Contractual Difference among various Contract Laws.

Kartikay Singh

LLM in International Commercial Law from University of Aberdeen (UK),

registered as an Advocate in Bar Council of India.

Contract is an important part of any business  transactions or an agreement between two parties. The formation of the contract differs from country to country such as the contract formation in common law countries are different than that of civil law nations. Apart from that there have been several other transnational contract law instruments which are widely used in international contract formation such as The United Nations Convention on Contracts for the International Sale of Goods (CISG), The Principles of European Contract Law (PECL) and UNIDROIT. The formation of the contract can only take place when it has some essential elements that is offer, acceptance, consideration, and intention to create legal relations.  The contract formation must  be guarded by the law  so that in case of breach of contract the parties can appeal for justice in the court of law.

The contract formation in Germany is considered as the omission  of offer and acceptance as the primary  act  for  formation,  whereas  in  England  the  formation  requires  concluded  offer  and acceptance as  well as  consideration which states that the parties  should be  creating reciprocal benefits. In Italy, there are four requirements for formation of contract including agreement, causa that is social and economic function of the contract, object, and the form. The CISG formation of contract is regulated in Part 2 of CISG Article 23 follows rule of offer and acceptance without form, causa, or consideration and being a transnational body Article 29(1) states that the contract can be amended if there is an agreement  between both the parties. In Germany, the offer is only binding if it  is  in detail, the mixed  acceptance rule  is being  followed where the acceptance of agreed terms by both the parties form contract whereas in Italy offer can be revoked prior to the acceptance, the England  states that  the unilateral promises  are unenforceable.  The CISG treats offer the same way as England where in Article 16(1) of CISG states that offer is revocable until accepted. The  knockout  theory in Germany  which states the general  odd conditions are  being removed from the contract by the consent of both the parties, on the other hand Italy follows mirror image rule that is the offer has to be accepted with no modifications unlike Germany. In England, the consideration of initial agreement is not enforceable in the new agreement therefore for every agreement there shall be new consideration by the parties. The CISG uses the mirror image rule of like that of Italy for acceptance and offer in Article 19(1) and Article 19(2) states that nonmaterial difference does not void acceptance. In Germany, Incomplete negotiations on major points signals unformed  contracts,  they  hold     pre-contractual  liability  which  states  duty  to  conduct  good negotiations,  whereas  in Italy pre-contractual  good faith should  consist  in  negotiations  unlike Germany. In England there is no pre-contractual duty of loyalty  therefore until  the contract  is formed  there  is  nothing  like  good  faith or  loyalty  unlike  Italy. Under  CISG pre-contractual obligations of good faith and loyalty depends on the jurisdiction of parties. The above comparison between the four regimes show the differences of contract formation among each of the mentioned regimes.  The difference between the contract  formation in the four regimes  shows the various variation of contract formation.

The contract interpretation states that how different legal system interpret contract in their nation and how they deal with international parties. The interpretation of contract is to establish common intentions between the parties, the provisions  shall  be used in such a way so that they can avoid internal conflict of terms, they should clearly identify the objects of the contract. The provisions shall  support  the weaker  party in the negotiations  and there shall  be  common  goals  when the contract is being drafted. The interpretation of contract can be categorized in three methods Literal Interpretation which states that the parties have more of legal certainty, Subjective Interpretation explains  in which the conduct of the parties is being observed during the negotiations and after signing the contract and Objective Interpretation aims at the reasonable regulations of the situation apart from the real intention of the parties.

