of the European Union stolen property 179
(TFEU) 27, 29, 179–80 ‘subject to contract’ clause 71–2
sources of contract law, European law, Draft Common Sudan 35
Frame of Reference of European Private Law suretyship (guarantee), formalities 102, 103, 107, 108,
(DCFR) 31, 33, 36, 104 112, 115, 116, 272
contract definition 41 surrogacy agreements, prohibited contracts 184–6,
contracts for the benefit of a third party 247 272
factoring 258 Switzerland 27, 52, 86
mistake caused by non-disclosure by other party
163–4 tangible goods
offer revocation 53 assignment 256
party agreement, ad hoc gap filling 130–32 termination of contract 229–42
party agreement and interpretation 125 anticipatory breach 236–7

Index · 287
bilateral contracts 229, 233, 240, 262 transport

conditions allowing 231 exemption clauses 248
defence of uncertainty 241 generic goods 197
effects 237–40 illegal performance 179
efficient breach theory 235 linked contracts 250–51
exceptio non adimpleti contractus (exception of a Treitel, G. 64
nonperformed contract) 241
freedom from contract 73 uberrimae fidei (of utmost good faith) contracts, good
fundamental non-performance 230–31 faith principle 145
interests of creditor and debtor, balancing 229–30 UK see England; Scotland
limits on 230–31, 234 Ulpianus, D. 187
long-term contracts 239–40 UN Convention on Contracts for the International Sale
methods of 235–6 of Goods (CISG) 32, 125
minor violations 233 damages for delay in performance 218
Nachfrist (second chance to perform) 219, 234, 236 lack of uniformity 32–3
notice, warning 236 offer revocation 51–3
partial termination 240 termination of contract 230, 231
retention of title clause 238, 239 undisclosed agency 254
retroactive effect 238 unfair contract terms see good faith principle, unfair
special protection to unpaid seller 239 contract terms, policing
unforeseen circumstances as ground for termination unforeseen circumstances doctrine
203–5 good faith principle 141
unilateral termination 232–3 as ground for termination of contract 203–5
value of performance, claiming back 238–9 legally binding promise see performance in natura
withholding performance 240–41 and legally binding promise, unforeseen
withholding performance, right to retention 242 circumstances doctrine
written declaration 236 UNIDROIT Convention on International Factoring
see also damages for non-performance; defects of factoring 258
consent and misrepresentation UNIDROIT Principles of International Commercial
Terré, F. 67 Contracts (PICC) 33–4
third parties, and contract law 245–59 contract avoidance for undue influence 171–2
agency 253–5 contracts for the benefit of a third party 248
assignment 256–7 offer, acceptance requirements, ‘knock out’ rule 57
contracts for the benefit of a third party 246–8 offer revocation 53
contracts with protective effect for third parties party agreement, ad hoc gap filling 130–32
249–50 party agreement and interpretation 125
exemption clauses, third-party effect 248–9 performance in natura and legally binding promise
factoring 258 198, 205
linked contracts 250–51 unilateral contracts 6, 42, 46–7, 48–9
third party losers 252–3 unilateral termination 232–3
third party winners 252 unique goods 200–201
threat Upjohn, Lord 74
defects of consent and misrepresentation 160, 169 United States 28, 32, 224
to legal certainty and predictability, good faith
principle 138 validity question and ‘good faith’ principle 115
timeshare 30, 106, 110, 114 value of performance, claiming back, and termination of
trade see commercial contracts contract 237–9
transfer of immovable property 102, 104–8, 115, 147, voidness and avoidability of contract 115
201 Von Savigny, F. 9

288 · Contract law
waiver of fundamental rights 181–2 withholding performance, termination of contract

wealth distribution function 13–14 240–41
websites Wright, Lord 86
offers to the public and advertisements written contracts 102, 125, 128–30
47–50 e-commerce 113
see also e-commerce termination of contract 235–6
Wilberforce, Lord 134
Zweigert, K. 59

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Contract Law

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PART 2 THE FORMATION OF A CONTRACT

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7 The party agreement: Interpretation and gap filling 121

PART 4 VITIATING FACTORS

9 Defects of consent and misrepresentation 159

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PART 5 CONTRACTUAL REMEDIES

PART 6 CONTRACTS AND THIRD PARTIES

14 Contracts and third parties 245

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2 Sources of contract law 16

PART 2 THE FORMATION OF A CONTRACT

3 Offer and acceptance 41

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Topics for review 62

4 The intention to create legal relations 63

5 Legal capacity of the parties 91

PART 3 THE CONTENTS OF THE CONTRACT

7 The party agreement: Interpretation and gap filling 121

8 The principle of good faith and policing unfair contract

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PART 4 VITIATING FACTORS

9 Defects of consent and misrepresentation 159

10 Prohibited contracts 177

PART 5 CONTRACTUAL REMEDIES

12 Damages for non-performance 209

13 Termination of the contract 229

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Topics for review 242

PART 6 CONTRACTS AND THIRD PARTIES

14 Contracts and third parties245

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1.1 Contracts and the economy 5

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First, substantive contract law is no longer the exclusive product of the

Second, learning the law is as much about learning a method as it is about

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Part 1: What is contract law and what are its sources?

Part 2: How does a contract come into being?

Part 3: What are the contents of the contract?

Part 5: What are the contractual remedies in case of breach of contract?

Part 6: How can third parties be affected by the contract?

Each chapter highlights significant issues in separate textboxes. Their aim

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ABGB Allgemeines Bürgerliches Gesetzbuch (Austrian Civil Code)

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3 Offer and acceptance 41

7 The party agreement: Interpretation and gap filling 121

9 Defects of consent and misrepresentation 159

14 Contracts and third parties 245

2 Sources of contract law 16

3 Offer and acceptance 41

Topics for review 62

4 The intention to create legal relations 63

5 Legal capacity of the parties 91

7 The party agreement: Interpretation and gap filling 121

10 Prohibited contracts 177

12 Damages for non-performance 209

13 Termination of the contract 229

Topics for review 242

14 Contracts and third parties245

1.1 Contracts and the economy 5

Cass. Civ. 3 February 1919, DP. 1923.I.126 (Révocation offre)�� 53

RG 8 June 1920, RGZ 99, 147 (Haakjöringsköd)��126

HR 19 May 1967, ECLI:NL:PHR:1967:AC4745 (Saladin/HBU)��140

Oberste Gerichtshof (Austria) 7 August 2007, 4Ob135/07t (Bastlerfahrzeug)��147

Treaty on the Functioning of the Directive 2008/122 on timeshare�� 30, 106

Code Civil see in Index, France and Obligationenrecht (1912)�� 10

• the agreement of the parties;

Title 2 Financial Collateral Contracts