The contract interpretation in Germany states that the parties shall have clear intention and shall be dealt with good faith and fair dealing, the contract  shall  be objective  so that it  can  clearly understood  by  the  reasonable  man  under  the  similar   circumstances.  In  Italy,  there  is  direct interpretation that is  in claris non fit interpretatio  which mean the contract shall be read literally with the understanding of parties’ behavior towards the contract. Like Italy in England the contract is being ready literally, but the difference comes when there is no substitution of bargain made in the contract. Under CISG the parties can use any jurisdiction to which they have agreed upon, the international trade is being promoted by the CISG. It promotes uniformity in the application and is observance of good faith in international trade. Unlike the above three regimes the CISG focuses more on international trade. The rule of falsa  demonstration non nocet cum de corpore constat which states that the false description of documents does not void the contract if the intention is clear  is  being  followed by  the Germany  and  thus they follow  the subjective  interpretation  of contract interpretation. On the other hand, in Italy if there is no textual clarity in the contract then it depends upon the judge whether to consider the contract according to fair dealing norms and tries to repair the contract. In England, the gap filling in the contract is not encouraged therefore the contract  must  clear  while  interpreted, unlike  Italy the judges  dissolve  the contract. Under Article 8 of  the CISG  the subjective interpretation states the intent  shall be clear and  shall be understood by the other party, the objective interpretation in the Article states that statements in the contract shall be interpreted in that manner that the other party in the same circumstances can easily understand and ex and post facto totality states that all the important circumstances  of the case including the negotiations and the intent of the parties shall be considered. In Germany the gap filling can be done by the courts that is if the parties have not clearly mentioned the regulations then in that case the court has to make sure that the gap filling is done with the principles of good faith and fair dealing whereas on the contrary in Italy , England the courts may not fill the gap in the contract interpretation as in England the literal reading of the contract is done where there can be no grounds of confusion and the contract has to be clear and precise. In case of renewal of lease Germany states that clearly agreed to terms cannot be overridden by notions of good faith and fair dealing as they were essentially contracted out of the deal similar  as Italy, England contracts are to be interpreted literally  as there is no place of good faith and fair dealing so long as contract formed  with consideration.  CISG likely  to  follow  the  similar  rules  likes  Germany,  Italy,  and England under the light of Lex Mercatoria. England follows subjective interpretation in very less proportion other than Italy and CISG whereas Germany follows objective interpretation where the interpretation is being dealt in what a reasonable party want to achieve in contract drafting not the contractual parties. The Germany Article 313 shall be used to rectify the regulations of the contract but that is only allowed under special circumstances  and cannot be used on the regular basis.  In Italy in case of unreasonable contractual clauses Article 1384 requires the judge to reduce the size of contractual penalty. The policy of good faith shall be considered while making the contract, the implementation of rights and obligations shall be regulated in the contract rather than correcting the rights and  obligations.  The  English  law  states that the contract shall  include the clause  of termination and no principle  of good faith is being applied in the contract. Under CISG the rules and principles given shall be fair for both the parties and it will not supersede the contract.

After discussing contract formation and contract interpretation,  the contractual reasonableness  is an important aspect  to be seen. When the contract is being interpreted, it  is in the hands of the interpreter how the contract is being dealt with where the necessity of contractual reasonableness come in place. The contractual reasonableness states the contract should be fair and there shall be no illegality  in the contract. There are certain legal cultures which have provisions to ensure that the contract shall be dealt with fairness.  The judicial control of contract deals with limitation of contractual  remedies,  termination  of  immaterial   breach,  determination  of  price  and  undue influence  on  calculation  of  royalty.  There  are  some  specific  categories  where  the contractual fairness of different nations is being divided into, they are Contra proferentem rule which means interpretation  as  control,  standard  form  contracts  are  non-negotiated  contracts,  information disclosure and contract law states that the performance of the contract varies from the information exchanged by the parties before the formation of the contract and good faith in English law this doctrine explains that the acceptance of implied duty with regard to performance.

In German law the general conditions are not the part of the agreement  and if there is a case of uncertainty the interpretation shall be in the favor of the party who has not drafted the conditions in the agreement however in Italy the laws are less similar  to that of Germany. In the Italy Codice Civile, Article 1341 it states that the general requirements  are binding on the parties if the party who did not draught them was aware of them or should have been aware of them. The English law are less identical than the Italian law, most the laws are being observed and taken from the English cases and the Unfair Contract Terms,  1977. The general laws must be brought in the light of the party who has not drafted them and shall be paid special attention If the material harms the group in an unexpected way. The CISG under Article 7 it is stated that the agreement shall be in good faith and it is not aimed at the actions of regulating parties, but the interpretation of the convention by the judges. Under the civil code of Germany Article 307 states that if the condition is assumed to be unenforceable, the concept of good faith adversely impacts the party that has not drafted it. In Italian Law Article 1341 states that if a party that has not drawn up an agreement  then the party must bear the responsibility of working faithfully to gain knowledge of the terms. The conditions involving  a  clear  bias  to the status  of  the party Article  1341 specifies  that  the conditions be expressly signed as a requirement  for their enforceability. Under English law as explained above that there no concept of good faith therefore the parties must be sure to draft the agreement and if the conditions are not clear the agreement is treated as void. In CISG the concept is  like that of English law, but the agreement can be modified by the judges of the convention. In the above paragraphs the difference between the four regimes have been stated under the light of contract formation, contract interpretation and judicial control of contractual fairness. All the four regimes  are different from one another and have different laws in contract. There  is slight similarity between the regimes, but all the regimes are unique in their own way of interpreting the contract law. From the above stated four regimes the best rules for formation, interpretation and judicial control of contracts enabling business contracts and which can be useful under the tough circumstances and conflict is the CISG. The CISG is transnational contract instrument and is the best set of legal  rules when it  comes to contracts or agreement  between two parties.  Under the formation of contract, the CISG only follows the rule of offer and acceptance stated under Article

23  of  the  CISG. This  rule  is  more  subtle  and  accurate  therefore  making  no  confusion  and

complications with the contracting parties. The CISG is more flexible and allows the party to make changes through agreement  in the case of formed contracts stated in Article 29(1). This  Article gives the power of to the parties to amend any clause in the contract on the mutual consent. The Mirror  Rule  is  being  applied  to  the  parties  where  Article  19(2)  states  that  the  non-material differences do not void acceptance. The obligation of good faith depends on the jurisdiction of the parties  or the jurisdictions  where  the parties  have agreed  to follow  in the contract. The  CISG follows  the broad  concept  of  Lex Mercatoria  which  makes  it  more  flexible  for  the parties  to commence the contract under them.

The Article 31 of CISG states about the seller’s  obligations  towards the agreement.  It provides three rules that might be applicable if the parties do not agree on the place for performance  of the seller’s delivery obligation. In case of contract involving carriage of goods then in that case Article 31(a) states the seller's  shipping obligations consist  of handling the goods to the first carrier  for delivery  to the purchaser.  “If the contract  does not  involve  carriage  of  goods, and  “relates  to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place, then the seller’s obligation  is to place the goods at the buyer’s disposal at that place. In all other cases, the seller’s obligation is to place the goods at the buyer’s disposal at the place where the seller had his place of business at the time of the conclusion of the contract.”[1] In conjunction with the facts of the case, Article 31 reflects a simple  attempt to identify the position of results. To the degree that it is needed to decide for legal purposes, a position of results, the consequence can often amount to a legal fiction crafted simply to ensure that a position remains for the purposes of applying other legal laws.

For the Convention to be applicable by virtue of article 1 (1) (a), the parties must have their relevant place of business in a Contracting State. “If the two States in which the parties have their places of business are Contracting States, the Convention applies even if the rules of private international law of the forum would  normally  designate the law  of a third country.” This is true, unless  the parties have designated a given law with the intention to exclude the Convention, which they can do pursuant to Article 6.36.[2]  This explains the importance of the CISG in which they show fairness to the contracting parties so that they can commence the agreement with being on the safe side.

Where the parties did not make a choice of law or where their choice is not valid, one has to resort to  the  objective  connecting  factors  of  the rules  of  private  international  law  of  the forum  to determine which law applies, and thus, whether the Convention is applicable by virtue of article 1 (1)  (b).  Pursuant  to  article  4  (1)  of  the  1980  Rome  Convention  on  the  Law  Applicable  to Contractual Obligations, absent  a valid  choice  of law,  one has to apply  the law  “most  closely connected”to the contract; according to article 4 (2), it is presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has its habitual residence at the time of conclusion of the contract. For this reason, the Convention has often been applied by courts in contracting States to the Rome Convention when the seller, who is the party that has to effect the characteristic performance, had its place of business in a Contracting State to the CISG. Under the 1955 Hague Convention, absent a choice of law the law of the seller applies except in cases where the seller receives the order for the goods in the buyer’s  country, in which case the law  of the buyer governs.”[3] The performance  of the contract are being with convenience of the parties so that it can take place in successful manner.

After the goods have been shipped and inspected in compliance with the sales contract , the buyer may find a defect in the goods and, therefore, argue that the goods in question do not comply with the sales contract. The buyer then wishes to invoke a remedy against the seller (e.g. a decrease in costs under Article 50 CISG or a particular performance under Article 46(1) CISG). Article 39(1) of the CISG specifies that the consumer  loses the right to rely on the lack of conformity of the products If it does not give the seller notice detailing the existence of the lack of conformity within a reasonable period of time after it has been discovered or should have been discovered. The buyer must therefore give a notice of non-conformity pursuant to Article 39(1) of the CISG to the seller to be able  to invoke a remedy, such as a price  reduction or relevant  output against  the seller.[4]

Therefore  the CISG is being considered as the best legal instrument  in the period of uncertainty

and conflict.

In the present day scenario the CISG has been an essential  part in the trading world, important trading countries like Japan, Brazil, Denmark, Finland, Sweden and Norway have using CISG for entering into contract with different nations and have successfully initiated their contracts.  The world’s largest economy China has adopted CISG as an essential part of domestic law. The South Asian countries like Cambodia, Brunei, Indonesia, Laos, Malaysia, and Myanmar have also accepted CISG as their trade regime as it provides security them as contracting parties. The CISG also promotes free trade area which helps the Asian countries to grow their trade and  engage in contract with countries like Finland, Sweden and other European countries.[5]  Hence the CISG is the most important and growing legal set of rules which can be really beneficial during the time of conflict and uncertainty.